Buy to let is one of the most popular forms of property investment and can be a highly lucrative one
if you have a good understanding of the costs involved.
Traditionally the realm of buy-to-let has attracted heavy investment interest owing to the high
returns generated through rental income and capital growth.
As an overarching factor, there are three main types of costs:
- Upfront costs (such as the cost of the property)
- Ongoing costs (the maintenance and upkeep of the property)
- Exit costs (expenses when you sell the property – for example, a capital gains tax)
It is therefore important to plan ahead with all the costs involved when investing in UK buy to let property. Whilst this article serves as a generalised overview of some of the costs involved, it is important to consult legal requirements and tax laws with a professional adviser as each individual investment will vary.
However, these are five essential cost components to consider when investing in buy to let property so if you’re wondering ‘how much money do you need for UK property investment’ – keep reading!
A Buy-to-Let Mortgage
Perhaps the main advantage of buy-to-let in the UK is the availability of a specialised buy-to-let mortgage which opens up scope for investors who may not have the financial means to buy the property outright otherwise.
The majority of buy-to-let mortgages are interest-only which means interest is paid each month but not the capital amount. Following the mortgage term, the original loan is repaid in full – though they are alternatively available in repayable instalments.
A buy-to-let mortgage requires a higher percentage of deposit that must be paid compared to
regular residential mortgages, however – this is usually around 25%.
With the average sold price for a UK property standing at £323,424 over the past year, buy-to-let investors should expect to pay around an £80,000 deposit.
Letting Agent Fees
For any landlord there will come a choice between finding tenants yourself or doing it through a letting agent Warrington – whilst the DIY option is less costly it is generally much more time-consuming with the landlord having to find tenants, manage viewings, set up deposit schemes, handle admin and reference checks amongst many other tasks.
Going through a letting agency, on the other hand, can add extra costs for such services – these will usually consist of:
- Let Only: Subject to specific agent and region, landlords can pay a one-time fixed fee to have their property advertised, viewings organised, let arranged and credit checks and deposit schemes handled.
- Rent Collection: This is where the letting agent collects rent on the landlords’ behalf through placing a fee on the overall percentage of the rent – this will usually be between 5 to 10 percent but varies between each agency.
- Full Management: Unsurprisingly the most expensive option – full management will see the letting agency handle everything from finding tenants through to handling tenant complaints and sorting any maintenance and upkeep. This varies anywhere from twelve percent of the rental income to twenty percent subject to the specific agency.
On top of this, landlords will also be subject to a renewal fee if any tenant decides to extend their
lease.
Legal And Admin Costs
Finalising a tenancy means adhering to a number of additional legal costs – a solicitor, for example, will need to be brought in to handle the legal paperwork which can cost up to £2,000.
On top of this, general admin costs such as reference, credit checks and registering the tenant to a deposit scheme will also be essential.
A land registry fee will be additionally placed on any property sold over a certain amount – houses sold between £100,001 to £200,000 will require a £200 fee whilst those sold between £200,001 to £500,000 will come out at £300.
It is also worth adding that a cash buffer will be useful as a means of having money to fall back upon should any unexpected costs arise – this could be around £2,000 to ensure a degree of confidence when investing.
Maintenance Costs
One of the most important components of being a landlord is having a responsibility to repair and maintain the property – this involves legal requirements to carry out gas, fire and electrical safety checks in addition to ensuring furniture is kept to a professional standard that meets health and safety requirements.
The scope of this maintenance should extend to the structure and exterior of the building too – with roof upkeep for example being particularly important to avoid any leakage. In addition, having a handle on gas pipes and electrical wiring will be equally essential. A good landlord-tenant relationship is strengthened by keeping on top of maintenance costs so keeping on top of these is crucial.
On average, studies show that landlords spend an annual average of £1,088.48 on maintaining a single property.
Tax (including stamp duty)
Stamp Duty Land Tax consists of a tax that is paid upon purchasing a property in England and Northern Ireland – it operates under a progressive tax system which means that buy-to-let investors will be subject to varying tax rates on certain portions of the property price. For example, a property bought for between £250,001 to £925,000 will see buy-to-let investors pay 8% stamp duty tax.
In turn, any profits made from renting out a buy-to-let property will be subject to an income tax on top of a Capital Gains Tax when the property is sold and has gained value from when it was bought. Capital Gains Tax is taxed separately from other forms of income which ensures that the income tax bracket will remain the same.
