To anyone outside the buy-to-let world, it seems as if landlords are sitting back and raking in profits. While this was never really true, a few years ago there was some justification for the perception.
But no longer. A combination of increasing hidden costs and Government measures such as increasing Stamp Duty have left landlords in a position where the average annual return is hardly more than £2,000 on each property.
What Are the Costs?
According to research from the letting platform Howsy, the problem starts right from the beginning, where set-up costs include Stamp Duty and agency fees to find a tenant averaging £7,475.
That’s just the start, though. Ongoing costs include interest on mortgage payments, letting agency fees and maintenance, and on average these work out at:
- Mortgage interest repayments — £6,921 annually
- Letting agency management fees — £1.622 annually
- Repairs and maintenance — £2,077
This adds up to £11,147 a year out of the rent you receive. However, this assumes that everything goes completely smoothly — and how often does that happen?
In practice, you have to accept the reality that you won’t be receiving rent for every single day of a given year. According to a recent survey, the average tenancy involves 23.75 void days a year, which would typically mean £535 less rent than you might expect. And unexpected costs could hit you, such as having to pay court costs to evict a tenant.
What’s the Alternative?
On the face of it, it seems that a buy-to-let rental is no longer a good investment. The average gross return is £13,343, but once those ongoing annual costs have been taken out, the average net profit is no more than £2,140.
However, it is possible to improve your margins. As with most sectors, property management has evolved considerably in recent years, and the traditional model of the high street letting agency is no longer a landlord’s only option.
If you shop around, you’ll find that some of these new-style platforms offer not only much lower fees, but also integrated packages. For example, in place of the uncertainty of repair bills that could hit at any time, you can pay a single monthly fee to cover any maintenance required.
There’s No Substitute for Good Management
Whichever approach you take, though, you won’t make a profit unless you’re regularly receiving the rents due to you. It’s vital not to let arrears build up more than you can help.
If you’re having any problems with rent arrears, feel free to give me a call and we can discuss how I can help you.