Buying, maintaining and even selling buy-to-let properties can be an expensive business, and it's important that you understand all the costs you'll face before deciding whether becoming a landlord is the right thing for you.
In addition to the below, it's worth having a contingency fund set aside in case any of your costs are greater than you expected.
Buy-to-let mortgage costs
If you're buying your property using a mortgage, your monthly repayments are likely to be your biggest regular outgoing. The larger the deposit you have, the better the rates you'll be able to get.
If you plan to take out a variable-rate mortgage, bear in mind that there could be rises in the Bank of England base rate in the next few years, so your costs could go up.
- Find out more: check out our full guide to buy-to-let mortgages or, for personal advice, call Which? Mortgage Advisers on 0800 197 8461.
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 they 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 a year.
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 property.
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%.
- Find out more: using a letting agent
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.
- Find out more: landlord insurance
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.
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)
Mortgage interest tax relief
The amount of mortgage interest landlords can deduct from their income when filing their tax bill has been gradually decreasing since 2017.
For the 2017-18 tax year, you’ll only be able to offset 75% of your mortgage interest. This figure will drop by 25% each tax year until 2020, when the tax relief is replaced entirely by a flat 20% tax credit.
- Find out more: mortgage interest tax relief
Wear and tear allowance
In April 2016, a new 'tax relief for replacing furnishings' was introduced for those letting out furnished properties.
Under the new tax relief, you can only claim the actual cost of replacing furnishings, rather than the previous flat rate of 10% of the rent.
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.
- Find out more: tax on property and rental income
Buy-to-let stamp duty
The 3% stamp duty surcharge for buy-to-let investors has had a major effect on property investment since its introduction in April 2016.
The extra charge means landlords buying a £250,000 buy-to-let will now face a stamp duty bill of £7,500, compared with just £1,500 before the rules were brought in.
- Find out more: buy-to-let stamp duty rates and calculator
Financing a buy-to-let home with a mortgage
Mortgage lenders will want to see evidence that your anticipated rental income will comfortably cover your mortgage payments – typically up to 145%. This figure is known as the 'interest cover ratio' and the exact figure required varies from lender to lender.
If you let out more than four properties, you'll be considered a 'portfolio landlord' by lenders. In 2017, new affordability rules came in meaning these landlords need to show profit/loss calculations for all of their properties, rather than just the overall profit/loss of their portfolio, when applying for new finance.
There is some respite for landlords, however. Some lenders use a method called 'top slicing'. Top slicing is when banks look at other forms of income you have outside of property investment when calculating what they'll lend to you.
The buy-to-let mortgage calculator on the Which? Mortgage Advisers website can help you figure out how much you may be able to borrow.
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.
New rules around EPCs
Rental properties now need to achieve a minimum EPC rating of E. Initially, this applies to new tenancies and renewals, but it will be extended to all existing tenancies by 2020.
Landlords could face cumulative fines of up to £5,000 for breaches such as providing false information, failing to adhere to compliance notices or letting properties that don’t meet the new 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
You need a special licence from the local council if the property you're letting is three or more storeys high and is inhabited by five or more people from two or more households.
You'll need a licence for each HMO you run, and licences are valid for five years. You can find out more and apply on the government's website.
Selective landlord licensing
While the introduction of a UK-wide licensing system has been debated, individual councils can currently 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.
- Find out more: quick guide to things buy-to-let landlords need to know in 2018
Upcoming issues for landlords in 2019
It's a complicated time for landlords, and 2019 could present yet more challenges.
The government is consulting on bringing in two pieces of legislation: a ban on letting fees and three-year minimum tenancies.
Letting fees ban
The government plans to bring in a ban on letting agents charging fees to tenants.
While it’s still unclear how the policy will work, these changes could add to the upfront costs of letting a property.
The ban is likely to come into force at some point in 2019.
The government has consulted on introducing minimum tenancy periods – which could result in default three-year tenancies with six-month break clauses for tenants.
At this stage, it remains unclear whether these proposals will come to fruition.
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: as a first step, you can 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 existing 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.
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 high 'guaranteed' rental yields that are above 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 rushing in.
With the raft of tax changes in the last few years affecting their profits, its 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 in 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 crowdfunded properties are not as regulated as other forms 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.
Get personal buy-to-let mortgage advice
If you want independent advice on financing your buy-to-let portfolio, you can get a free call back from a mortgage adviser by filling out the form below.