You are looking to invest in a buy-to-let property because you want to make a profit; this comes mainly from rental income and capital growth. That is to say, the more money coming in than going out, the better. Simply put, to do this, it’s vital that the property generates more income than it produces in costs, sometimes expressed as the Rate of Income (ROI) or yield.
Let’s look at some of the costs involved with buy-to-let property investments to give an idea of the sort of costs that investors can expect to incur.
The biggest expenses you will have been likely to face are the mortgage repayments. Depending on what type of mortgage you opt for, the repayments are easy to gauge, and you can know what they will be with a degree of certainty. Interest-only mortgage payments will be a lot less than capital repayment monthly payments. There are plenty of online calculators that can help work this out for you.
Even though you may have a protected interest rate mortgage to get going, at some point, the interest rate will change, and depending on the base rate, sometimes for the better and sometimes for the worse. Once the fixed-rate term has ended, one option is to shop around for deals for remortgaging to gain a more favorable interest rate deal, especially with the introductory rates that many lenders offer. If you do opt for remortgaging, don’t forget to add in the fees that come with it.
Having said this, it’s worth calculating your mortgage repayments against a higher interest rate to see how you would cope with higher repayments. A good way of doing this is to calculate your mortgage at 5% and 7% interest rate repayments, which amounts to a 2% lender rate above the fluctuating base rate. In other words, if you can cope with a 5% or even 7% interest rate repayment, then you are in good standing for any rises down the line that may come.
Service Charges and Ground Ren
For leasehold properties like apartments, you can expect to pay ground rent to the freeholder owner, often run by management services on their behalf.
The level of service charge payable is dependent on what facilities the apartment comes with. For example, if there are expensive things like pools or large grounds that need upkeep, the service charge will be higher to cover the costs. Your research for the right property should include questions to the estate agent about ground rent and service charges, including any anticipated increase in charges for the future or about any planned expensive work to be done.
Repair and Maintenance
Estimating what these costs will be is not easy and can vary greatly. The age and condition of the property, the local weather conditions, the type of tenants you have, and many other things all play a part in determining what the costs could be. Because of the number of variables involved, these costs provide some uncertainty for buy-to-let investors.
However, when it comes to leasehold apartments, the maintenance costs can sometimes be lower compared to houses due to certain things being covered by the service charge. Furthermore, property management services usually have things like “sink funds” in place to cover greater other expenses
Unless the building insurance is already part of the service charge, a small monthly cost will need to be added to your calculations.
Management Services and Fees
Depending on what type of buy-to-let investor you are thinking of becoming, you may decide to be less hands-on and employ the services of a management company. If you decide to go down this route, be prepared for the cost to be somewhere between eight and fifteen percent of the rental income. There are pros and cons to using these services, so weighing up your options is a good idea. Ask around with other investors about the service they have received to see what they think.
Like with maintenance costs, it’s not easy to predict if you will have any periods of time where your property is not being occupied, and you are not receiving any rent
If you have chosen a good location for your investment, such as one where employment is high, you should be able to reduce the risk of it becoming a problem.
One tip is to stay on good terms with tenants. This will reduce the likelihood of awkward ones obstructing other potential tenants from viewing the property while they are seeing out their notice period. The sooner you can get interested parties to view the property, the faster you can get them into the property and pay rent.
You will have to decide if bills will be included in the rental price, and if so, they will have to be calculated into the rent. With houses in multiple occupancies (HMOs), the bills are usually included. Single property lets normally don’t include the bills.
Assessing your property buy-to-let investment deal involves calculating your expected rental income and deducting your anticipated costs, as briefly set out above.
To adjust the cost side of the equation, however, some things can be done. For example, you can decide to be totally hands-on and cut out management costs. You could also look at making home improvements. You may be able to attract a higher-paying tenant and charge more rent.