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What are the costs involved in being a landlord? model house on top of paperwork

What are the costs involved in being a landlord?

Co-written with tenant history resource Tenant Referencing, this article runs through the true costs involved in being a buy-to-let landlord.

Unlike most other forms of investment, a buy-to-let requires you to keep putting money into it for as long as you own property. As a result, you've got to make sure you have extra funds available.

Many of the costs that come with being a landlord aren't necessarily obvious if you're new to buy-to-let. If you haven't taken them all into account, you won't be able to work out how much profit you're actually making. Worse still, you might come to realise that your investment simply is not the money-generating vehicle you imagined.

To help ensure you don't underestimate what your expenditure is going to be, here are the key costs involved in buy-to-let.

Your mortgage

If you have a buy-to-let mortgage, that's likely to be your biggest monthly cost. If you have to renovate or refurbish the property before you can let it, remember that you will have to cover the mortgage payments yourself during that time, so factor that into your initial budget.

Plus, a reduction as small as 0.25% to your mortgage interest rate can make a big difference over a year. For example, if you have an 80% interest-only mortgage on a £250,000 property, at 5% that's a monthly payment of £833.33. At 4.75% it's £791.66, saving you £41.67 a month and £500 over the year. At 4.5%, the repayment is £750 a month, which is a saving of £83.33 a month and nearly £1000 a year.

There are new products coming onto the market all the time, so get in touch with your broker every 6 months and check that you're still on the best rate for your circumstances.

Health and safety compliance

When you let a property, you have to comply with the Housing Health & Safety Rating System (HHSRS) to reduce the risk to your tenants from 29 specific potential hazards.

You're also required to comply with fire safety regulations. Also, if you're planning to operate the property as a House in Multiple Occupation (HMO), there may be sound insulation requirements you have to carry out.

The additional cost of ensuring your property is safe and secure for your tenants before you let it will vary, depending on exactly what's required. Contact your local council housing department and if you're in any doubt as to what you need to do, ask someone to come and inspect the property.

Things you may need to consider include:

  • Fire extinguishers and blankets
  • Smoke detectors, heat sensors and carbon monoxide detectors
  • Fire doors
  • Soundproofing
  • Replacing any old furniture with items that bear the 'cigarette and match resistant' labels

Additionally, you're required to have:

Further information on a landlord's legal obligations can be found here.

Insurance

Every home needs insurance, but specialist landlord insurance is better suited for your buy-to-let.

What specific landlord cover you need will vary depending on your own circumstances. But here are some of the features available:

  • Buildings insurance
  • Contents insurance
  • Public liability insurance, in case your tenant or a member of the public injures themselves in your property.
  • Alternative accommodation cover, in case you need to temporarily re-home your tenants while the tenants can't stay in the home due to an insured event.
  • Cover for malicious damage and theft by tenants
  • Equipment breakdown - if white goods are included in the let
  • Legal expenses - to cover the cost of evicting squatters or rent recovery

Having the right level of cover can really save you money in the long run, especially if you need to make a costly claim. If you have several properties, you can reduce the cost per property and insure up to 15 properties on one policy with one renewal date.

Management costs

Whether you engage a managing agent to look after your property or handle everything yourself, there is a cost, although it is tax deductible. A lot of landlords look at agents' fees and think they're saving money by letting and managing themselves. However, it can be a false economy if you don't attach a value to your own time.

Consider how much time and effort it's going to take to do everything required to keep your property legally let. Letting agents are professionals who will have the experience and resources to carry out most tasks in a fraction of the time it might take you. Could your time be better and more profitably spent doing something else?

When you're looking at agents' fees, make sure you know exactly what they include, as some have a low 'basic' fee but charge for things like maintenance call outs and inventories. Any agent you engage should be a member of ARLA, Safeagent or RICS and offer client money protection, so you can be confident you have some recourse should anything go wrong.

Finding and securing a tenant

If you choose to find and check in a tenant yourself, there are a number of different costs to take into account:

  • Advertising
  • Referencing, immigration checks ('Right to Rent'), credit and financial checks. These can be done online, via specialist companies such as Tenant Referencing UK.
  • Inventory - Ideally, engage a professional who is a member of the Association Of Independent Inventory Clerks (AIIC). Having an independent inventory carried out at the start of a tenancy can save you a lot of problems at the end.
  • Tenancy agreement - These can be bought 'off the shelf', but make sure you're always using the most up-to-date version to ensure it's legally correct. Also, Direct Line for Business Landlord Insurance comes with its Legal Documents service that customers can use to draw up a tenancy agreement and have it checked by a qualified solicitor.
  • Legal advice - If you want to make any adjustments to the tenancy agreement, such as inserting a 'no pets' clause or stipulating additional responsibilities, you must consult a legal lettings specialist to make sure none of the terms are unfair.

And don't forget to include the cost of the time it will take you to carry out viewings, as well as the administration above.

Licensing and membership fees

Depending on the type of let, you may need to pay for a licence, especially if you're letting a House in Multiple Occupation (HMO) or within a selective licensing area. Contact your local council to find out what regulations might apply to your buy-to-let.

If you're not using a managing agent, it's advisable to join a landlord association, such as the National Residential Landlords Association (NRLA), which has a membership fee. In return, you will receive regular updates on developments within the industry and have access to legal advice and support via a helpline, which can be invaluable if you don't have the benefit of an agent's support.

There are also a number of online landlord forums that can offer free tips, advice and discussions covering a range of subjects including eviction, access, health and safety, and letting agents.

Regular and on-going maintenance

These are jobs that need doing regularly throughout the year, every year. Things you should certainly budget for are:

  • Gardening and gutter/drain clearing
  • Cleaning and decoration touch-ups between lets
  • Annual gas safety check
  • Annual Portable Appliance Testing for electrical goods

If you have the same tenant for several years, you might not need to do so much maintenance. But if you have a succession of 6-month tenancies or operate an HMO, your maintenance costs will be higher because of the higher turnover of different people coming through your property.

Periodical updates and large repairs

No matter how well you maintain your property on an on-going basis, bigger jobs and more thorough maintenance will need doing every so often. This is why it's wise to put money aside every month and plan ahead. Larger bills won't come as a surprise and you will know you can afford to keep your buy-to-let in good condition and appealing to tenants.

So when you put together your business plan make sure you include allowances for:

  • Inventory Mid-term review/inspection quarterly or half-yearly during a tenancy
  • Full redecoration every 3 years
  • Replacing furnishings and renewing external paintwork every 5 years
  • Renewing white goods and boiler as well as looking at the roof every 10 years
  • Replacing kitchens and bathrooms every 10-15 years

The timescales above are a good rule of thumb, but how often many of these tasks will need carrying out will depend on how often your tenants change.

Loss of rent

There are two ways you can lose rent as a landlord: voids and tenants not paying. Both can make a serious dent in your profits, so it's important to make allowances in your budget.

Our own research has shown that the average length of time between tenancies is just over 3 weeks. As such, we would recommend you allow for a month's void every year.

Read more about our recommendations for dealing with voids.

Tenants falling into arrears can be more costly than voids, mainly because it takes longer than a month to remove a non-paying tenant from your property. Always act quickly and contact your tenant right away if their rent is late.

If they can't or won't pay, you will have to issue them with notice to leave (Section 21) and if they then refuse to leave, you may have to go all the way through the eviction process. As part of a Section 21 notice, you will need to issue proceedings for a possession claim, costing £355. However, if you do this online it costs £325 instead.

Tenant history resource Landlord Referencing estimate a Section 21 Accelerated Possession on average can mean anything from four to six months with no rent. This is another good reason for keeping some money in reserve as evicting a tenant can be costly process.

Tax

You usually pay Stamp Duty Land Tax (SDLT) on increasing portions of the property price when you buy residential property. How much stamp duty you'll pay depends on certain factors, and there are rates and thresholds you should be aware of. Gov.uk also provides guidance on working out tax relief for landlords and assessing the impact of the finance cost reduction.

Summary

Although you can prepare yourself and plan for most of the costs involved in being a landlord, there are some that are variable in terms of when they might come up and how much they might be. That could be a particularly drawn-out eviction or an unforeseen structural issue that you need to cover until an insurance claim is approved.

Take a look at our recommendations on how to plan and budget for your buy-to-let so you know and take into account all the likely costs of buy to let - before you purchase.

Landlord Insurance Kate Faulkner Rental Road
Kate Faulkner

Kate Faulkner
Last Updated: 14 Dec 2022
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