Unexpected Costs Sting Buy-To-Let Investors

According to new research from a national estate agent, 84% of landlords receive less annual rental income than they expect. They found that landlords are losing £2.1bn a year in arrears, void periods, and maintenance charges.

Nick Cooper, said, “While buy-to-let has the potential to be lucrative, many landlords don’t appreciate the expense and time that are actually required.”

With rents at an all-time high, the temptation to enter the buy-to-let market is strong. LSL Property Services found the average UK rent to be £741 a month in September, 3.2% higher than the same time the previous year. Increasing numbers of novice landlords are jumping in without a good knowledge of the potential pitfalls and how to avoid them.

Damage to the property can often be covered by the tenant’s deposit, but sometimes the repair work has to be more extensive and therefore costly, leaving the landlord dipping into their own funds. The typical deposit of six-weeks rent is unlikely to cover serious damage.

Kate Faulkner of Designs on Property, an advice service, said, “All landlords expect wear and tear, but clearly some tenants are higher risk. Students are likely to have late-night parties, while young children are likely to drive toy trucks into your skirting boards.

“Think carefully if you want tenants who smoke or have pets. It’s not necessarily a bad thing but you must protect yourself for example, you could stipulate that curtains and carpets must be professionally cleaned when they leave.”

Routine repair costs, such as fixing a boiler, faulty electrics or a leaking roof can all run up costs in the thousands, especially in older or poorly maintained properties.

Tenant’s are expected to pay the rent on time, but they don’t always do, which can be very distressing and financially worrying for novice landlords. LSL’s data showed that 9.1% of all rent in September was late or unpaid. It is estimated there were 99,000 tenants who hadn’t paid rent for the past two months, the highest number since 2008, when their records began. The number of tenants facing eviction notices in the second quarter of 2012 was 25,422, an 8% increase on the previous year.

David Brown, commercial director at LSL Property Services, said, “This is a nightmare for landlords because they have a property that is neither providing an income nor able to be quickly filled.”

Although it isn’t easy to foresee whether a tenant will face a sudden financial hardship such as being made redundant, it is essential to make thorough checks before accepting them. A reference from their employer should be obtained, and credit reference checks carried out. It is a good idea to ask to see the previous three months bank statements or salary slips. Checking with the tenant’s previous landlord or letting agent to find out if they have ever missed rent is also helpful.

Void periods between tenancies are also financially damaging, especially for landlords relying on rental income to pay their mortgage. However, rushing in tenants is a mistake, as they may be unsuitable and could prove more costly in the long term.

Time consuming and expensive paperwork for things like property tax, HMOs, and EPCs catch both novices and experienced landlords out. Chris Norris, head of policy at the National Landlords’ Association (NLA), said, “There are over 50 Acts of Parliament and more than 70 sets of regulations governing the private rented sector. Even experienced landlords come across new challenges.”

The cost of buy-to-let mortgages surprises some landlords, despite the record low Bank Rate. Aaron Strutt at broker Trinity Financial said, “Buy-to-let tends to be more expensive than residential mortgages as they have higher rates and bigger arrangement fees, sometimes as much as 3.5% of the loan.

“It is also important to check the reversion rate of the mortgage when you choose a rate. Selecting a cheap deal now could cost you a fortune if you find yourself in a position where you can’t re-mortgage to another bank.”

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