Balance the books: Expenditure that must be taken into account

Posted by Mark Lloyd, Property Mastery Academy on 26 September 2018 | Comments

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As any canny property investor knows, it’s always worth taking the time to do a last scan of the figures before signing off on any deal.

It’s easy to get caught up in projections of capital gains and rental income. But there are a few other boring financial practicalities to take into consideration. Before you take the plunge, make sure you factor in the following costs associated with property that often get forgotten.

property investment cost considerations

Including these in your costs and calculations will help you to ensure that your investment is successful and a profitable addition to your property portfolio.

Calculate agency fees

If you intend to become a landlord, do you plan to manage your buy-to-let properties yourself? If not, then you’ll need to take into account letting agents’ fees.

This is usually worked out on a percentage of rental income. You’ll also need to decide if you want to pay them to completely manage the property for you, or just source tenants. Whichever you choose, make sure you have a detailed breakdown how much you’ll spend on agency fees.

Maintaining gas and electrical appliances

As a landlord, it’s your responsibility to have up-to-date gas and electricity safety certificates. If you’re letting a property that includes white goods, you should also get electrical appliances tested regularly.

And if you intend to rent fully furnished, you’ll need to buy white goods including washing machines, fridges and freezers, ovens and microwave ovens – as well as any necessary furniture.

Is work needed on the property?

If you’re buying an older property have you checked out every aspect of the exterior and interior? Is any refurbishment needed?

And the term refurbishment can cover anything from installing a new roof, or a new kitchen or bathroom to fitting new flooring, carpets or curtains.

Make sure you list every piece of work and each item that will need to be purchased in order to ensure the property is suitable to put on the market to rent.

Are there ground rent or service charges?

As landlord of an apartment, you may be obliged to pay ground rent, and you need to be prepared for any future increases. This is something your solicitor should check before you sign off on a deal – and find out how the ground rent is calculated and charged. Also ascertain whether it’s possible to include ground rent as a charge to your tenant.

While ground rent covers the land where your property is located, a service charge covers services such as lighting and maintenance of communal areas. As landlord, you’ll be liable for paying service charges. Again, find out how they’re calculated and if they’re likely to increase in the future.

Mortgage Interest

When calculating your monthly profit, clearly you need to take this into account. As interest rates are still relatively low, this could give you a false sense of security as your profit will be better than it will be when rates rise so you should always calculate your interest on a nominal rate to stress test the profit - we would suggest at least 5%

Reduce expenditure, increase profits

If you need to reduce the costs associated with managing a property, the simplest way is to cut down on upfront costs.

Let the property unfurnished and you don’t need to worry about kitting it out. And consider if you have the time and resources to find tenants and handle the maintenance yourself. If you can manage it, then that’s more profit for you.

The crucial factor is to ensure at the outset that you’ve fully calculated every item of expenditure associated with the property. That way, you can decide how lucrative the deal really is.

As a guide, these are the usual items you would allow for:

  • Mortgage interest at 5%
  • Letting agent at 10% of gross rent
  • Insurance - say £15-20 for a basic buy to let
  • Monthly operating expenses at 10% of gross rents - this is to create a contingency fund and to cover other Expenses and should be put into a separate account and not spent! Having a contingency fund is a wise investment decision


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