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:
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
Water damage from burst pipes
Damage or destruction from fire or smoke
Theft, vandalism or malicious damage
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.
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:
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.
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
Estate agency fees
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.
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.
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.
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
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.
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
£125,001 - £250,000
£250,001 - £925,000
£925,001 - £1.5m
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
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.