Financial Costs Of Being A Landlord

I’m going to shamelessly confess before I do or say anything else. Before I became a landlord I had no idea what the associated costs were involved with the profession, although I had naively convinced myself otherwise- I thought I knew it all (or at least could hazard an accurate guess). In retrospect, after years of experience, it’s become apparent that I was blissfully ignorant. I may as well have entered the Dragon’s Den without a business plan. Embarrassing.

In my feeble little head, I had reduced the financial costs of being a landlord to a small handful of expenses, which was actually, primarily why the whole landlord deal looked so mouthwatering. Don’t get me wrong, the whole landlord deal is still a sweet deal, just not as sweet as I initially anticipated in terms of expenses/profit.

Now, if you’re reading this blog post it means you’re probably a lot more sensible than I am, because I’m assuming you’re actually researching the costs of being a landlord before biting the bullet. Wise decision. You’re already a whole lot smarter than I ever was (but I wouldn’t use that as positive measurement for intelligence).

Before I go any further, I want to clarify, the information I divulge isn’t to scare you, it’s to prepare you, and essentially make you a more informed and ultimately a better landlord. Hopefully you’ll be able to get a rather rough, yet practical idea of what costs are involved with being a landlord so you’re able to assess your decision with a little more clarity and precision.

While no one can predict the unpredictable (trust me, a lot of unpredictable shit happens in this business), we can muster together a foundational idea of what a typical balance sheet will look like. When I say typical, I mean a balance sheet that doesn’t experience any extreme situations.

From my experience, the following are the bare bone expenses that landlords have to endure per year.

Mandatory Costs

ExpenseDescriptionCost (approx)
EPC (Energy Performance Certificate) An EPC is a legal requirement. It’s an assessment of how energy efficient your property is.

Landlords must have a valid certificate before any viewings are taken. An EPC is valid for 10 years (you only need to pay for one every 10 years), but can be renewed if you make significant energy efficiency improvements to the property and want it reflected in the report.

£55
Gas Safety Certificate A landlord gas safety check is also a legal requirement, and it MUST be done annually.

All gas appliances and fittings must be checked by a Gas Safe registered engineer. At the end of the check, assuming everything is safe and in working order, you will be given a certificate.

£80
Capital gains tax Being a landlord is like ANY other profiteering business- tax has to be paid!

For most landlords, any profit you make will be part of their income tax e.g. If you’re a basic rate taxpayer, you’ll pay 20%, while higher rate taxpayers pay 40%.

Varies per case
Smoke & Carbon Monoxide alarms All landlords in England are required to supply and install smoke and Carbon Monoxide alarms. Fortunately it’s a pretty sensible and inexpensive requirement, so all good.

More details about the legislation and what’s requirements here.

The average house will need 2 smoke alarms (one per floor) and 1 Carbon Monoxide alarm, which should cost about £30 for all 3.

Circumstantial costs

The following costs may apply depending on your specific situation…

ExpenseDescriptionCost (approx)
Landlord License Some landlords will require a landlord license. Will you need one? Well, that depends on the location of your property. Some boroughs require landlords to have a licence, some don’t. The best way to find out is by contacting your local council.£500 every 5 years
Mortgage interest The cost of a mortgage applies to most landlords, particularly new ones. I can’t imagine there are too many landlords that won’t require a mortgage to get their foot onto the ladder. Of course, the interest paid on the loan is an expense and should be taken into consideration.

It’s mostly impossible to provide an accurate cost that will apply to everyone, as every circumstance is unique. So this is something you’ll have to work out. Something worth noting is that, interest on BTL mortgages are generally higher than regular residential mortgages, so don’t base costs on residential mortgage rates. Look at the rates available for products today and base your costs on that.

Varies per case
Landlord Insurance Ideally, this would be under the list of mandatory costs, but in reality, ‘Landlord building insurance’ isn’t a legal requirement for landlords. However, you’d be stupid not to have it. Also, most mortgage lenders won’t lend without insurance.

There are various options available, and many “bolt on” extras, which can come in handy (e.g. legal coverage, which covers costs for eviction). But at the very least, ‘Building Insurance’ should be acquired.

Refer to the Insurance Guide for a rundown of the most common options available.

Varies by case. But I pay £150 per year for a 2 bedroom house
Tenant Acquisition I can’t imagine there are many landlords out there that won’t have to endure the cost of acquiring a tenant, although it is still a “circumstantial cost”, because some landlords won’t (e.g. they’ll let to friends/family). The cost of tenant acquisition can vary depending on the method used e.g. online letting agent Vs High-street letting agent. Online Letting agent: £50
High-street agent: 8% of annual rental income
Empty/Void periods This can be an expensive period, and it most commonly occurs during the transition between old tenants vacating and new tenants moving in. There’s almost always a void period, especially during a slow market, or/and repairs and decorating needs to be done before the new tenants move in.

This is when a contingency is useful, because you need to remember that your running costs will be going on, most notably mortgage payments, insurance and council tax.

Varies by case.

Here are a few other areas to consider…

Utility Bills
Generally, tenants are responsible for paying utility bills directly. However, some landlords do offer “bills included” as part of the deal. If that’s the case, this should be added onto the expenses, and also reflected on the rent cost.

Maintenance & Repairs
Most of the points I cover can be inserted into the category of “maintenance and repairs”, but for the purpose of being as transparent as possible, I will discuss certain areas in more detail below.

There’s literally no way of avoiding this aspect of being a landlord, and there’s mostly no way of predicting how much you’ll spend on maintenance. I frequently have boilers, fridges, cookers and the plumbing die on me. However, there have always been years’ when I’ve gotten away without spending a penny on maintenance, while other years the costs have climbed into the thousands (it’s scary). In that respect, it’s pretty much like any other property that’s being lived in.

I’ve also had mother nature have her wicked way with me by blowing over garden fences. Not to mention, tenants that cause so much damage that the tenancy deposit doesn’t even begin to cover the cost of repair. How can you prevent or predict all of that? Impossible. That’s why it’s imperative to have a contingency pot of money to help cover these unexpected occurrences.

However, what I will say is that you can limit the costs. Extended warranties, insurance policies and landlord emergency repair services are available. For example, British Gas offer a landlord cover service, where they charge £15 per month to cover plumbing and electrical faults.

While it is impossible to predict exact costs, it’s very possible to get a better idea of how much you’ll spend in average on repairs and maintenance after a few years.

Size of house
Larger the house, the more it costs to run. That’s the general idea anyways. Reason being is that, simply, there’s usually more to break. But also, larger properties are usually rented to families, meaning there are more people living in the property, and in particular children. That all equates to higher chances of breakage and wear.

Older houses
Generally speaking, older houses are more expensive to maintain because they have older boilers and heating systems, not to mention the electrics.

Redecorating
Every few years and/or after going through a few tenants, you’ll probably have to freshen up the property. It’s part of the landlord cycle.

Personally, I’ve found that the carpets take the biggest beating, as does the paint on the walls, consequently I find myself repainting and laying down new carpets every 3 or so years per property.

Legal costs
The true under belly of being a landlord.

Assuming you’re a good landlord, and you stick to your legal obligations and be a good landlord, the only legal costs you might be subjected to is the prosecution of rogue tenants. This is unfortunately more common than most new landlords are aware of.

The costs of dealing with a rogue tenant can be soul-destroying, and not just the legal costs, but also the associated costs of losing out on unpaid rent, which is usually the case.

Furnished / Unfurnished
While furnished properties do demand higher rent and larger deposits, they do tend to cost more to maintain, for obvious reasons. Some times the extra earned in rent doesn’t cover all the “fair wear” expenses.

Pets
Are you a pet-friendly landlord? Many aren’t, but some are. Tenants with pets notoriously find a hard time finding properties to rent, particularly dog owners. However, landlords can (and do) take advantage by demanding more rent from pet-owners. But it’s important to bare in mind, pets cause damage and may have an impact on the overall cost for maintenance and redecorating.

Smokers
I wasn’t sure whether to include in the list. I know some people get “touchy” about the issue (mostly smokers). However, I do believe it’s something worthy of noting, and from experience, I do believe it to be a real issue.

Similarly to pets, tenant smokers can be destructive, particularly if they’re compelled to smoke inside. Smoke can cause damage, and consequently reflect on the overall cost for redecorating at the end of the tenancy.

Economies of scale
This isn’t something most new landlords will benefit from, but it is something to consider.

I’ve found that some costs do significantly reduce with economies of scale. Meaning, the more properties you have, the cheaper costs can become. For example, I get a good deal on Gas Safety Checks if I order more than 3 at a time. That’s just one example, but this can be applied to many areas, particularly in regards to redecorating and buying materials/supplies. It all adds up.

For a more detailed article on how to save costs as a landlord, you may want to hop over to the best ways for landlords to cut costs & save money article.

The round up

Relatively speaking, there is a lot to pay for, and potentially a lot more than “a lot” depending on individual circumstances. It may even seem like “blow your brains out” expensive (especially the unpredictable maintenance side of things), and I wouldn’t entirely blame you if you now feel compelled to completely abandon ship and throw your money into shady penny shares instead, because right now that seems better stacked in your favour.

Being a landlord definitely isn’t as easy as many believe, and that’s primarily because it’s a business based around people, and people are idiots… they break things, which can be expensive. I’ve had tenants break everything from bathtubs (literally) to my soul (by falling into arrears).

But don’t be mislead, there is profit to be made (obviously), you mostly just need to buy the right property for the right price, and fill it with the right tenants. Sounds easy, right? It’s not. But luckily, I’ve written an in-depth guide for new landlords that cover the essentials. Enjoy it (but only after you’ve finished with me here).

It’s also worth noting that being a landlord is like any other business, the more experienced you are, the cheaper it becomes as you master the craft. I’ve noticed that over the years my expenses have drastically reduced purely through experience and gained knowledge. One particularly significant example is switching from high-street agents to online agents. It’s the best thing I ever did.

For the first couple of years I was using a high-street agent to find tenants. I’d say, on average, the acquisition would cost £700. I paid that excruciating amount for a couple of years. But then I discovered online lettings agents, and my cost tenant acquisition cost reduced to £50. Massive difference, right?

“Once I was blind, but now I see.”

Another example of how experienced reduced my costs is when I realised letting agents are generally the “middle-man” for most services. For example, I often used to acquire things like gas safety certificates and EPC’s from letting agents.

That’s without a doubt one of the most expensive ways of acquiring those things, because agents put a mark-up on the price on the products and then hire third party suppliers. In reality, I could have just gone direct to the suppliers and saved myself a buttload, which is exactly what I do these days.
If I sat here counting how much my inexperience cost me, I’d be a blubbering, incoherent mess. I’d rather just chalk my losses up as lessons well learned, and opportunities to help others.

Lastly, I was just to clarify, a lot of the spiralling costs will be depending on YOU, the landlord, not just tenants. For example, if you use cheap materials and fittings that aren’t fit for purpose or durable, you’re likely to spend a lot more than necessary on repairs. But that’s a lesson new landlords usually learn through experience, because it’s hard to sway new landlords away from spending as little as possible when they’re starting out. However, for more information, you maybe interested in the how to renovate and decorate your buy-to-let property article.

I often become teary-eyed when I think of the money I wasted – not just with online letting agents – but in general. But that’s something wisdom and experience can help iron out. In the mean time, I hope my little nuggets of advice will prove for a good starting point in what you should expect.

Have a contingency

One of the biggest mistakes most new landlords make is that they don’t put measures in place to deal with unforeseen expenses. Being financially ill-prepared can literally cripple a landlord’s business and cashflow, usually in the form of expensive debt, or even worse, negligence of their duties (e.g. ignoring tenants maintenance issues).

The “grab and run” approach can be extremely appealing, and you wouldn’t be the first to fall victim to its appeal. We’ve all done it. As in, when we see money in our account, we just grab and run. But that could lead to expensive mistake.

If you’re able to make profit every month after paying all your expenses (e.g. insurance, mortgage), don’t be tempted by the devil- don’t grab and run with all of what remains. Leave a percentage in there every month, and allow it to build up, which will allow for a nice contingency, to cover (or at least help contribute) any of those unforeseen mishaps. ALWAYS have a contingency in place.

If anyone can think of any other costs, please let me know. I’m pretty sure I covered all of them though, or at least for the mandatory part anyways.

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8 Comments- Join The Conversation...

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Sid 12th January, 2010 @ 13:05

Good information mate..

Im considering buying a property to rent out.

Now, if the mortgage is on capital repayments and the monthly rental income is greater, what sort of tax is paid?

I also have a day job, im on about £26k a year?

Myself and 3 other freinds may do this together, how would the tax issue work there.

How would you go about setting everything up. Do you have any links/guides for new landlords?

1
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Pamela 27th April, 2014 @ 16:44

Simon. You are right in one sense to maximise your allowable expenses on interest only,I've done that too. I think you might not be aware though that your capital gain is based on the selling price minus the purchase price with associated cost of buying.
If you borrow over and above the original purchase price 2 things will affect this strategy;
1. Interest cost on borrowing will not be allowable over the pp unless you demonstrate the released funds were applied to your property rental business.
2. Capital gains will be payable regardless of borrowing levels, when the sale is for an amount higher than the pp

2
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Daf 1st August, 2014 @ 11:22

Similar to Sid's comment above, I am new to the idea of renting but I am looking for some advice from those 'in the know'.

From my research into the rental market, student housing seems to be the area of the highest yield and quickest rate of returns. To me, the figures seem almost too good to be true (whilst in uni I stayed in a 10 bed house where rent was £70 per person per week - £700 a week total). Now with a standard mortgage of say 400-600 a month, the profit margin seems to good to be true.

Essentially my question would be what are the hidden costs to student landlords in particular? I understand the tighter control on fire procedures, gas and the issue of finding new tenants every year, but this alone surely barely touches the overall profit received?

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Dawn 23rd September, 2014 @ 20:29

Hiya i have a property and want togo alone (have no leting agent ) what do you need to be a landlord any advice would be great thank you

4
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Andy 8th December, 2014 @ 15:53

Simon, you mention paying down the mortgage on the rental, but it's more tax efficient if you use the profits to pay down the mortgage on your own home.

Andy

5
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Amie 5th April, 2015 @ 18:46

Firstly, thank you for this site. I have just discovered it and it's a gem!

We currently own our flat but are looking to move and convert it to a buy-to-let mortgage. The plan is a repayment product and to reduce the term of the mortgage so that interest payments are high enough to ensure no taxable profits (then once it has been paid off, remortgage it and use the funds on our own home).

Our buildings insurance is covered by the service charges. Would you recommend other landlord insurance on top of this?

Thanks again,
Amie

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Noel 4th February, 2016 @ 14:53

Thanks, I was looking for this.

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Zoe 10th April, 2016 @ 06:10

I think it's worth noting that you cannot let a property out on a standard mortgage. Maybe stating the obvious here but new landlords trying to work out their profit need to consider the extra costs associated with a buy to let mortgage (higher interest rates and sometimes higher set up fees).

Additionally at the moment banks are demanding minimum of 25% deposit to apply for a buy to let mortgage so needing that capital up front is important.

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