To succeed as a landlord in the North West’s booming rental property market, one of the main aspects you’ll need to have a realistic expectation and idea of are the costs once letting a property, and how to effectively budget for them.
There’s more to letting a property than simply moving the tenant in and collecting the rent. Letting a property comes with an array of financial and legal responsibilities. If you’re not on top of your obligations, regulations and maintenance as a landlord, you could lose money or wind up in court (or both).
In order to successfully let a property, whether you’re a first-time or accidental landlord, or a seasoned portfolio investor, factoring in all the costs and budgeting for every eventuality is essential.
Of the monthly costs felt by letting a property, mortgage payments are the most significant outgoing for landlords. There are a wide variety of rates and terms that landlords can find, but you need to be aware of the terms and conditions typically found only in buy-to-let mortgages. The monthly interest payments on a buy-to-let mortgage depend on various factors. These include the size of your initial loan, the rental value of your property and your own financial situation. However, it will also heavily depend on what type of loan you take out. This could be a fixed rate or variable rate mortgage. There are advantages and disadvantages to all types of mortgages. Of course, the mortgage payment will be offset by the tenant in-situ. If they fail to make payment (no matter the circumstances), you will still be expected to cover the mortgage payment. This is a consideration that needs to be made should your tenant fall into difficulties of payment, and should therefore be included in your budget.
Most buy-to-let mortgages feature a condition of landlord insurance. This can be opted for through a general policy (which should cover property liability, buildings insurance, contents and loss of rent), or one that is more far-reaching (which will come at a higher premium). Regardless of which policy you choose, adding insurance into the costs is a must. Buildings insurance is required by most mortgage providers and will cover your property in the event of damage or fire. Contents insurance is not mandatory but will cover any existing furniture you have in the property, including carpets and curtains. You do not have to insure the contents belonging to your tenants – that is their responsibility.
Landlord liability will cover you if any tenants or visitor dies or is injured on your property. This is also not mandatory in most cases, but some areas of the UK do require you to have landlord liability, especially if you’re renting to students. Factoring in insurance to your letting budget is a must.
When it comes to tenants, sourcing ones with a safe and proven background, including employment and affordability checks, is the best method of guaranteeing the rental income. Many landlords are happy to source a tenant themselves, particularly as it can potentially save them up-front costs. However, it can cost you far more in the long term (especially if any legal bills are racked up from not carrying out the correct documentation procedures) by not carrying out due diligence on prospective tenants.
A good property management agent, with years of experience in sourcing good tenants with thorough referencing processes, can help find you a tenant with affordable up-front costs that won’t cost the earth down the line. The management fees for having an agent in place, which will help to restore control of your time, are an aspect you need to budget for from your monthly income if you are looking for the hands-off approach. Edward Mellor’s prospective tenant checking process includes a full affordability check to guarantee the tenant meets your rental figure’s affordability.
Another component every landlord needs to consider in costs and budgeting is tax; the rules around what you can and can’t claim as a landlord have tightened in recent years. Any rent you receive from your tenants is classed as income, and therefore you are obliged to pay income tax on it. Other tax considerations to make, particularly if you’re a portfolio investor or looking to sell your property, are Capital Gains Tax and Stamp Duty Land Tax.
Perhaps the largest consideration to budget for when letting a property is maintenance. All properties, whether they are for let or not, will require general maintenance from time to time. Landlords are legally obliged to ensure their properties are safe for let (this includes keeping up to date with elements such as gas, electrical safety and checks) and in good condition throughout. Setting aside funds to cover for this and any emergency repairs that may crop up (We suggest between five and 10 per cent of annual rent) is always a wise choice for a landlord to make. Proactive responses to maintenance allow for any issues to be rectified quickly before they escalate into larger problems; saving costs, time, and any potential hassle from losing a valuable tenant.
On the subject of the loss of a tenant, void periods are an additional component of property letting to factor in. The absence of a tenant does not mean your mortgage payments will stop, and you will have to cover these in order to prevent your property from being repossessed, Even the most optimistic and diligent landlords need to be prepared for the short periods of time that a property may be vacant for between tenants (or longer depending on how effective your marketing strategy/managing agent is). Budgeting for at least six weeks of rent is usually a wise decision to make for each and every tenancy.
Other budgeting factors to consider emerge from if your property is leasehold or requires service charges, such as apartments. If your property is in an apartment block, you may need to pay a service charge or ground rent, whilst leasehold property owners may have to also contribute to the cost of work carried out in any communal areas.
The final element to consider budgeting for is if you have or are looking for a managing agent. What you pay in management fees, however, you gain back in control of your time and a hassle-free, hands-off property management experience. You can typically expect to pay between eight to 15 per cent of the monthly rent; so it’s worth considering your options conducting thorough research into any managing agent rather than simply jumping at the lowest fee. Edward Mellor has a number of packages tailored to suit budgets and varying degrees of how much landlords wish to be involved with the management of their property. In addition, we can help support you in budgeting for letting your property or an entire portfolio; giving you clarity and a clear pathway to successfully letting your property. For more information, call our property management team on 0161 820 6638.