Buy to let running costs

Think the extra costs of a standard residential purchase are bad
enough? With a buy-to-let enterprise your pockets need to be even deeper. But providing you do your sums it shouldn’t put you off a venture, says Olly Morrison

A sad fact of home buying is all the extra expense you have to stomach along the way. Mortgage lender Woolwich estimates that first time buyers spend an average £9,113 getting on the ladder - a 94 per cent rise from the year 2000 when new buyers needed an average £4,698 to cover stamp duty, solicitors' bills, mortgage fees and such like. The additional costs are higher further up the property ladder, says Woolwich, whose research revealed that moving from an average semi-detached property valued at £174,744 to a detached home worth £293,248 now costs £12,535 - almost three times as much as in 2000.

Much of the problem has been caused by house price increases
bumping up properties into heavier stamp duty brackets. Things are worse in London and the South East. Property buyers in the
capital typically spend £16,659 in extra costs when trading up.
On top of buying costs home buyers often overlook smaller expenses that can mount including furniture, renovations and decorations and phone, internet and satellite connections. But a sadder fact for prospective buy-to-letter’s is that they can expect
to stomach even more added expenses. They can also expect a larger army of small but irritating ongoing costs.

MORTGAGE

First off, buy-to-let mortgages are more expensive than their
conventional cousins. While buy-to-let deals are probably more cut rate than they’ve ever been, interest rates are typically charged at about a per cent over the base rate and you still don't get the choice of highly competitive rates as you do with conventional deals. Importantly, you’ll also need a considerably larger deposit - usually 15 per cent to 20 per cent of the value of the property, compared with typically a minimum five per cent in the standard market. On the plus side, buy-to-letter’s can expect to avoid a Higher Lending Charge (HLC) which can sting standard residential borrowers with less than a ten per cent deposit.

You will usually have fork out completion fees of about 0.5 per cent of the loan amount, compared to a flat fee of £299-£399 on a residential scheme. Also beware of more punitive early redemption charges. With a standard home loan you can expect to have to pay up to two months of interest if you leave the deal early. With buy-to-let deals, you can be penalised six months of interest. Expect stamp duty, legal fees, search and survey costs and land registry fees to be in line with a standard house purchase. Remember your tax and allowances at this stage. You’ll have to fork out yourself for all the costs of the initial furnishings and appliances in your buy-to-let property. Deductions against tax on rents received may be claimed for the costs of maintenance, such as insurance, cleaning, gardening, agent's commission and other reasonable management expenses - but not improvements. You can claim for the cost of
replacing furniture and appliances. Alternatively a wear and tear
allowance of 10 per cent of the rents received can be deductible.
You can of course limit some of your initial costs by not furnishing a property. The downside here, though, as that you could lose out on a chunk of potential tenants looking to rent furnished accommodation.

LITTLE AND OFTEN

A big chunk of costs that concern buy-to-letter’s will be ongoing. Unlike the large one-off sums involved in a traditional house purchase or move, there’ll be of the little and often type that can cause such a sting due their unexpectedness. “Whatever rent you’re setting a month take off 20 per cent for extra costs,”says Mark Harrison, a property investor and founder of the advice portal www.yourpropertyexpert.com. “Ten per cent for mortgage and any letting agents fees then another 10 per cent for all these little things.” He says the second highest cost you’ll pay after your mortgage repayments are leasehold costs. “The number one mistake new buy-to-letter’s make is buying new flats without thinking about leasehold costs. You’ll pay twice as much on maintenance on leasehold over freehold. They’ll be extra facilities like shared lighting and you’ll lose the ability to cut a deal with local tradesman.” You could also lose the chance to use your own handyman if you’re hiring a letting agent on a ‘full management’ basis. There are examples of letting agents calling out plumbers (charging a £75 call out fee) to a property to deal with a ‘damp’ problem caused by nothing more than an overflowing bath. Always get written evidence from the agent on
what’s being spend on what.

Letting agents worth their salt can be key to a successful buy-to-let investment, especially for amateur landlords, as they can tell you who is renting what in your given area and therefore advise on the types of property to buy and types of tenant to target. They can recommend what rent to set and how best to furnish a property. But consider the ‘hidden’ extras they can levy. For a fee of typically around ten per cent, agents will promote your buy-to-let property, find and vet prospective tenants, take their deposits and check them in and out of the property. They might also collect the rent, chase arrears, prepare inventories and ensure bills are put in tenants name. For the slightly dearer full management service (between 15 and 17 per cent) they will deal with tenant enquiries, maintenance and check your property meets furnishing, gas and electrical safety standards. ‘Hidden’ fees might include a flat fee of as much as £400 for finding your tenants and around £75 for drawing up an AST agreement  (Assured Short hold Tenancy) between landlord and tenant. A rarer fee levied by letting agents you might come across will be an estate agency fee. This will be payable if you put the house up for sale and the tenant buys it. It will typically be around 1.5 per cent of the sale price. But they can be avoided. AST forms can be downloaded online for a few pounds, for instance, and you also might want to do inspections yourself. Harrison adds: “Be prepared to negotiate with letting agents as charges can be waived.” Also always check the small print. You are similarly advised to read the terms of the lease very carefully to spot any extras. You might come across a charge levied by the property freeholder - called a ‘freeholder permission or review fee’ -
where they will demand an annual fee (typically £100 a year) for
allowing you permission to sub-let a property. No one minds dipping inside their pockets for a job well done, but £100 a year for writing you a letter takes the mick.

You also got to account for costs of getting your electrical appliances inspected and it’s worth shopping round for your insurance. “I can save £200 pounds a year finding my own insurance rather than getting it from my mortgage provider,” says Harrison. Some landlords like to woo tenants by including contents insurance in the terms of the lease. Premiums tend to cost between £60 and £100 per year.

LEGISLATION

Watch out for new legislation beefing up your extra costs. For example, thanks to the 2004 Housing Act landlords now need a license from their local authority if they are letting out a house with five or more rooms, or Homes of Multiple Occupation (HMOs). It’s still early days, but permits could easily cost four figures a year. Things are worse for buy-to-letter’s in Scotland where new landlords have to register and be approved by the local council, which will vet them to ensure they are a fit and proper person to be a landlord. The Housing act also includes a ‘tenancy deposit scheme’ (TDS) where landlords or agents can only take a deposit from a tenant if that deposit is protected by a TDS. The penalty for landlords that fail to comply with these new rules is an amount equivalent to three times the deposit, to be paid within 10 days. There are also be penalties for landlords failing to uphold their legal responsibilities. Landlords are obliged to provide their tenants with a safe home. It must meet furnishing, gas and electrical safety standards. If your property has gas appliances you are obliged to have the gas checked by a CORGI registered engineer at least once a year. Furniture must also meet fire regulations. The advice here is to look out for if you’re kiting out a property with second hand clobber.

NIGGLING

David Lawrenson, a professional landlord and founder of buy-to-let consultancy www.lettingfocus.com, agrees that it’s these niggling and incessant little costs that buy-to-letters need to watch out for. “A big mistake people make is thinking they are going to get it let it immediately,” he says. “But assume you’re not going to let it for more than a month as there’s always something to be done. Boilers never seem to work.” Always budget for wear and tear once tenants are in there and, more
importantly, for void periods: times when there are no tenants in a house or flat. “People think you can get a property and let it straight away but it doesn’t happen like that,” says Lawrenson. “Budget for three to four weeks in void periods each year.” Remember you may still have agents fees to pay during void periods. Also budget for bad tenants, who can really dent your rental return and potentially set you back a lot of money which you’re unlikely to ever recuperate. Insurance is available protecting you against dodgy tenants. Non payment of rent insurance usually costs four to five per cent of your monthly rental income. Legal cover, in case you have to take your
tenants to court, will set you back between £100 to £150 a year.

VIABLE

So should you be put off a buy to let venture due to all these extra costs? House prices aren’t rising as steeply and rapidly a they were a few years ago, so can new landlords be happy they’ll be able to remortgage quickly and recoup the costs?
The key is to keep thinking long-term, say the experts. “If you’re gonna become a landlord you’re in it for the long-term,” says Harrison. “It’s gonna take you 15-20 years to make any money. The growth we’ve seen in the last few years from 2000 to 2003 was unusual, don’t assume we’ll get that going forward. Most landlords go for long-term capital appreciation not cash flow from the start.” David Lawrenson agrees: “Be prepared,” he says. “You’re not going to make an instant profit like you would if you started a few years ago. At the start your return will barely cover your costs.”

Contacts:
www.lettingfocus.com
www.yourpropertyexpert.com


For more help on the extra costs associated with buy-to-let get in touch with other letting agents or get in touch with landlord associations such as;

-The National Federation of Residential Landlords (NFRL), 0845
45609357, www.nfrl.org.uk
-National Landlords Association www.landlords.org.uk, 0870 241 0471
-Residential Landlords Association, www.rla.org.uk, 0161 962 0010


typical buying costs include;

stamp duty
survey
valuation
legal costs
deposit
mortgage repayments
mortgage fees
fixtures/furnishings
insurance
removals/repairs furniture

ongoing costs include;

• maintenance costs such as painting, decorating, plumbing
etc.
• keeping up with new legislation such HMOs and tenancy
deposit schemes
• ground rent or service charges if the property is leasehold
• letting agent's fee for finding and vetting tenants, as well as
any additional costs for providing a full property management service
• legal insurance to cover costs in the event of having to evict
a tenant
• building and contents insurance for items provided as part
of the rental agreement
• furnishing and decorating costs for furniture required as
part of the rental agreement
• gas/electrical appliance maintenance costs to ensure they
comply with regulations such as health and safety
• annual cost of joining a landlord association or representative body should you wish to become a member
Case Study

Attracting the best tenants can help limit the ongoing costs of a buy-to let venture, says 45-year-old David Gibbons. He and his wife own three properties that they let to tenants in Saltaire
in West Yorkshire. “Always buy the best you can afford in the very best district,” he says. He and his wife have limited the costs of maintenance and void periods buy spending good money on properties before letting them out so they attract high-calibre tenants. “We didn’t just give them a lick of paint. The properties are furnished but fitted brand new appliances and well known brand names. Our typical refurb bill was between £2,000 and £3,000.” He insists the value of getting a property that sells itself outweighs the cost of padding out a property nicely. “If you present it impeccably you’ll get the best tenants. If you don’t you’ll get the tenants you deserve. They’ll have better credit ratings and treat your property well.” They’ve never had anyone default and they only had two void months in total in four years of letting the properties. One property has been let by the same tenant for 26 months. David spends £500 a year in maintenance costs on his portfolio. “The better the tenants the less worry in terms of damages and void periods,” says David. He warns that in today’s market investors may only be able to cover all their costs with a interest-only mortgage. But his long-term plan to use buying to let as alternative to a pension has helped budget for the additional expenses of property investment. “We’ve always planned to pay off the mortgages on the properties after
15 years. Then we’ll either or sell up and use the profits for a pension or keep letting them out and use the rental income.”