Understand the costs you’ll be liable for and the key responsibilities involved with owning a buy-to-let property.
Buying, maintaining and selling buy-to-let properties can be an expensive business, so it’s important to understand all the costs you’ll face before deciding whether to become a landlord.
We’ve listed the main outgoings below, but it’s also worth having a contingency fund set aside in case any of your costs are greater than expected.
Buy-to-let mortgage costs
If you’ll need a buy-to-let mortgage, your monthly repayments are likely to be your biggest regular outgoing.
The larger the deposit you have, the better the deal you should be able to get. The impact of coronavirus on the economy has meant fewer mortgages on the market, so if you have a deposit of less than 20% you’re unlikely to get a loan in the current climate.
If you plan to take out a variable-rate mortgage such as a tracker, you’ll be at the mercy of the Bank of England base rate. If this rises, so too will your mortgage payments.
Landlords with large portfolios might find it more difficult to take on additional finance, as banks now require more comprehensive evidence of profits from investors with more than four properties.
Property maintenance costs
There’s no exact science to working out maintenance costs but, if you already own a home, you should have a good idea of what the main types of maintenance might be.
Experienced landlords recommend a ‘little and often’ approach to maintenance, as it will often keep costs down over the long term.
As a minimum, budget for costs of about £250 per year per property.
You’ll probably need to redecorate or refurbish parts of the property every few years. Again, the best guide to likely costs for this type of work is to think about when you’ve done something similar in your own home.
As a rough guide, budget for costs of around £2,000 over five years.
Letting agent fees
If you decide to use a letting agent to find tenants and collect rents, you should budget for a fee of at least 10% of the monthly rent.
If you would like the letting agent to fully manage the property for you – i.e. collect rent, deal with tenants’ problems and queries etc – this figure is likely to be nearer 15-20%.
It’s a good idea to take out landlord insurance and, if you have a mortgage, your lender will usually expect you to do so.
You can get different levels of insurance – for instance, cover for the building and cover for your contents if the property is furnished.
Costs will vary depending on where the property is, what kind of property it is and the level of cover you want.
Void periods are times when you don’t have a tenant living in your property, for example between tenancies or when you’re doing refurbishments.
These periods are very costly for landlords, so it can be helpful to have a contingency fund to cover any unexpected rent losses.
Tax on buy-to-let properties
You may need to pay income tax on profit you earn from letting out your property. Your profit is what you have left from your rental income after deducting ‘allowable expenses’. Allowable expenses include:
- letting agent fees
- landlord insurance
- maintenance and repair costs
- legal fees
- interest on buy-to-let mortgages (limited, see below)
Mortgage interest tax relief
The amount of mortgage interest tax relief landlords are entitled to has been gradually decreasing since 2017.
For the 2019-20 tax year, you are able to offset 25% of your mortgage interest when filing your tax return.
Since the 2020-21 tax year, the allowance has been replaced by a flat 20% tax credit.
Wear and tear allowance
Wear and tear allowance was abolished back in 2016, so you can now only claim the actual cost of replacing furnishings when filing your tax bill.
Property tax can be very complicated. For example, something that you may think of as a repair or a replacement of existing furniture may actually be categorised as a capital ‘improvement’ by HMRC – in which case, you would not be able to claim tax relief for it.
Buy-to-let stamp duty
The 3% buy-to-let stamp duty surcharge is a major consideration when buying an investment property.
The extra charge potentially adds thousands to the cost of a buy-to-let property, though you can make some savings if you purchase during the current stamp duty holiday.
- Find out more: stamp duty calculator – find out how much you could save before and after the end of the tax holiday
Landlord responsibilities and licensing
If you’re thinking of becoming a landlord, you’ll need to get to grips with a number of rules and regulations:
Landlords must ensure that any gas equipment has been installed and maintained by a registered Gas Safe engineer and that an engineer does an annual gas safety check on appliances.
Tenants should be provided with a gas safety check record before they move in, or within 28 days of a check being done.
It’s the landlord’s responsibility to ensure the property’s electric system is safe, including wiring, fittings and any appliances.
Landlords must provide a smoke alarm on each storey of the property and a carbon monoxide alarm in any room with a ‘solid fuel burning appliance’ (for example a wood-burning stove or coal fire).
There must also be access to escape routes at all times and furniture and furnishings must be classified as fire safe.
Landlords with larger HMOs must also provide fire alarms and extinguishers.
You need to get an energy performance certificate (EPC) when you let the property to new tenants. This tells them how energy efficient the property is and gives you recommendations for how you can improve energy efficiency.
If you don’t have an EPC available for prospective tenants to view, you could risk a fine. The only exception is houses in multiple occupation (HMO). These are exempt from the EPC rules as they typically have to abide by stricter regulations.
Rental properties need to achieve a minimum EPC rating of E. You could be fined up to £5,000 if you provide false information, fail to adhere to compliance notices or let properties that don’t meet the regulations.
Right to Rent
Landlords are required to carry out ‘Right to Rent’ checks when setting up a new tenancy agreement.
You will need to check that your tenants have the legal right to live in the UK by looking at and making copies of immigration documents, such as their passport.
If you use a letting agent, they can conduct these checks for you. For more information, visit the government’s Right to Rent guide.
House in Multiple Occupation (HMO) licensing
A house in multiple occupation (HMO) is a property rented by at least three people from more than one household who share facilities such as a bathroom and kitchen. If you’re letting out an HMO, you should check with your local council to see if you need a licence.
Licences are mandatory for ‘large HMOs’ – properties inhabited by five or more people from more than one household. You’ll need a licence for each HMO you let, and licences are valid for five years. You can find out more and apply on the government’s website.
Selective landlord licensing
The introduction of a UK-wide landlord licensing system has been debated, but it’s currently up to individual councils to decide whether landlords are obliged to obtain a licence or adhere to a code of practice.
Some permits only apply to landlords letting HMOs, while others are compulsory for all landlords in an area.
Check your local council’s website to see if you’ll need a licence.
Choosing a buy-to-let property
Choosing the right property to invest in is crucial to having a successful buy-to-let. As a starting point, follow these five tips:
- Research local property markets: look on property portals such as Rightmove and Zoopla to understand what types of property are available locally, and also what types are being advertised for rent. Speak to letting agents to really understand the local rental market; for example, which types of property are easiest to let, what types of tenant there are in the area and whether there are any types of property in short supply.
- Decide between new and old: new-build homes should in theory mean lower maintenance bills and less work on your part. The downside to this, of course, is a higher initial outlay. New homes may seem an ideal longer-term investment, but think about supply and demand, and whether you may be able to get a better deal on an older property.
- Think about ideal tenants: when looking at any home you should be asking yourself one key question: who would want to live here? Families will want larger, unfurnished properties near the best schools, while young couples might want swanky city pads. If the property will offer shared accommodation, it’ll need to have the right layout to work – no walking through somebody’s bedroom to get to the garden.
- Don’t stretch your budget: the margins on property investment can be fairly small, so don’t break the bank. Do your projected rent calculations, set a budget and stick to it. You’re in a strong negotiating position as you don’t have any onward chain, so be prepared to haggle.
- Think with your head, not your heart: don’t select one property and buy it at any cost. View your favourite properties several times before jumping in, and think carefully before buying at property auctions, where you might get carried away.
How to calculate rental yields
The rental yield is how much profit you make from your property in a year, as a percentage of its value.
To calculate rental yield, you’ll need to take your annual rental income and divide it by the value of the property.
- Example: if you receive £12,000 a year in rent on a property worth £200,000, you’ll need to divide 12,000 by 200,000 and multiply the result by 100 to get the percentage. In this example, your yield will be 6%.
Rental yields vary significantly depending on the wider property market, the value of the specific property, and the area you’re operating in.
Broadly speaking, a yield of more than 5% should give you sufficient scope to make income from your property while taking the costs of routine maintenance into account.
Alternative property investment
With sluggish buy-to-let yields in some places, landlords are looking towards alternative types of property investment – though these come with their own risks, too.
Houses in Multiple Occupation (HMOs)
HMO investment has its pros and cons. On the plus side, you can get better rental yields, and the prospect of costly void periods and rental arrears are offset by the number of people living in the property. Also, with high demand for flexible accommodation (especially in city markets), you shouldn’t find it difficult to fill a property.
On the other hand, there’s much more legislation around registering and licensing HMOs, and this form of investment comes with higher up-front costs. Mortgages can also be more difficult to obtain.
Crucially, capital growth might be lower, too, as the market for self-contained HMO sales will generally be landlords such as yourself.
Student HMO investment/guaranteed yield HMO investment
Developers of some HMOs – such as student accommodation blocks – have been known to offer investors ‘guaranteed’ rental yields that are higher than what you’d normally achieve on a standard buy-to-let property.
In the past, however, guaranteed yield offers have been known to collapse as the companies making the offer go bust.
This form of HMO investment is very risky, so it’s best to take independent financial advice before investing.
With the raft of tax changes in the last few years eating into profits, it’s easy to see why landlords could be attracted to property crowdfunding schemes.
Crowdfunding companies usually buy a portfolio of properties and encourage investors to chip in to own a share of them.
Landlords can invest sizable sums, or put in as little as £5,000 with some schemes.
The attraction here is that you can invest from a distance without carrying the burden of taxation or looking after the let.
There can be several downsides, however. You’ll lose the control of managing your own buy-to-let properties; it might be harder to cash in your investment if something goes wrong; and while crowdfunding companies must be regulated by the Financial Conduct Authority, there are still some uncertainties around this form of investment.
Inheriting a buy-to-let property
If you inherit a buy-to-let property, the most important thing to do is take independent financial advice on your options.
Inheriting a property portfolio can be complicated, especially if the homes have outstanding mortgages.
In theory, when the owner of the property dies, the mortgage has come to an end and the lender can demand the outstanding cash from the estate.
In this instance, you’ll have to decide whether it’s prudent and realistic to try to refinance the existing properties or sell them.