Landlord maths - unexpected costs

[Nw34567]

I’m looking at buying a flat that has a separate rental unit attached. We are cash buyers so don’t need to worry about a mortgage, but do need to be sure that the sums work out and we’ll see a return on investment! So can you help with me what unexpected costs I wouldn’t have thought of in my calculations?

The current tenant is apparently paying £1500 per month, inclusive of bills. I am not a higher rate tax payer but this income might push me over, so assume I’ll pay 40% on all of that. I’d also need to pay utility bills, and put away money for repairs etc when needed. What else have I not thought of?

I have been a landlord before, for about ten years ending about ten years ago, but it was a different set up and I’m aware things have changed in that period! Any advice gratefully received.

Insurance. Gas safety check. 5 yearly electric check.

Yearly price increases on utitlty bills, i would be suprised if you make much on this.

Thanks guys, already costs I hadn’t thought of myself! And in case it’s relevant, flat is a small studio, so utility bills shouldn’t be massive.

In terms of profit, I need to be clearing £5600 a year. Anything on top of that is a bonus but not necessary. Do we think this is possible?

Why would you pay the utilities? Surely the tenant pays that? Or is there no separate meter?

Factor in void periods between rentals. We also found each new tenant found lots of things that needed sorting when they first moved in - so the first month or so had quite a lot of 'fixes'.

Paying there utilities would concern me
if I was your tenant I’d have heating on 24/7 easy burn through £500 a month

Do you need a landlord notice in your area. They can be very expensive.

Landlord insurance.

You can offset the bills against the rental income for tax purposes.
You really need some specialist financial advice Angela😄

Yeah no separate meter! So I’m not able to offset against tax either, according to Google, as no way of knowing how much has been used by the tenant.

Be careful as you could get a tenant who just leaves the heating on full blast 24/7 then youd be looking at really high bills. You need specialist financial advice really.

So you need to make approx £467 profit per month? That’s a lot! Is that pre or post tax? Even if it’s pre-tax, I don’t think making one-third of the rent as profit is anywhere near realistic. The average gross yield on a buy to let in the UK is 4-8%. You’re looking for closer to 30%!! Even without a mortgage to pay, that’s looking unrealistic given you’re including bills etc.

A flat with a separate rental unit but doesn’t have its own water & electric meters

Hmmmm you had better check with the council that you can legally rent this out as an AST because it will have to be registered as a separate dwelling for council tax- which the tenant would pay.

If you can’t, then the ‘separate rental unit’ is more of a MIL annex and you’d be getting a lodger and the rules & costs are very different.

Get some proper advice - possibly from the NRLA although you may have to become a member to get their advice.

I'd be concerned about the utilities too.

There are so many things that can go wrong. Make sure you are fully aware and fully insured.

My tenants (a couple) both lost their jobs and didn't pay the rent and then reported me to the council for not doing repairs, even though they were £1000s in arrears. Total nightmare.

Thanks for your reply, I’m trying to understand the figures but not sure I’m clear! According to Zoopla, rental yield is the annual income of the property divided by its value, expressed as a percentage. So doesn’t seem to reflect how much of that I manage to keep as profit? And surely without a mortgage to pay, that’s hundreds more a month that I keep as profit? Am I missing something here?

If you’re a cash buyer you must have a fair amount of cash. You’d be more likely to make that money by sticking your cash in a high interest account? Much safer

Before you go any further I would check out @SummerFeverVenice advice and see if you can actually rent out the unit

Just to break it down further - it would be great if someone could point out any errors in my maths here, or anything I’ve missed!

Rental income pa - £18,000
Taxed at 40%, with first £1000 tax free - £11,200
Insurance £220 (average according to Google) - £10,980
Gas, electric, EPC certificates - £500 (every 5-10 years) - £10,480
15% set aside for maintenance (figure recommended on landlord forum) - £7,780
Utilities - £150 (this is a guess based on what I pay in a considerably larger flat in the same locale) - £5,980

This seems to suggest the income I need (£5,600) isn’t wildly out of reach?

Obviously this assumes full occupancy which cannot be guaranteed, but it’s in a popular area, and has been rented as a short term let before so could fill in the gaps between a longer term tenant.

That’s exactly the maths i’m doing - the money is currently invested in stocks and shares and I need to match that income from the rental unit to make it a smart and affordable buy. It’s really a dream property for us, unlike anything we’ve ever seen, but I need to balance the books before we take the plunge!

I have been a LL for 20+ years and I have never seen the conditions so utterly unfavourable for people getting into buy to let. Obviously everyone’s circumstances are different but investing in stocks and shares seems a lot more certain than property.

If you are going to manage it yourself be prepared to spend the time dealing with the increasingly onerous requirements. Membership of a LL forum like the RLA is helpful. If you don’t already pay for an accountant then factor that in. Stamp duty and cgt could be complicated if the studio is not a separate property.

Thanks Alpha. What makes the conditions particularly tricky at the moment?

A quick google will generate most of the issues but off the top of my head, the things I am grateful for my agent for dealing with are inventories, right to rent checks and compliant information for tenants. Right now, I have two tenants who are failing to pay their rent and I am glad the agent is dealing with them. I have had two fires in the past - both caused by the carelessness of tenants. One caused major damage and both could have resulted in serious injuries or death.

BTL insurance has skyrocketed (not down to previous claims, they were over 10 years ago). Good tradespeople are hard to find. Again, agents can be great at this but they charge you, and the tenants, for everything.

Local councils are cracking down on short-term lets. The government is making noises about charging national insurance on rental income.

Finding good tenants is hard. If you are in a high-demand area you can be overwhelmed with people desperate to home their extended family and pets. For example, I had one woman who wanted to house seven adults, three children and two dogs in a four bed property and she accused me of discriminating against people on benefits when I said it wasn't possible.

ISAs are much less trouble!

Huge difficulties if you want to sell. We are in this position. We need to prove why we want to sell the flat. The renter's needs trump ours at this time and it is going to get worse. It is costing us £££££ - specialist lawyer required.

You mention”we” in your OP - is your partner/ husband close to or at higher rate tax? I assume it would be a partnership, so remember you each will be taxed on some of the profits. Take to a tax advisor, because you may be able to weight the profits towards one of you

I'm a landlord (acquired the dratted properties when I got married) and I swear it gets worse every year.

You will need an electrical condition report (and a new one every 5 years) along with annual gas safety checks. I'd check and make sure the area doesn't require landlords to be licensed. I definitely wouldn't include utilities in the rent, as they will run the heating on full day and night (I've had that happen)!

You need to have a contingency fund for things going wrong and they will always go wrong. New boiler, cooker, etc - tenants tend to not look after things as well as they would if they owned them. Joined the NRLA as they have tenancy agreements there you can download and use - it's about £125 a year though it goes up about 20% every year!

In the budget they may be looking at landlords paying NI on rental income though you may need to have several properties to be liable for this, but it's another lovely outgoing.

You need to keep very detailed records and I would recommend a separate bank account for rental income and paying bills. I've been audited by HMRC before and it's a total ballache having to explain every single invoice paid and rent amount received if your records aren't detailed.

I've been a landlord for about 17 years and have never made any money - I have mostly lost money. It just isn't worth it nowadays and you can make better and less stressful returns elsewhere. It's especially bad if you get a terrible tenant, and you probably will at some stage. I've had some corkers!

EPC certificates - £500 (every 5-10 years)

the EPC is every 10 years, BUT

its changing

BUT

how it’s changing nobody knows

the government was going to change EPC for rental to be C or above, it has now been stopped and a new EPC rating is being devised- which will come out next year and then 2030 a new landlord EPC limits will be activated - but no idea what it will be.

what is the EPC on the rental now?

Is that in England? The law in England doesn;t currently require this but when the Renters Rights Bill goes through, and S21s are abolished, it will.