The hidden costs of buy to let investments

The buy to let market presents an opportunity that seems too good to miss – whilst your property is appreciating nicely, your tenants are, in effect, buying it for you.

It is only when you start arranging buy to let mortgages, finding tenants and preparing your property for rental that you realise how many hidden costs there are.

Arranging your buy to let mortgage

The growth in buy to let purchases has been fuelled by the banks and building societies. Ten years ago, for example, it was very difficult to obtain mortgages to finance buy to let properties.

Times have changed and many lenders now offer buy to let mortgages. Obtaining buy to let finance has now become relatively easy, however the willingness of lenders to finance these purchases is only matched by their readiness to make large profits from investors.

If you have ever tried to arrange a buy to let mortgage, you will see what we mean.

High mortgage arrangement fees

Arrangement fees, valuation fees, telegraphic transfer fees and legal fees should all be taken into account when comparing buy to let mortgage offers.

Some banks and building societies proudly advertise that they do not charge arrangement fees for fixed rate buy to let mortgages. Excellent, you think, until you realise that they are charging one percent more interest than other lenders.

Take Lloyds TSB, for example. They are currently advertising zero product arrangement fees for some of their fixed rate mortgages. The slight catch is that at the time of writing, they are charging 6.88% for their two year fixed rate.

You can currently obtain three year fixed rate deals with Godiva Mortgages (part of Coventry Building Society) for 6.09% but there is £1000 booking fee.

Balancing arrangement fees against higher rates is complex and depends on your circumstances, however you should be aware that buy to let mortgages are expensive to arrange, particularly when you consider the cost of valuation surveys and legal fees.

Click here to get a free, no obligation buy to let mortgage quote

Costs of finding tenants

Letting agents are in business to make money so you have to be careful that they are not overcharging you for their services.

Their role broadly falls into two activities finding tenants and then managing your property once the tenant is resident. Both activities can be expensive, and should be factored into buy to let profit and loss projections.

Most letting agents will charge you a percentage of the first months rent, and this can be up to 100 percent of the first months rent plus VAT. This means that if you have two tenants a year in your property, each for six months, then you are spending more than a sixth of your annual rental income on tenant finders fees.

The cost of letting the agents manage your property – arranging for maintenance and other problems to be sorted out and performing quarterly inspections – can be as high as fifteen percent of the rent plus VAT per month. Don’t forget that you then have any maintenance or repair costs on top of these management charges.

Negotiate hard with letting agents

The key to reducing agents costs is to remember that letting agents now operate in a highly competitive market. As more Internet only agents join the fray, they will have to compete harder for your business.

Take advantage of this competition and negotiate hard to get the best deal. Play one agent off against the other, but remember that you do get what you pay for so don’t drive prices so low that you end up with poor service. Void periods are your most expensive cost!

Also consider managing the property yourself although you will need to supply a contract to your tenant and have good contacts with reliable tradesmen. A good way of saving money is to take out service contracts with companies such as British Gas. For around £20 per month you can buy excellent repairs and emergency cover for your central heating, electrics, plumbing and drains.

Managing the property yourself can be tying as you must be available to respond to telephone calls from your tenants at any time, even when you want to go on holiday. Negotiating a good management deal could give you more peace of mind and flexibility, particularly if you are renting out a number of properties.

Paperwork and legal costs

As a landlord you have legal responsibilities and it costs money to ensure that you are fully compliant. Annual checks on your gas appliances, the new rules for managing the tenants deposits, buildings insurance, liability insurance and performing inventories all cost money.

Discuss these costs with your letting agent and ensure that you factor them into your profit and loss projections. Depending on your property these could add up to around £500 per year so be aware of them before embarking into the buy to let market.

As a buy to let investor, you are running a business that the tax inspector wants to know about. Your tax affairs will become more complicated and have to take into account your annual income and expenditure from your properties.

You should ideally employ an accountant to prepare your annual tax return. It can cost at least £200 to prepare the tax return of a buy to let investor, but you can minimise accountancy costs by being very organised with your books and investing in a simple accounts package such as Tass Books, Microsoft Money or Quick Books

Buy to let pain and gains

Becoming a buy to let investor means creating a business with costs and, hopefully, profits. As with any business, it is those who fully understand the costs involved and who have the organisational skills to manage the administrative, legislative and commercial aspects of the enterprise, who will succeed.

Don’t let these hidden costs put you off, but do take a level headed approach to your buy to let investments and you will be rewarded with a business that could grow into a significant portfolio. The rewards are there for those who are aware of, and can manage, the costs and pitfalls of the buy to let market.

Other buy to let articles

  • Becoming a Buy To Let Investor
  • Building a Buy To Let Portfolio
  • Buy To Let And Your Tax Situation
  • Buy To Let Investments and Interest Rate Rises
  • Buy To Let Mortgages
  • Finding the best buy to let mortgage deals
  • Types of Buy To Let Mortgages

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