One of the most exciting bits of letting out your flat or investing in a buy-to-let property is sitting down with your calculator and the rental estimates to work out how much money you might make.
But while you’re busy totting up your potential income, remember that whatever sum your tenants pay, there are a raft of costs which need to come off the top of it before the profit hits your pocket. Obviously these will depend very much on the individual property, but here are a few things you might want to budget for:
- Letting and management fees. If you decide to use an agent, their fees will vary depending on the location and the level of service, but fees for fully-managed properties tend to be around 10-15%. If this seems like a lot, then it’s possible to take on the letting and management yourself.
- Initial outlay. Before you can rent a flat out, various jobs might need doing. A professional deep clean, for example, or some degree of redecoration. If the place doesn’t already have an EPC (Energy Performance Certificate), then you’ll need to get one, along with a gas safety certificate. Finally, if you’re planning on letting the flat furnished, then you’ll need to budget for that traumatic Ikea trip.
- Covering mortgage payments during void time. Hopefully you will rarely be without tenants, but even in well-managed lets, you may find yourself with the odd week or even month where you’re not getting rent in.
- Service charges. If your flat is leasehold, then you will still have to pay the associated costs, like maintenance, buildings insurance, fire safety equipment, ground rent and agents’ percentages. These can vary wildly, but estimating them at 10% is probably sensible. You may also need to pay the freeholder for a sub-letting licence.
- Ongoing expenses. There will usually be something that needs repairing, and you might find maintenance firms can be less inclined to round the numbers down when they know they’re dealing with landlords rather than residents. You’ll also need to factor in regular costs like annual gas safety checks. Furnishings will need to be renewed from time to time, though there are tax allowances to help with this.
- Expenses associated with a change in tenants. These might include Tenancy Deposit Scheme (TDS) registration, contract administration fees and check-in or check-out costs (these can require professionalinventories, and costs are often shared with the tenant).
- Tax. Don’t forget that many things (especially repairs and agency fees) will need VAT adding on. So a 15% letting and management bill is actually 18%, a £500 repair job is actually £600 and so on. Finally, once your expenses and allowances have been taken off, you’ll need to pay a proportion of what’s left as income tax.