If you’re thinking of becoming a landlord, you’ve probably compared the rental price you believe you can achieve against the monthly mortgage cost you’ll need to pay. But the real costs of being a landlord are much higher than most first-timers think.

Here, we break down the costs so you don’t have to. 

Mandatory costs

These are the compulsory fixed costs that you always have to pay to meet your legal obligations.

1) Income tax

You’ll need to declare the income you make after deductible expenses (for example service charges, landlords' insurance, legal fees etc.) by filling out a self-assessment tax form every year, and pay income tax accordingly. HMRC will work out how much you owe, which will be 20% or 40% depending on your other income. Don’t be tempted not to declare - HMRC are actively cracking down on landlords.

2) Certifications

Legal regulations mean that you’ll need to make sure any gas and electrical equipment and wiring are safe and that you’ve provided fire safety equipment.

You’ll need to get:

• A gas safe check each year (to cover gas boilers and heating systems, and any gas appliances including cookers). The cost varies: British Gas charge £75 upwards. 
• A smoke alarm on each level of the property, and a carbon monoxide alarm in any room where there is an appliance that burns solid fuel (such as a wood burner). Smoke alarms cost around £15 for a basic battery alarm, to around £80 for a mains-powered alarm. Alarms must be tested at the beginning of each tenancy.
• If you run an HMO, you’ll have additional fire safety costs. They include installing a fire extinguisher on each floor in communal areas, at a cost of £50-80. You might also need to install fire doors and alarms. The regulations are complicated so you should speak to your local authority or property manager and they will help you carry out a risk assessment.
• Electrical safety checks. You’re required to make sure that all the electrics and electrical equipment in the property are safe. The best way to do this is with an electrical safety check. HMO landlords need to do this every five years. It’s not a legal requirement for other landlords, but it is recommended. The cost varies depending on the size of the property, but is usually £100-200.
• An Energy Performance Certificate. The EPC rating gives your tenants an idea of how much they’ll have to pay in energy costs. Your property will be on the EPC register for 10 years at a cost of around £50.

Other costs

1) Agency and letting fees

Letting agents’ fees cost around 15-20% of your rent for full management, which includes things like answering tenants’ questions, managing maintenance issues (but not paying maintenance costs), and collecting rent. Most estate agents offer a cheaper service of around 10-12% of the rent, for rent collection only, or a fixed fee of around three weeks’ rent for letting only.

However, if you choose either of the cheaper options, you’ll need to make sure someone is able to be on-call to deal with tenants queries at all times (think about what you’ll do if you’re on holiday, for example). 

Extra costs to look out for: Agencies will also usually charge one-off costs for checking tenants’ references, renewing tenancies and carrying out inventory checks. These are likely to be around £50 - £100 per tenant, or around £150 per property for inventory checks.

Can I avoid agency costs?

You can let the property yourself without an agency, but that isn’t a cost-free option. As well as the need to find someone to be on hand when you’re not there, you’ll need to factor the cost of advertising your property and professional photography. If you need to take time off work or incur travel costs to show prospective tenants around, you’ll need to factor that in too. You might also find your property is harder to let, so you’ll lose money that way. DIY letting costs could be anything from £150 to £1000 depending on your circumstances. 

2) Insurance

Landlords’ insurance costs around £200 a year, and although optional, it is absolutely advisable if you wish to avoid incurring excessive costs in the case that something goes wrong. Always shop around each year for the best deals. 

3) Mortgage costs

Depending on your mortgage provider, you will need to pay fees when you renew your buy-to-let mortgage, and mortgage interest tax relief is being phased out, meaning your tax bill will increase.

4) HMO licenses

If you have an HMO, you’ll need to get a licence at least every five years. The costs vary depending on your local authority and the size of the property, but are likely to be between £500 and £1500.

5) Maintenance and repairs

According to PropertyWire, the average landlord spends over £3000 a year on maintenance and repairs, including:

• £360 on renovations
• £370 on boiler repairs
• £313 on structural damage
• £265 on decorating
• £203 on garden maintenance

Repairing damage to the inside of the property, replacing white goods, cleaning and removing things that tenants have left behind accounted for the rest of the costs. Whilst insurance might cover some of these costs, you’ll still need the cash to pay up front before reclaiming.

6) Void periods

Even the most desirable properties will sometimes lie empty. The average landlord lost around £500 to void periods in 2018.

Feeling overwhelmed? It can be difficult to work out all the costs of letting your property but it can still be a profitable business with good financial planning. Follow us on Twitter @lyvlylandlords for more advice or get in touch with us directly.