New Landlord Guide: Understanding The Costs of Being a Landlord and Managing Your First Buy-to-Let

Deciding to invest in property can be very lucrative but you may find your investment turns into a money pit if you don't keep an eye on your expenses

Coin stacks indicating rising property values in Leicester by Harry Albert Lettings & Estates

When you decide to invest in property, you will be able to generate an income which can either be used to support your current lifestyle or further invest for your retirement and property can be very profitable, especially in Leicester where it is cheaper to buy than it is to rent!

However, if you aren’t aware of your costs, especially at the start, what could be a very profitable venture could turn into a money pit as your costs begin to outweigh the income, diminishing your return on investment. That’s why new property investors need to know what costs are involved with being a landlord. This short guide is designed to help you understand what costs are involved with being a landlord and how these costs can impact your return on investment.

Costs associated with buying a property

When you first start looking for your perfect buy to let property for sale in Leicester, you may be faced with various costs, these can include:

  • Fees for searching the Land Registry
  • Deal Sourcer fees
  • Survey fees when you find a property you feel might be a good investment
  • Mortgage arrangement/brokerage fees if the survey checks out and you’re happy to go ahead
  • Mortgage deposit
  • Stamp Duty

You may also find yourself having to consider paying for structural engineers to look at any defects highlighted in the survey but for your first property to rent, we’d recommend not proceeding with any purchase if the surveyor has highlighted any serious concerns.

When you apply for a mortgage, there may be an arrangement/brokerage fee payable and you will find some mortgage advisors and mortgage brokers will charge for their advice, There are a plethora of different types of lenders and brokers, some are specialist, some have access to only certain types of mortgage, others are only able to access some of the mortgages available, others will have access to the whole of the market and some will charge fees and others will work off the commission paid to them by the lender. Whilst it may be wise first-time landlords to consider a broker who doesn’t charge upfront fees and has access to the whole of the market to keep your upfront costs low, however, this may mean working with a broker who would offer you a loan which pays them the highest commission and may not always be the best deal for you. The more interest you pay on your loan, whether it’s an interest only or capital repayment, fixed or variable rate mortgage will all impact your return on investment differently. You need to seek specialist legal advice and only use this for information purposes only, we are making no recommendations.

You may also want to investigate certain properties you come across to find out what you’re getting for your money and whether there are any covenants included with the title deeds which may limit what you can do with the property. One way of doing this is via the Land Registry, you can search the Land Registry quite easily and you have to pay a small fee for any records you wish to download. Often, searching the Land Registry can throw up some surprises which could potentially make or break a deal.

You’ll be required to pay stamp duty dependent on the value of the property you purchase, new stamp duty rules mean you’ll pay a 3% surcharge on any second (or more) property you purchase so, on a property that’s below the stamp duty threshold meaning you’d pay no stamp duty if this property was going to be your only home, as a buy to let purchase, you’ll pay 3% stamp duty (£3’000 on a property that costs £100’000).

What is a property deal sourcer?

Property deal sourcers find properties that are either below market value with a high potential for capital gains and/or rental income or properties that have potential to be converted into something else, such as a house in multiple occupation (HMO), to generate a higher level of income for property investors. Harry Albert Lettings & Estates help investors to source the best deal available to them on the Leicester market so it’s always wise to get in touch with your local Leicester letting agent to find out how they can help you source the best property deal.

Day to Day Costs of Being a Landlord

Once you’ve purchased your new investment, you’ll find there are even more costs involved. This is why it’s important to consider these before you actually purchase a property. These costs may be:

  • Income Tax
  • Class 2 National Insurance (if you’re operating your property investments as a business)
  • Mortgage Interest and Capital Repayment (unless you’re on an interest-only mortgage)
  • Insurance costs
  • Maintenance and Repairs
  • Safety Checks
  • Utilities and council tax when the property is vacant
  • Energy Performance Certificates (EPC)
  • HMO Licensing fees
  • Planned Licensing fees
  • Letting Agent / Property Management Fees
  • Eviction costs when you’re unfortunate to find yourself stuck with a bad tenant
  • Refurbishment/redecorating costs where necessary

You’ll need to pay income tax on any personal income you earn as a landlord. Due to recent changes to the tax system (often referred to as Section 21), many landlords are opting to invest as a limited company. The tax changes mean landlords will no longer receive any tax relief on mortgage interest payments whilst, as a limited company, this is considered an expense which is deducted from the income earned from rent. Limited companies don’t pay income tax, instead, they pay corporation tax on their profits so by deducting the interest payments as an expense from their revenue, they will have lower profits and a lower tax bill. Harry Albert Lettings & Estates can help you form a limited company to hold your investments at no extra cost!

If you do decide to become a director of a limited company, you will be required to pay Class 2 National Insurance contributions whilst as a sole-trader, you’d have to pay Class 1.

When you buy the property, you typically start paying the mortgage off immediately, this can spell trouble if you haven’t budgeted for the initial void period. Many vendors (sellers) and developers won’t allow you to erect a ‘To Let’ board or even begin marketing the property until the contracts have been exchanged and they have every right to do so because until the contracts are exchanged, the property still belongs to them and they can still pull out of the deal. You can get an interest-only mortgage that allows you pay lower sums back each month but at the end of the term, you’ll need to have enough funds available to repay all of the capital that’s left otherwise, the bank will repossess the property if you’re unable to repay the capital; this often catches landlords out. Landlords typically opt for interest-only mortgages if they know they’ll be able to repay the capital at the end of the term or if they’re intending to resell the property to repay the capital when they sell the property, often relying on capital gains.

You’ll also find there’s a huge range of insurance products on the market and it can be daunting to choose a product that’s right for you. Many of our landlord clients have found success with AXA’s tailored landlord insurance, this isn’t a recommendation but you can find out more information on Leicester Property Insight’s website. Just click here to access Leicester Property Insight’s website.

Next, when you’ve found a tenant, you’ll undoubtedly eventually find yourself having to deal with repairs and general maintenance, a good letting agent like Harry Albert Lettings & Estates will have qualified, professional contractors on hand to overcome any repairs or maintenance your tenants may report to them whilst, with adequate insurance, you’ll be protected against any and every eventuality!

Landlords are required to carry out Gas Safety checks by a Gas Safe registered and approved engineer every year, many Gas safe engineers are also plumbers so it’s best to develop a good relationship with them, luckily, Harry Albert Lettings & Estates have already achieved fantastic relationships with all of their contractors to enable them to provide the best deals from the most reliable tradesmen in Leicester. There has been some new gas safety legislation that has taken effect already which gives greater flexibility to landlords to avoid last minute checks being carried out. You can find out more about the Gas Safety changes by clicking here.

When the property is empty, you’ll be responsible for council tax (you’ll also be responsible for council tax if the property is let for less than six months) and utilities. This is why it’s important to factor in void periods (when the property is untenanted) when buying a property and ensure you’re aware of what council tax band the property falls in to. Harry Albert Lettings & Estates, a Leicester letting agent, will be able to help you with this. The council tax bands are:

Leicester Council Tax Bands 2018/2019
Band A £1’180.61
Band B £1’377.38
Band C £1’574.15
Band D £1’770.92
Band E £2’164.46
Band F £2’558.00
Band G £2’951.53
Band H £3’541.84

You’ll also be liable for any utilities and as such, Harry Albert Lettings & Estates will be able to help you to find the best deal. Click here to switch today!

Recently, for a property to be legally compliant to be let to a tenant, it must have an energy efficiency rating of E or above, the government have made it clear they intend to raise this to A eventually, the highest energy efficiency rating possible. Energy Performance Certificates (EPC) are valid for ten years and are required before the property can go on the market to let.

If you instruct a highly rated agent like Harry Albert Lettings & Estates, there will be fees associated with their comprehensive management service, you can find out more about what’s included in this service by clicking here, this is something else you need to factor in. Many greedy agents will charge far above the odds whilst others will charge a minimal fee for a very poor service. Harry Albert Lettings & Estates are well known for their simple fee structure which is:

  • Set up fee: £100 (This is a one off payment and you’ll never pay this again).
  • Tenant Find Fee: £99* (You’ll pay this each time you need a new tenant)
  • Monthly management fee: 7% of the rent due each month.

*£99 Tenant Find Fee only applies to landlords who instruct us to manage their property. Our regular tenant find service costs £249.

What is an HMO?

Houses in Multiple Occupation (HMO) are typically shared houses. A HMO can be defined as a property let to three individuals or more that form two or more separate households. These are regulated by the government and HMO landlords require licenses for their property to be operated or managed as an HMO.

HMO licenses typically last for five years and can be quite expensive in certain areas of the UK, they also have much stricter health and safety requirements and landlords and their agents can find themselves shouldering more responsibility including potentially acting as a mediator when relationships turn sour. HMOs are fraught with risk and we’d never advise a first-time landlord to convert their property into an HMO until they’ve at least experienced a single let for a few years!

What is Planned Licensing?

Planned Licensing is a new initiative proposed by Leicester City Council to profiteer from landlords by charging them to let properties in certain areas of Leicester. There are currently no proposed timeframes for this but Nottingham City Council have already imposed the same system to certain boroughs of Nottingham which they’re calling Selective Licensing, they charge nearly £600 and the license lasts for five years. It’s important to consider the impact this may have on your return on investment.

As you can see, there’s a lot more to being a landlord than just buying a property and letting it out. There are a lot of costs involved and whilst it is still very profitable to be a landlord in 2018 and will continue to be a profitable venture going forward, it’s important you do things righ. We always recommend using a reputable Leicester letting agent like Harry Albert Lettings & Estates who specialise in maximising returns on property investments and are dedicated to helping landlords and property investors to achieve their financial and property goals. Get in touch with Harry Albert Lettings & Estates today on 0116 321 4970 to find out how we can help you let your property!

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