The real costs of being a landlord

If you’re buying a place to let, you might have dollar signs in your eyes right now – and looking at rent figures, it’s easy to see why. The UK’s average monthly rent is [£794] and in London, a whopping £1,665.

What’s more, over the next 5 years, UK rents are expected to increase by 15%.

But it’s not all sunshine, rainbows, and big piles of money. While there’s good money to be made from buying to let, it doesn’t come cheap either. That’s because there are costs to pay: like the mortgage, letting agent costs, day-to-day running costs, tax…

In fact, one in eight landlords underestimates these costs by as much as £8,359 a year.

Don’t be one of them! Always make sure you understand the costs and plan ahead. This guide can help.

The 5 main costs of renting out a property: a summary

There are five main types of costs to consider if you’re thinking of buying a rental property:

  • A buy-to-let mortgage. You’ll have to pay a deposit, and your bank will also charge fees and interest.

  • Letting agent fees. These vary depending on the kind of service you want. Most letting agents offer three levels of service: tenant-find or let-only, rent collection and full management. More on this in a minute.

  • Legal and admin charges. These include the cost of credit checks, reference checks and registering with the authorities.

  • Maintenance costs. It kind of goes without saying, but you’ll have to make sure your property is safe and in good repair.

  • Tax (Yep, HMRC will want a cut of your profits). You’ll also have to pay stamp duty if your buy-to-let property isn’t the first property you’re buying.

We’ll go over all of these in our guide – but remember, it’s just a simple guide, published on some website. Always check things like your legal requirements and tax with a professional adviser.

1. The cost of a buy-to-let mortgage

Owning a rental property can be risky. Your tenant might lose their job and find it difficult to pay the rent on time. Or you might have trouble finding tenants in the first place, and end up with an empty property for months.

But you still have to pay your mortgage and other expenses, even if that happens. All that means buy-to-let borrowers are more likely to become unable to pay back their mortgage compared to other types of borrowers.)

Lenders are extra wary about these risks, and factor that in to the price of your buy-to-let mortgage. That means buy-to-let mortgages:

  • Need a larger deposit
  • Tend to have higher interest rates than traditional mortgages
  • Have more expensive fees

The deposit

This is the part of the house price you have to pay upfront, out of your own pocket. On a residential mortgage, you can pay as little as 5% of what the property’s worth. But for a buy-to-let, you’ll typically need to put down at least 20%.

According to Zoopla, between 2018 and 2019 people in the UK paid an average of £276,834 for a property. That means a buy-to-let deposit could set you back as much as £70,000.

Expect to pay a lot more in London, where the average property is worth £628,416.

Interest rates

Roughly speaking, there are three types of interest rate you can get on your mortgage:

  • Fixed rate mortgages, where the interest rate is locked in for a set amount of time.

  • Variable rate mortgages. Here, the interest rate (and so your monthly repayment) can go up or down.

  • Tracker mortgages. These are a type of variable rate mortgage in which the interest rate follows – or ‘tracks’ (see what they did there?) – a particular interest rate, like the Bank of England’s base rate.

What’s the average interest rate in the UK? Between April and June 2019 the average rate on buy-to-let mortgages with a two-year fixed rate was 3.09%. Tracker rates were slightly cheaper, at an average of 2.93% over two years. The type of rate you go for depends on what you need from a mortgage – your broker can help you decide.

Most buy-to-let mortgages are interest-only. That means your monthly repayments will often be lower than those on a residential mortgage. But importantly, you’ll still owe your lender the full amount you borrowed when your mortgage term is up. So you’ll either have to save up, or sell the property to cover it.

Fees

Like with traditional mortgages, you’ll have to pay some fees to get a mortgage:

  1. Arrangement fee
  2. Non-refundable booking fee
  3. Valuation fees
  4. Exit fees and early repayment charges
  5. Solicitors’ fees
  6. Stamp duty

We’ve laid them out here.

1. Arrangement fee

This covers the administrative cost of setting up your mortgage. Not all lenders charge it (between April and June 2019, 22% didn’t).

Out of the lenders who do, some bill you a percentage of your mortgage (1%–2% on average). Others charge you a flat fee (£1,504 on average).

You’ll normally have two options for paying the fee:

  • Pay it in full out of your own pocket when your mortgage application is complete
  • Add it to your monthly mortgage repayments

Your broker can help you choose what’s best for you.

2. Non-refundable booking fee

This is a fee which some (but not all) lenders charge to “reserve” your mortgage while they process your application. It can cost anywhere between £99 and £250.

Unlike an arrangement fee, you pay the booking fee at the start of the process. Even if your mortgage application falls through, you still have to pay.

3. Valuation fees

Before your lender approves your mortgage, they’ll want to value the property, to find out how much it’s really worth. Your lender will usually charge you for this. It’s usually £150 or more but exactly how much varies between lenders and depends on the size and worth of the property.

Buy-to-let valuations are slightly more complicated than residential mortgage valuations. Your lender will still want to make sure your property is worth the price you’re paying for it. But, just as important, they’ll also want to check how much rental income it could get you.

As a general rule, lenders will want your rental income to be at least 125% of your monthly mortgage repayment. So, if your repayments are £300 a month, they want you to be able to rent your property for at least £375 a month. This is so you have a buffer when your property is between tenants.

Lenders’ valuations are usually pretty basic. If you’d like to get a more detailed report for yourself – usually called a homebuyer’s survey – you certainly can, but expect to pay more for that. Costs start at around £400.

4. Exit fees and early repayment charges

The exit fee is the cost of maintaining and closing your mortgage. It can be anywhere between £75 and £300.

You may also have to pay an early repayment charge if you take out a fixed rate mortgage and leave the deal early, or pay off more of your mortgage off than you agreed to each year with your lender (that’s called ‘overpaying’).

An early repayment charge can be as low as 1% and as high as 5% of the mortgage you’ve got left to pay. So, if you wanted to leave a mortgage deal early and you had £150,000 left to pay, your early repayment fee would be £7,500. Some lenders also make you pay back the cost of the valuation, and some other fees too.

5. Solicitors’ fees

You’ll need a solicitor to take care of conveyancing – the legal side of buying a property. Conveyancing can cost anywhere between £850 and £1,500.

Your solicitor will carry out searches to find out if there are any problems with the property – for example, they’ll check the area for risk of flooding. (They might charge you a seperate fee for these searches, on top of their professional fees – it depends on the solicitor.)

They’ll also do other important tasks, like:

  • Go over the contract of sale, explain it to you and swap signed copies with the seller
  • Transfer the money to the seller
  • Arrange the payment of your stamp duty to HMRC
  • Register the property with the Land Registry

6. Stamp duty

Stamp duty is a tax you pay when you buy a property. If your buy-to-let property isn’t the first property you’re buying, then you’ll need to pay a higher rate of stamp duty on it than usual.

Stamp duty is a pretty meaty topic so we’ve written a whole other guide about it. Scroll down to Buy-to-let to see exactly what you’ll pay in England, Wales and Scotland.

2. The cost of hiring a letting agent

So you’ve got the keys to your property. Step one, done. Now to start reaping the rewards, you have to find tenants.

You can go about this two ways:

1. Do everything yourself. This means you have to:

  • Advertise the property
  • Arrange and conduct viewings
  • Handle the admin, including credit checks, reference checks and drawing up the tenancy agreement
  • Pay your tenants’ deposits into a tenancy deposit scheme
  • Collect the rent
  • Manage the property on an ongoing basis, address tenants’ queries and concerns and handle maintenance and repairs

2. Hire a letting agent to do all that for you

Going DIY is usually the cheaper option. For example, you can list your property on Rightmove for free. The flipside is it can be stressful and time-consuming. And you’ll need to make sure you understand all the rules, regulations and procedures around being a landlord.

Hiring a letting agent is more convenient. But convenience has a price.

Letting agents tend to offer three levels of service. Here they are in order of least to most expensive:

Tenant-find, or Let-only

For a one-time fixed fee, your letting agent will advertise your property, book viewings, arrange the let, and take care of tasks such as checking references, running credit checks, drawing up the inventory, drafting the letting agreement, and collecting the security deposit.

Fees vary by region (as you’d expect, it costs more in London, for example). And they’ll also depend on the agent. For example, the Edinburgh Letting Centre’s fees start at £295 plus VAT. Compare that with Foxtons’ let-only fee, which is 13.2% of your annual rent.

Rent collection

The letting agent will collect rent on your behalf and chase late payments. Fees vary from one agent to another. Expect to pay around 5% of the rent or more for this service.

Full property management

With this option, your letting agent will take care of everything – from finding tenants to collecting rent, addressing tenant queries and complaints, and organising maintenance and repairs.

Again, fees vary from agent to agent. But you can expect to pay around 12% of the monthly rent or even upwards of 20%.

And for all these options, if your tenant decides to extend their lease, you’ll have to pay a renewal fee.

To set up the tenancy and make sure all the legal boxes are ticked, you’ll have to pay a host of charges. That’s whether you use a letting agency (see section #2 above) or not.

Referencing, credit checks and admin

It used to be that tenants had to pay these costs. But this was banned in Scotland in 2012 and England in 2019, and is likely to be banned in Wales and Northern Ireland too.

So expect to pay an average of £400 to cover these costs. If you use a letting agent, they might pay it for you – but probably raise their fee to make up for it.

Deposit Protection Scheme registration

This protects your tenants’ security deposit during the tenancy. Fees can vary quite widely from scheme to scheme. And it depends on the size of the deposit too. For example, myDeposits costs £19.12 for deposits of up to £500 and £26 for deposits over £500.

Energy Performance Certificate (EPC)

An Energy Performance Certificate shows how energy-efficient your property is. You need to get one every 10 years and right now, it costs between £60 and £80.

Gas Safety Certificate

If you’ve got any gas-powered appliances and fittings, you’ll need to get them all checked by a Gas Safe-registered engineer once a year. This can cost £80 or more.

Landlord registration

Private landlords in Scotland have to register with the council where their property is located. Private landlords in Wales and Northern Ireland have to register with the Landlord Registration Scheme.

If your property’s in England, it depends on the council. You can check your local council’s rules here.

Registration costs between £34 and £80, depending on where you are.

ICO registration

As a landlord, you’re technically a ‘data controller’ under the Data Protection Act, because you’re handling your tenants’ sensitive personal data. By law, data controllers have to register with the Information Commissioner’s Office to confirm they’ll process and manage people’s data in the right way. (With great power comes great responsibility, after all.) Registration costs £40, and you’ll have to renew it every year.

Buildings insurance

This isn’t a legal requirement, but most lenders won’t give you a mortgage unless you agree to get buildings insurance. The average buildings insurance policy costs £111.83 a year.

4. The cost of maintaining a property (running costs)

Your tenants will do the simple maintenance stuff: like day-to-day cleaning, mowing the lawn and testing smoke detectors. But it’s your responsibility as the landlord to make sure the property stays safe and fit to live in.

By law, you have to carry out gas, fire and electrical safety checks every year. You also have to make sure that any furniture or electrical equipment you provide meets a certain standard of health and safety.

More importantly, you have to make sure your property is in good repair, everywhere, like in the:

  • Structure and exterior of the building, including walls, stairs and bannisters, the roof, and external doors and windows
  • Common areas
  • Sinks, baths, showers, toilets, pipes, and drains
  • Chimneys and vents
  • Heating, including hot water, the boiler, and gas pipes
  • Electrical wiring

How much does all that cost? UK landlords spend an average of £765 a year on maintenance.

5. Letting property and income tax

You’ll have to pay income tax on any profits you make from renting out your property. Zero surprises there.

How much tax you pay depends on many things, but a big one is whether you’re buying your property as an individual or through a company. We’ve written more about that here. If you like thorny taxation issues, you’re going to love it.