The Costs of being a Landlord

The Costs of being a Landlord

Becoming a landlord is a fantastic way to generate an income through rent – but you need to be aware of all the costs involved to remain profitable.

‘’We’ve created this guide to help you avoid many ‘hidden’ costs but becoming a landlord may not be as easy as you think,” says Rob Smith, Managing Director of Whitegates.

“Our advice is to do your research! Absorb as much information as you can and always plan ahead, without skipping costs.

Here’s your comprehensive guide to all the costs you can expect when you become a landlord…


1. Landlord insurance costs

Adequate insurance is vital for landlords, as this will cover you against huge costs should your property become damaged, someone be injured at the property, or your tenants default on their rent payments.

There are different types of landlord insurance, with several additional ‘bolt-ons’ available:

 

Buildings insurance

If you’re buying a property to rent out and taking out a mortgage, your lender will insist you have a suitable buildings insurance policy in place.

This will protect your rental property against:

Damage or destruction from weather events, such as flooding, wind, and lightning

Subsidence

Water damage from burst pipes

Damage or destruction from fire or smoke

Theft, vandalism or malicious damage

 

Contents insurance

If you’re thinking of renting out your property on a furnished basis, you should consider a contents insurance policy to protect your items.

If your tenants bring their own things into the property, or you rent it unfurnished, however, they’d need a separate policy of their own.

 

Liability insurance

This landlord insurance policy covers you if a tenant or someone visiting your property is injured while there.

Of course, you should always ensure your rental property is safe for your tenants and anyone visiting, but liability insurance can protect you should the worst happen, and you be forced to pay compensation.

 

Tenant default insurance

If your tenants fall into rent arrears, this can be hugely costly.

Tenant default insurance, or ‘rent guarantee insurance’, can help cover lost income should your tenants be unable to pay.

 

How much does landlord insurance cost?

What you’ll pay for your annual landlord insurance premium will depend on:

The size and value of the property and its projected rebuild cost

How comprehensive your policy is and which add-ons you choose

The number of tenants living there

The age and history of the property

 

2. Taxes on buy-to-let

When you become a landlord, you’ll need to factor in your tax liability.

The taxes you pay on buy-to-let include:

 

Income tax

If you earn an income from rent through your buy-to-let property, you’ll have to pay income tax.

If you’re a basic rate taxpayer, you’ll pay 20% income tax on your earnings and if you’re an higher rate payer, you’ll pay 40% on any earnings over £50,270.

If you earn more than £150,000, you’ll fall into the additional rate bracket and pay 45% income tax on anything earned above that amount.

To pay your income tax on rental profits, you’ll need to complete an annual self-assessment tax return by January 31.

 

Capital gains tax

If you sell your rental property in the future, you may have to pay capital gains tax on any ‘gain’ you make.

The ‘gain’ is the difference between what you paid for your rental property and what you sell it for, with the tax due calculated on that amount less your personal allowance and any allowable deductions, including private residence relief.

Capital gains tax on property is charged at 18% for basic rate taxpayers and 28% for higher and additional rate payers.

For more on capital gains tax and property, check out our full guide.

 

Corporation tax

If you purchase your rental property through a limited company, you’ll pay corporation tax on your profits.

Corporation tax is currently charged at 19% against operating profit.

If you wish to extract money from your limited company, you’ll need to complete a self-assessment tax return and pay income tax on what you take out.

 

What costs can I claim as a landlord?

When calculating income tax on rental profits, you can deduct:

Repair and maintenance costs that aren’t classed as a capital improvements

Costs of compliance such as electrical and gas safety

Buildings and contents insurance costs

Council tax costs during void periods

Ground rent if your property is leasehold

Utility costs for common areas

Travel costs for visiting the property

Admin costs, including postage, stationery and phone calls related to the property

Licensing costs for Houses in Multiple Occupation

When calculating capital gains tax if you’re selling your rental property, you can deduct:

Any remaining personal allowance, up to £12,300 or £24,600 if you own the property with a spouse

Stamp duty costs on purchase

Solicitor fees

Estate agency fees

Survey costs

The cost of any capital improvements made between purchase and sale

 

4. Letting management fees

One of the most important decisions you’ll make when becoming a landlord is whether to use a letting agent to manage your property or manage it yourself.

There are huge benefits that come with using a letting agent management service, including:

You’ll have more time to focus on other things

Your agent will deal with issues and emergencies at your property

The agent will arrange repairs and maintenance

Your agent will ensure your property is always fully compliant

Your tenants will be fully referenced by your agent

Your agent will collect and chase rent on your behalf

 

How much do letting agents charge for management services?

Your agent will charge a percentage of your total rental income to look after your property for you.

How much they charge will depend on the level of service they’re providing, which could range from a fixed fee ‘tenant find only’ service to a full management service chargeable at a percentage of the monthly rent.

 

5. Compliance costs

Staying compliant with lettings legislation is the single most important aspect of being a landlord.

The compliance costs you can expect include:

 

Energy Performance Certificate

To legally let your rental property, you must have a valid Energy Performance Certificate (EPC) in place with at least an ‘E’ rating.

EPCs are valid for 10 years but can be renewed at any time and you should expect to pay between £35 and £120 for an energy assessment depending on the size of your property.

 

Electrical safety

All rental properties in England must have a valid Electrical Installation Condition Report (EICR) to be legally rented out.

EICRs must be renewed every five years and you should expect to pay between £100 and £300 for an assessment depending on your property’s size.

 

Gas safety

It’s a legal requirement for your rental property to have a valid gas safety certificate and this must be given to all tenants at the start of their agreement, or within 28 days if carried out during an existing tenancy.

A Gas Safe engineer must carry out the assessment and you should expect to pay between £50 and £100.

 

Smoke, CO2, and fire safety

You must provide at least one working smoke alarm on each storey of your rental property used as living accommodation.

Working carbon monoxide alarms, meanwhile, must be provided in any room where solid fuel is burned.

You can expect to pay between £5 and £20 for alarms, depending on what you wish to install.

 

6. Landlord licensing

If you’re thinking of becoming a landlord of a House in Multiple Occupation (HMO), you may require a licence to let your property.

HMOs are properties rented by individuals from more than one household, who share common facilities such as bathrooms and the kitchen but rent their bedrooms individually.

HMOs with more than five tenants require a mandatory licence from the local authority, while smaller HMOs may also require a licence if the council is operating an additional licensing scheme.

 

How much is an HMO licence?

HMO licence costs vary between local authorities, with the average cost being around £600.

 

7. Mortgage and purchase costs

When buying your rental property, you’ll need to consider the costs associated with the purchase, including:

 

Mortgage payments and interest

Your monthly mortgage payments will be one of most regular costs you face as a landlord and your rental income will need to adequately cover those payments.

You’ll also pay interest on your buy-to-let mortgage, which can no longer be deducted from your rental income before calculating income tax.

Instead, you’ll need to claim a 20% tax credit for mortgage interest when completing your annual tax return.

 

Lender fees

When you take out a buy-to-let mortgage, your lender may charge you a range of fees, including:

A mortgage arrangement fee – £1,500 on average

A booking fee – between £90 and £250

A valuation fee – around £150

Early repayment or exit charges – variable

 

Solicitor fees

When buying a property to rent out, you’ll need a solicitor or conveyancer to do the legal work for you.

You should expect to pay between £700 and £1,600, depending on the complexity of your purchase.

 

Stamp duty

If you’re an existing homeowner and purchasing an additional property to rent out, you’ll pay a 3% surcharge on all stamp duty bands in England and Northern Ireland.

These are the rates you’ll pay for each portion of your purchase price if that price is more than £40,000

Portion of purchase price

Stamp duty rate

£0 - £125,000

3%

£125,001 - £250,000

5%

£250,001 - £925,000

8%

£925,001 - £1.5m

13%

£1.5m +

15%

 

8. Costs during void periods

If your rental property is empty, you’ll have to cover many costs usually covered by your tenants, including:

Your mortgage repayments with no rent coming in

Council tax

Utility bills

Maintenance, repairs, decorations

 

9. Property maintenance costs and repairs

When you become a landlord, you’re committing to keep your rental property well maintained and in good order.

That means you’ll have to consider the costs of ongoing maintenance, as well as any emergency repairs or replacement items.

The cost of all this can’t really be predicted, so it’s always best to have a contingency pot of cash to cover all eventualities.

 

10. Leasehold property costs

If you’re purchasing a leasehold property to rent out, for example a flat or apartment, you may have to pay fees to your freeholder.

Regular costs could include:

Monthly ground rent charge

Monthly maintenance charge

Other potential costs could also include:

Reserve or sinking fund contributions

Buildings insurance contribution

Charges for extending the lease

 

11. GDPR costs

If you store or process your tenants’ personal information on digital devices, you’ll need to register with the Information Commissioner’s Office (ICO).

Fees for registering with the ICO start at £40.

 

Further reading…

Eight great buy-to-let tips you can use

Your complete guide to EICR regulations

Everything landlords need to know this year