Landlord costs, aren’t they the ones that determine if you are going to be able to create a sustainable and cash flowing property business or not?
Like it or not:
Everyone goes through a phase when they start property investment where you buy properties and can’t see your cashflow as much as you expected.
If you are in that situation then here are two reasons why you probably are seeing that scenario.
First, you have purchased a property which isn’t a deal in the first place when you put your numbers but went ahead to purchase it anyways.
Second, not having factored the landlord costs. i.e. the hidden costs of being a landlord which not many actually account for in their books.
This post is going to list out such hidden landlord costs and a bit of detail to understand such costs based on what we have seen managing and optimising our portfolio.
1. Letting Agents Fee (+ VAT)
Whilst some of the landlords prefer to manage their own lettings, most or close to 75% of people whom I get in touch with have preferred full management.
Not surprising at all….
Many don’t account for letting agency fee when opting for full management of the property. It’s a sizeable amount varying between 10% to 15% of the property rent.
Even if majority accounted for that amount, VAT is often ignored which comes out as an additional spend when an invoice is sent.
This may sound small but when you sum up such small spend from multiple set of landlord costs, you end up with just half the cashflow you expected as returns on the property.
If you are investing in areas where rents are in the region of £300 to £500 then every small margin counts.
2. Yearly Costs
With Section 24 coming into effect completely, it becomes more prudent to factor in all the landlord costs into your numbers to ensure you still have a deal in hand.
Once you let the property, you tend to ignore the hidden landlord costs that show themselves up after tenanting the property and probably a year later.
Such costs include:
- Safety Checks
- Pre-Tenancy Clean-up and Decoration
- Service Charges
Imagine if you are investing in buy-to-let properties with yearly cashflow coming up to £2500 to £3000, then further reduction of £500 on above listed costs isn’t something you want eating up the cashflow.
Another reason why investors prefer to calculate return on investment than yield when buying a property.
It’s given that pretty much majority of investors factor in insurance as one of those landlord costs when they put their numbers creating and securing a property deal.
There are two catches that one should be aware of.
Have you factored this one in the detail?
i.e. if you need just buildings insurance or both buildings and contents insurance?
Yes, tenant takes contents insurance however may not include the white goods or furnishings you are providing as a landlord.
Each year when you renew insurances, the best practice is to check if there are better deals.
Simple fact is, every insurance provider increases premium once the first year is completed.
If you have taken the insurance from an authorised dealer, you will have additional admin charge that also goes up post that first year.
You would think the is common sense but trust me more than half the investor community don’t hit this kind of small savings that on a portfolio of 15 properties will save massive landlord costs.
4. Mortgage Costs
Whilst you purchase the property, you do factor in mortgage broker fee in within your numbers but do you factor in the yearly remortgage or once in two years cost that goes into your books?
It gets worse if you are investing within a Limited Company.
Potentially you will have following landlord costs to think about that will impact your cashflow
- Mortgage renewal broker fee
- Mortgage product fee (depending on product)
- Solicitor fee during renewal
- Independent solicitor review fee
All in all, you probably will incur close to £800 to £1000 just renewing the mortgage every period.
5. Maintenance Repairs
When you list hidden landlord costs, costs accounting to maintenance repairs is the most unpredictable ones given we never know what is going to be thrown our way.
At best we can put some money aside from the rent each month across the portfolio for every property.
The very common issues include:
- Boiler repairs
- Damp proof course
- Broken garden fence
- Leak from roof
You get the picture………
Here is the deal:
Having some expenses fund taken out each month for rent for each property will create the lump-sum of money that will help address any small or bigger issue within any of the property in the portfolio.
Fact is when you put some money aside for a rainy day, you don’t need to look for money when tenant complains of an issue.
Property voids probably is the first thing in the list that landlords ignore while investing in property.
Our average tenancy tenure across the portfolio is coming to about 1.5 years once we tenant the property which in my eyes is good enough but can be improved further.
What if the average tenancy tenure is less than a year?
Not good. Is it?
If it’s less than a year, then you probably are seeing couple of months where property is not let with in the year.
Question then becomes:
Do you account for voids as part of landlord costs within your portfolio when you create your deals? I can bet not many do it and not many track their tenancy related metrics as such.
There you go, that’s another nugget that can help save money if you start tracking relevant metrics on each property and improve based on feedback.
7. Income Tax And Capital Gains Tax
How much tax you pay when a property is on your name is all dependent on how much you earn as taxable income.
This is not one of those hidden landlord costs but is one that is lost in translation.
Here is a current view of what you pay as tax as of 2019-20.
Fact though is, this is something many think of when they are due to file their returns and a massive tax bill is handed over by the accountant.
We are no accountants and certainly cannot suggest but your accountant should be able to help invest in tax efficient way.