Buy to let - Back to basics part 4
June 18, 2021
The fourth part of our buy-to-let basics series covers the topic of the acquisition costs and running costs of a buy-to-let property.
As a quick recap, Vesta believes the following should be considered by anyone interested to get started with investment property:
- Is being a landlord right for me?
- Setting property goals
- Financing a buy-to-let property
- Costs of acquiring and running a buy-to-let property
We have covered the first three points already and today we will look at the fourth point:
Costs of acquiring and running a buy-to-let property
The deposit for a buy-to-let mortgage is generally the largest cost associated with acquiring a rental property, however, there are significant additional acquisition costs that need to be factored in alongside the deposit, as well as a number of ongoing running costs.
Below you will find several points to consider, however, this list is by no means exhaustive nor complete and you should do further research and assessment on the property you plan to buy before starting out as a landlord.
Depending on the solicitor you choose and the complexity of the transaction and the type of property, solicitors will typically charge between £850 and £1,500 to undertake and complete the conveyancing process.
It is often worth getting quotes from three different solicitors and checking if they have the capacity to act expediently on your behalf, as a quick completion is one of the levers you can use to secure a discount off market value of a property.
You should also ensure that the solicitor you select has extensive experience, and ideally a specialist, with investment and buy-to-let properties as these require a number of additional checks and processes that differ to a standard owner-occupier property purchase (e.g. local licence checks, tenant agreements, appropriate certificates in order, etc) and missing these can often cause significant delays in the process or increase risk.
You should also note that you are likely to be charged some level of fees if the transaction does not complete.
Lenders will typically charge a valuation fee ranging from £250 to £1,000, depending on the lender, the property, and the amount of the loan. Note that for HMOs and blocks the fees are likely to be higher.
This fee is for them to undertake a valuation to ensure the property is suitable as their security. Lenders will then make a loan offer based on the market value or the purchase price, whichever is the LOWER.
It is important to understand that this is the lender’s valuation, not an independent valuation undertaken to ascertain the structural integrity of the property or an independent market appraisal. Should you wish to undertake these, there will be additional costs and they may often be necessary for properties that have had recent works or require development.
Your solicitor carries out searches for anything unusual or untoward, such as rights of way, environmental, water, or clauses linked to the use of the property.
Costs are usually included in the solicitor's fee, and unless there is something seriously amiss or time-consuming, estimate from about £300 to £600.
Land Registry fees
There are some small fees to pay for having the title registered in your name. Your solicitor will pay these and add them to your bill.
If you already own a property and are buying additional ones, you will become subject to the 3% stamp duty surcharge. There is useful guidance from the Government here .
Mortgage arrangement fees
There may be fees associated with your mortgage. These can be quite substantial and can be paid as a lump sum or added to the loan. Most BTL investors add them to the loan.
It will almost certainly be a requirement of your mortgage Terms and Conditions to take out buildings and landlord insurance from the day of completion. This is based on the value of your property. Even if you are a cash buyer, you should still ensure that you have the correct level of protection for your property, in the event of a fire or other insurable peril.
Dressing the property
A new-build property or one where the vendor has stripped everything bare may need "dressing" such as lampshades, hooks behind doors, towel rails, loo roll holders, mirrors, shelves, window coverings etc. Some of these costs, such as new blinds/curtains, can be significant, so it may be worth negotiating with the vendor that they are included as part of the sale.
Your property may need a very deep clean prior to letting, including carpets. Allow around £200 to £400 (and sometimes more depending on the size of the property and the amount of work required).
Gas safety certificate
To let a property compliantly you will need a valid Gas Safety certificate which must be renewed every year. This can cost from £80 to £150 depending on who you use. Find a Gas Safe Engineer at the Gas Safe Register.
Remedial works and preparing a property for letting
There may be costs associated with repairing fixtures and fittings in the property, and bringing it up to habitable standards, such as putting in new carpets, decorating, having a new boiler installed, etc.
Council tax and standing utilities
When you complete on a property, you immediately become liable for the council tax payment.
Check with your local authority if they have any exemptions for empty properties, as each council has a different policy in this regard.
It may take you a couple of months to get the property into a lettable condition and find a suitable tenant, so, during that time, you may be paying the council tax and standing utilities. This also applies to any void periods where the property is vacant after a tenant has moved out and before the new tenants move in.
Energy Performance Certificate (EPC)
A valid EPC is a legal requirement and landlords must have one in place before any property viewings are taken.
An EPC is valid for 10 years but can be renewed at any time if significant energy efficiency improvements have been made to the property and you want it reflected in the report. This can cost from £65 - £120 depending on who you use.
From 1 April 2020 all domestic lettings (including existing) must achieve an E rating, unless a valid exemption is in place. More landlord guidance from the Government can be found here.
Electrical safety inspection/report
Since 1 June 2020, landlords in England are legally required to comply with and ensure national standards for electrical safety are met and obtain a ‘Electrical Installation Condition Report’ (EICR) for their property.
The report must be renewed at least every 5 years by a qualified and competent person. Allow around £100 to £250 (and could be more for bigger properties) for this but note that the price will vary depending on the complexity of the job. Find an accredited electrical engineer on the NICEIC register.
Income tax and National Insurance
When renting out property you may have to pay income tax and National Insurance. You can find more about this on the Government website here.
Smoke and carbon monoxide alarms
Since 1 October 2015 all landlords in England are required to supply and install smoke and carbon monoxide alarms.
At least one smoke alarm is required on every floor of the rental property which is used as living accommodation and one carbon monoxide alarm in any room used as living accommodation where solid fuel is used.
It is the landlords responsibility to ensure the alarms are in working order on the first day of each new tenancy. Thereafter it is the tenants’ responsibility to check the alarms regularly.
Whether or not you require a landlord licence depends on the local council your property is located in. Some councils require landlords to obtain a licence whilst others don’t.
You can find your local website quickly here.
As a landlord you will likely be handling or processing personal information about your tenants such as their name, address and other details, as well as information about other contacts. Under data protection law and GDPR you are obliged to collect, store and protect this information correctly.
One requirement of good data protection practice is to register with the Information Commissioner’s Office (ICO). This applies to landlords too if they are a limited company or as sole trader/individual.
Even if you appoint a managing or letting agent to handle everything around the tenants, as soon as you receive any data that would identify the tenants, this includes a name, mobile number or email address, and you hold this information in electronic format, or if it was shared electronically with you, via email or mobile phone you are required to register.
You can complete this short questionnaire from the ICO to help decide if you need to sign up: Does data protection law apply to my business?
The cost of registering with the ICO depends on the size of the business and fees start at £40 per year. This fee-assessment tool will tell you how much you will need to pay.