Operating a rental property can be a fruitful venture, earning monthly rental income and creating value in the long term through capital appreciation. However, it's not without significant outlays, many of which can be unanticipated costs. In fact, landlords usually make a loss or only break even in the immediate financial year following their initial investment. That's why it's vital to understand the full range of costs involved with running a buy-to-let portfolio, so you can adopt cost-mitigating measures and create a longer-term plan for value creation. With that in mind, this guide explains the real and full cost of being a landlord.
Debt financing costs
The majority of landlords purchase their buy-to-let properties with a mortgage. Unless you're already sitting on a small fortune, there's every chance that you have a mortgage on your investment, or you'll need one to proceed with your planned purchase.
Many buy-to-let mortgages are paid on an interest-only basis, which keeps the monthly payments down and allows you to retain more of your rental income. Nevertheless, there's still a monthly mortgage fee to pay, with the amount depending on how much you borrow and the interest rate attached to the mortgage.
It's not uncommon for landlords to buy a property with a 75% LTV mortgage, paying the remaining 25% with a deposit. Let's say you purchased a property for £250,000 and borrowed £187,500 with an interest rate of 1.5%. That would mean a monthly repayment of around £234 (if you opt to pay the interest only rather than making loan repayments to build equity). And because you can only claim 20% of all mortgage interest against your tax, the majority of your mortgage costs are a non-deductible monthly outgoing.
The costs of loan interest vs equity payments
When you measure the cost of an investment, it's important to distinguish money lost paying off interest from payments made to build equity. Mortgages paid off on a repayment basis impact your cashflow as you have a greater monthly outgoing, but much of that fee goes toward reducing the balance of your loan, which means that you are accruing equity in the property. It is the value of the interest paid on your loan that is most important in determining the ROI of your investment.
Marketing costs and tenancy admin fees
There are several costs to consider before letting the property. These outlays are part of the necessary processes involved in finding and include marketing the property. Most landlords use a letting agent to find tenants on their behalf and pay them for the service.
A letting agent typically charges a percentage of the annual rental income, usually between 8-12% nationwide and 9-15% in London. On top of this, they’ll charge admin fees for tenant referencing, credit and Right to Rent checks, tenancy renewals and general admin fees.
For example, if the tenant-find fee is 10% of an annual rental income of £15,000, the landlord will need to pay £1,500 plus the admin fees, which are usually several hundred pounds.
Management services fees
Some landlords prefer to employ a management company to oversee the day-to-day running of their property. This can be helpful, as they don't need to get involved with every aspect of the let.
Most lettings providers offer this service monthly. Instead of charging a single tenant-finding fee of 10%, they might charge 15% for finding a tenant and managing the property, to be paid each month. An annual rental income of £15,000 would see the landlord paying £187.5 per month if the agent charged 15% for letting and management.
Before the tenant moves in, you'll need to ensure that the property is safe and inhabitable. These are costs involved with this, which include:
The gas safety certificate is required every 12 months for properties with a gas boiler. A qualified engineer needs to visit the property and inspect the gas. Once completed, they will provide a certificate stating the property's gas safety level. Gas safety certificate costs range between £60 and £90.
The government recently introduced an electrical installation condition report (EICR), which landlords need to do every five years. Like the gas safety report, it requires a qualified engineer to visit the property and test the electrics to see if everything is in working order. An EICR usually costs around £200+ depending on the size of your property.
An electrical performance certificate states the property’s energy efficiency using a rating system from A to G, with A being the best rating given to the most energy-efficient properties. Properties are currently required to have a rating of at least E before they are let to tenants, and this will rise to a rating of C by 2025. A landlord needs an engineer to perform an EPC every 10 years.
It isn't mandatory to provide tenants with documentation detailing the results of a Legionella risk assessment, but as a landlord you are required to ensure that the risk of Legionella at your property is effectively monitored and mitigated. It is therefore strongly recommended that you arrange for a risk assessment on a regular basis.
You can complete checks yourself but, for peace of mind and to spare you the hassle, you can hire a professional to do this. Someone will conduct a test on the water to ensure it's clean and won't cause anyone using it to contract legionnaire's disease. Legionella risk assessments usually cost around £50-£100.
Some councils require landlords to pay a fee for letting their property. It's entirely at the discretion of the local authority, and costs vary. Some charge as little as £25, while others may require fees closer to £500. You should check with the council where the buy to let is located before purchasing the property.
If you wish to let your property as an HMO, if you are planning to rent to 5 or more tenants from two or more households then you will need a mandatory licence. The cost of acquiring a licence is usually between £500-£800. Many local authorities also operate additional licensing schemes for all HMOs where there are three or more tenants from at least two households. If you own property in London, you can check if it needs a licence here.
Furnishing also isn't mandatory, though doing so can increase the property's appeal and help you to achieve a higher rental income. If you do decide to offer your property furnished, you will need to think about the costs involved. The minimum that a tenant would expect for a typical one-bedroom flat includes a double bed, wardrobe, sofa, table and chairs.
A void period is the time between tenancies where your property sits empty. Most landlords don't spend much time thinking about voids when purchasing a buy-to-let property, but a lengthy period of vacancy can end up costing a lot, and you often only have limited control over when a void period will occur.
The biggest cost associated with void periods is lost rent. If your property sits empty, the obviously it means that you don’t receive any rental income during that period. Standing costs associated with your property investment therefore need to be paid out of pocket while you look for new tenants.
As a rule of thumb, landlords are advised to save one month's rent to cover the costs associated with void periods and maintenance (more on that shortly). You will also be responsible for costs that the tenant usually pays during that time. These include:
- Council tax
- Utility bills like gas and electricity
Any property located in a block of flats will have service charges and ground rent. These are the landlord's responsibilities whether the property is tenanted or vacant, though the cost will usually be covered by . In London, the average service charge is between £1,800 and £2,000 per year. Ground rent is around £300.
Routine maintenance and repairs
Landlords are required to fix issues in the property that arise through no fault of the tenant. These can include replacing broken fixtures and fittings or furniture if the property is furnished. Landlords also need to address emergency repairs, such as faulty boilers or leaking pipes, at short notice and (usually) a premium cost.
If your property is professionally managed, the management team will take care of arranging the repair on your behalf, and this may mean you get charged an additional margin on top of the cost price of any works carried out. However, you will still need to pay for the replacement or repair cost on top of the monthly management fee.
From time to time, you may need to refresh the property. This might involve light touching up, such as giving the walls a new coat of paint to cover marks and blemishes. However, it might require something more costly and laborious, such as refurbishing the bathroom or kitchen.
These costs vary, but they can be anywhere between a few hundred or a few thousand pounds. While it might seem like a large amount, not doing anything could be even more costly in the long run. If your property looks tired and poorly maintained it will lose its appeal and struggle to achieve its full potential asking rent. Therefore, it's worth keeping an eye on your property and ensuring it's up to scratch between tenancies.
Landlords who earn more than £12,500 per year, whether from their rental property or a combination of the investment and their employment, must pay tax. There is no exemption, and you will need to file a tax return with the HMRC if your earnings surpass the threshold (and it is wise to do so even if you have made no income or incurred a loss).
Some of your expenses are claimable against your tax. These include:
- Letting and management fees
- Service charges (if it’s an apartment)
- Ground rent for apartments
- Replacement cost for furniture
- Repair costs
- Refurbishment costs
- Costs for travelling to and from the property
It's vital that you file a tax return for your rental income. Failure to do so could see you investigated by the HMRC, resulting in a hefty fine and imprisonment in the worst-case scenario. For all tax-related matters, it's best to speak with an account or qualified financial advisor.
Summary: the true cost of being a landlord
There are plenty of expenses involved with being a landlord, which is why you should be fully prepared before taking on the responsibility of owning a buy to let. However, thanks to the emergence of new and efficient proptech solutions, there are now far more means that ever of mitigating costs while still enjoying end-to-end service.
When letting your property with Home Made, you can achieve cost savings of 60-80% compared with a typical high-street letting agent, while still benefitting from accompanied viewings, professional tenancy administration, a dedicated account manager to handle negotiations, and proactive property marketing. Additionally, the industry leading time-to-let (i.e. the time between listing the property and agreeing a deal) we achieve for our means you can enjoy increased revenues and fewer void periods. For more information, see details on our service below.
At Home Made, we offer a hybrid lettings solution that adds value at every stage of the rental process. With our proprietary technology and data-driven marketing processes, we can help you to achieve higher rental yields and significantly lower operating costs, all while providing exceptional customer service that improves the rental experience for all stakeholders.
Our median time-to-let from point of listing is just 8 days and our clients save an average of £2,300 per tenancy with us. We charge 3% plus VAT for tenant-find services, 4% plus VAT per month for full management services, and there are no fees for renewals. For more information on our services, visit our landlord page.Book valuation