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.

OP, I would seriously contact someone like the NRLA or the RLA. The membership fees aren't expensive and it might be worth it just so you can make a fully informed decision. They should have helplines you can call to discuss your specific circumstances.

Renting has changed a LOT since 10 years ago - the legislative burden on landlords is far greater and tax is far less advantageous. That said, if you won't have a mortgage you will escape one of the biggest cons ever which is called Section 24; basically taxing on income rather than profit.

But remember you can deduct all reasonable running costs from the rental income before declaring for tax. Not sure on your point re: utilities if the meter is shared, presumably you can deduct a %? Don't trust Google - get proper advice.

Do you need a licence to rent out a property from the council? In my area, it’s just under 1k for the licence for the simplest property, also proving that you have up to date EPC and gas checks.

@TeenagersAngst Scotland. We want the tenant out and to sell the flat on the open market. We have bent over backwards to be helpful - about 4 years now hence the legal input.

I don't think the rental income is generally considered the only income from property investment, you'd hope for some capital gains too.

When you say you need £5600, is that to get the % return on investment you'd expect elsewhere? In that case don't factor in tax, as you'd pay that wherever you invest.

The thing that holds me back is the idea of a nightmare tenant causing a lot of damage and/or legal fees. No idea how likely that is in reality.

Have you considered using it as an air BnB instead? No experience of this but others can advise if works out easier / cheaper / more tax efficient / lower risk etc even if brings in a lower income

Picking up on your point about the cash being invested in stocks and shares. Unless it is all in ISAs don’t forget about Capital Gains Tax.

I have no idea but should you pay tax on the money going to utility bills etc, are they an expense of being a landlord? I would take advice on how much should be taxable and how much is allowable.

And don’t forget CGT when you sell

Thanks for your reply. I'm surprised at the price, I just got an EPC for my property and it cost £60 - is the system different for a rental?

The EPC is currently a D.

Thanks for your reply. When you say you have lost money - does this include mortgage payments? So if you owned the properties outright you would be in profit?

Thanks for this, seems my council only requires licenses for HMOs.

Yes this is a possibility! Although London has a 90 day limit on Airbnbs - not sure if this extends to other short term lets too.

ISAs definitely less trouble, you're right there!

Basically, a dream property has come up for us. Over budget, but alongside the property we would live in, there is a separate studio flat - so we are working out if we could spend more cash that is currently invested, and make up the return from the rental income. Keeping that money invested and buying a more modest property would almost definitely be a more prudent decision, but this property is one of a kind and really somewhere we'd dream of living, so we're willing to take a chance if we can balance the books.

The situation is made all the more complex owing to the nature of the flat - I'm not sure the studio is technically a separate address. It doesn't show up on the Royal Mail address finder, or to be registered for Council Tax. This makes me wonder if it would be a lodger-type agreement rather than a proper tenancy, which might make things simpler or more complex? Anyone have any experience here?

I've been a landlord for about 17 years and have never made any money - I have mostly lost money

to the PP to posted this- hasn’t the mortgage been paid down in that time, and is the property worth more than it was 17 years ago? I wouldn’t expect to make much month to month profit from being a landlord, to me the profit is in the acquiring of an asset.

I think your last post throws up issues that would need to be clearly resolved before you invest.
As it is a separate dwelling you need to ask all of the questions pp have highlighted if the plan is to rent it out. Separate gas/electric, registered as fit for habitation (fire escape windows etc), registered for council tax etc?

I think you need specialist advice. If a dwelling is a separate, self-contained unit it could be liable for separate council tax. Self-contained usually means it's own entrance, a kitchen (even a rudimentary one), a bathroom and a living/sleeping area. Is the kitchen fire-proofed from the rest of the studio?

Don't assume that because it has been rented out by the current owners that they are doing it all above board. They could well be cutting corners and hoping the Council and/or the tax man won't catch up with them.

The fact that this is a way to enable you to make a dream property purchase come true means that only you can decide whether the hassle and risk is worth it.

Also depending on how close this is to your home, remember you will have people coming and going all the time, possibly with multiple cars, guests, garden noise (if they have access to outside space), children and pets

It's a studio in inner London so no worries about cars, gardens, children or pets. I suppose the tenant could be noisy but then so could any of our other (many) neighbours - in fact we'd have slightly more control over this neighbour than we do any of the others, so that's an advantage!

Thanks, you're right that there are a lot of questions we need answers to. Hoping we can get more information from the seller if we decide to proceed. When you mention specialist advice - what sort of specialist would you suggest would cover this area?

the ePC is for any type of property and £60 is going rate

but if your property is only D then it may cost you to update to a different level so you are able to rent

unless you have a logger in the annex / that might be different

The yield is calculated as a % of how much the property cost. Not as a % of the rent.

Yes with a rental of £1500 pcm even with you paying utilities with no mortgage you should clear that. I have a rental property than rents for less (£1000) (but the bills aren't included) and clear that.

However, if the studio is not stand alone but includes bills and council tax(?) then perhaps they aren't a tenant but a lodger?

You’re not missing anything- that poster is working out yield incorrectly. you are correct.

if the property isn’t classed as a separate dwelling for tax purposes I’d have thought you could claim the rent a room allowance. You would need to check it met the requirements but would give you 7.5k tax free.

Otherwise, I would think hmrc would accept a reasonable apportionment of costs based on the number of rooms in your house.

I don’t think your figures are unachievable at all.

I suspect MikeRafone means the EICR - the electrical certificate which needs to be renewed every 5 years.

The EPC is different. If you’re currently a D, get ready to be required to improve the property to be able to achieve a C. That’s probably another bonkers requirement coming down the tracks.

The current EPC minimum requirement is E but as I said in my last post, there have been proposals put forward to change that to C.

A property lawyer?