Buying property and renting it out is a great way to build up your investment portfolio, but it comes with its challenges. In 2015, The Telegraph reported that one in eight landlords underestimate the real cost of using buy-to-let as a source of income by over £8,000, because they have overestimated their returns and didn’t take the ‘hidden’ costs into consideration. From housing insurance to tax implications and repairs, it may take a long time to reap the rewards of being a landlord. That being said, if you research all the costs of becoming a landlord, and understand that it will take time and perseverance, then it will be worthwhile. In this blog we’ll tell you all the ‘hidden’ costs of being a landlord, what they mean and how you can prepare for them.
What are the hidden costs of being a landlord?
1. The Letting Agency fees
When it comes to letting agency fees, there are two types of services landlords can choose from. Whether you choose to use a High Street Letting Agency or an Online Letting Agency, you can choose from either:
- The basic service: This includes tenant finding and handling all the advertising, interviewing and credit checks.
- The full management service: The full management service find you tenants and manages the property for you. They collect monies, pay bills and handle the day-to-day relationship with the tenants.
What is cheaper? A High Street Letting Agency or Online Agency?
Depending on whether you choose to go through a traditional High Street Letting Agency to rent out your property, or through an Online Letting Agency, the costs will vary.
High Street Letting Agency
For a more basic service, charges for High Street Letting Agency starts at around 8% of the monthly rental price. For a full management service, you should expect to pay around 15% of the monthly rent – whilst this may seem like a big chunk of your profit, you will be saving your time. If you don’t want to be caught out on any hidden costs, you have the option to pick an agency that offers a ‘No let, no fee’ policy, ensuring that you don’t get charged if they fail to find someone.
Online Letting Agents
Online letting agents usually charge a set fee of £50 in order to manage the initial let of your property, and then more for the various levels of service that the letting agents provide. This will range from finding tenants to referencing and signing contracts to a fully managed service throughout the duration of the let.
How can I save money on Letting Agency Fees?
If you have the time and the resources to find reliable tenants, reference them, credit check them, collect their rent and provide maintenance for them, then you you have the option to go it alone. However, you must remember that it will take up your time. That being said, as long as you keep your tenants happy, it means less work in the long run. You need to weigh up the time it takes to source new tenants, in regards to the money you will spend having people do it for you.
2. Landlord Insurance
Landlords need a particular type of insurance, as a standard home insurance policy will not cover the same risks as a landlord insurance policy does. When it comes to insurance you should always read the terms and conditions when it comes to what is covered, and it is better to be safe than sorry. The most basic landlord insurance you will need is buildings cover, but you should weigh up the different options to see what works for you. If you’re renting out a fully furnished property then you need to get the correct type of contents insurance so that you can cover yourself, should any issues arise. Alongside this, we recommend covering yourself for the following:
- Loss of rent.
- Providing alternative accommodation for your tenants if your property becomes uninhabitable.
- Cover for damage caused by tenants.
- Any legal fees in case you need to evict a tenant or if they take you to court.
Going for the cheaper insurance policy might be the most tempting option, but it leaves you open to risks, and there’s a chance you’ll end up paying for it later on down the line. Choosing the right landlord insurance policy will give you peace of mind and could save you a lot of money in the long term.
3. Safety checks and property maintenance
Another surprising cost that landlords often forget about is keeping their property in good working order. Not all maintenance jobs will fall under the responsibility of the landlord – some will be down to the tenant, but the landlord is responsible for the overall maintenance and safety of the building. Regular checks and maintenance will help to reduce any other problems later on down the line. It is the landlord’s legal obligation to carry out yearly safety checks on gas and electrical appliances – this costs anything between £40 and £100. You are also legally obliged to provide fire extinguishers and smoke detectors.
Health, safety and maintenance aren’t costs you can scrimp on, but if you keep on top of property maintenance and ensure that you are following the correct health and safety procedures, you won’t incur any surprise costs or fines.
4. Cleaning costs
When a tenant moves out of your property there will be a certain amount of cleaning and redecoration that you will need to do before renting the property out again. If you’ve got the time, you can choose to clean and redecorate the property yourself, keeping the costs at a minimum.
Can I use Tenants deposits to cover cleaning costs?
If your tenants have left the property in a poor state then you might be able to use their deposit to cover some of the costs – be sure to check the contracts that were signed when they first started renting your property. You can use your tenant’s deposit to cover the following: cleaning, damage/loss of property, unpaid rent or bills.
5. Legal Fees
Another mounting cost that is forgotten is the legal fees and other miscellaneous costs that come with landlords renting out their property. On their own these costs seem minimal, but when you add them up, they do make a difference. This includes:
- Tenancy agreements
- Deposit Protection Scheme registration
- Obtaining an energy certificate
- Utilities, such as water and ground rent
- Security measures
- Setting up a limited company
Once again these are not fees you can ‘skip’ out on, but if you seek advice and shop around, you may find you save a little bit of money. Hiring a landlord accountant will also help you keep on top of these legal fees, helping you to stay organised and on top of everything.
6. Landlord income tax
The profit Landlords make on renting their properties out will be subject to taxes – the costs of maintenance and property management will come under expenses. In order to keep on top of income tax you should file away all receipts for any work you’ve had done on the property, along with any other bits of paperwork. Organising your finances takes time and can be very difficult – for some landlords they will pay for an experienced chartered account or landlord accountant to help them manage their finances. Whilst this may be an extra cost, it means that you are on top of your finances and won’t get any nasty surprises from the taxman.
7. Vacant properties
When landlords rent out their properties, they often forget that the property may not be rented for 100% of the time. You will need to allow for time to clean the property and advertise it. Alongside this, you should be prepared in case your property isn’t rented for a few months, Whilst vacancy rates may not ever affect you, you need to be prepared.