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The Six Types Of Cost

Generally speaking, costs will revolve around the following areas:

• The need for ongoing maintenance of property
• Dealing with tenants’ problems
• Dealing with letting agents and paying them
• Loss of rental income during void periods when you are between tenants
• Legal responsibilities
• The cost of your mortgage

Of course, many of these costs will be tax deductible. But for the purposes of creating a comprehensive picture of your costs, you will need to map out everything – and then work out how to mitigate them!

1) Maintenance

Whatever the age or state of repair of your property – or properties – there will always be the need for some ongoing maintenance. If you’re lucky, this can be minimal, but it will never be none!

Even if nothing ever breaks, malfunctions or leaks, remember that between lettings you’ll need to have a place prrofessionaly cleaned – or at least cleaned to a professional standard; and even if you do it yourself, this should be counted as a cost if it deprives you of doing something else that would earn you more than the cost of cleaning!

You may need to re-decorate – you certainly WILL need to decorate every few years, if you want a place to let well. You may be able to get away with a quick lick of paint, or you may have a rotten floorboard or two under the bath.

Even model tenants rarely take care of a place as they would their own home, as first time landlords quickly discover.

So, you will be well advised to use the cost of maintaining your own home property (and then adjusting this according to the relative size and age of your home compared to the investment property). And one you’ve worked out that cost, you can pretty much add around 30 per cent to it.

It’s not just about tenants who don’t alert you to the first sign of wear and tear or damage or who are careless; it’s also all the other things you will need to spend money on that come under the heading of maintenance – an annual inspection of the gas boiler by a qualified professional, for example.

And, while many tenants won’t bother you at all by alerting you to problems before they escalate, others will be ultra-zealous and demand immediate attention to seemingly trivial repairs, plus other more serious matters that will need professional (and therefore expensive) attention:

• Broken taps
• Broken windows
• Central heating failure
• Broken washing machine
• Non-flushing loos
• Burst pipes

And so on…

2) Tenants

We used the term “tenants’ problems” above rather loosely because within this label we’re including finding them in the first place!

But, whatever way you look at it, tenants are a cost centre.

The main costs associated with tenants are:

• Finding them in the first place
• Replacing them
• Dealing with bad ones

Every six or 12 months, or every couple of years, you’re going to need a new tenant for your property. If you have a large portfolio, there might only rarely be times when all your properties are full.

You can do go about this in two ways, one cheaper than the other in immediate costs (but potentially more costly later).

You can go through an expensive letting agency, or you can go out and get the tenants yourself, which will take up more of your time and involve advertising costs, but will be cheaper overall. Except if you get a bad tenant, of course.

If you do this, then you could end up wishing you had paid the extra and used a reputable letting agency who took up references and had the experience to vet properly.

We generally recommend that landlords use a letting agent and there are a whole bunch of reasons for this, mainly to do with achieving the highest rent and avoiding the dreaded bad tenant. But, we accept that, dispensing with a letting agent does save cash and can work if you’re a more experienced landlord or just one who knows how to source and check out good tenants.

In addition, under tenants, you should include all the minor – but cumulative - costs such as phone calls and travel.

3) Agents and letting agents

Letting through agents can save you a great deal of time and angst (and possibly cash) at one extreme, or it can leave you feeling that you’re paying money for nothing at all at the other.

The difference between these two experiences is that you either have or have not chosen your agent carefully.

Whether your agent is useless of the best of the best, you still have to pay. The difference is that a useless one may actually cost you a great deal more in the longer term, especially if they don’t assist with solving tenant problems – caused by tenants they have selected! The best advice for choosing a good agent is threefold:

• Invest as much time as it takes in asking around locally until one name comes up repeatedly as the best in the area
• Don’t select on price alone – this could well be a false economy
• Don’t automatically select the agent who offers to achieve the highest rent for your property, in fact rarely do this!

4) The dreaded V word

Voids – simply, periods when your property is without a tenant – eat into the yield on your investment dramatically and almost imperceptibly, like moths munching on clothes in a drawer.

Voids are really unavoidable at some stage, but minimising them is probably the most effective way of keeping your yield optimal.

Yield = the rental return on either your investment or the value of your investment property expressed as a %.

It is commonly expressed as gross yield – before all costs have been deducted.

To calculate gross yield:

(Annual rent / Cost of Property) x 100 = Gross yield

Or the yield on your investment:

(Annual rent / Amount You Invest) x 100 = Gross yield

For example – a property costs £200,000 and achieves an annual rent of £10,000:

(10,000 / 200,000) x 100 = 5%

Even without running the numbers, any experienced landlord can explain that all the most effective yield raising measures aim to reduce voids to a minimum.

Your anticipated pattern of void periods will depend on the type of property you have and the type of tenants you are targeting.

For example, if you’re letting to students you might have to allow for long voids during holidays (although more students are now prepared to rent a place they like and want to keep year-round.)

Holiday lets or short term lets of a week or several will generally attract more void periods – and higher rents when they are let, of course.

It is crucial to be organised ahead of a tenancy changeover, allowing prospective new tenants to look round the property in good time. Also, as we said above, it’s important to do necessary repairs and redecorate, etc, as quickly as possible between lettings.

5) Liabilities

This is an area of cost that, while unavoidable, is at least fairly predicable.

As a landlord you must ensure that your properties meet a number of standards and requirements, as defined by law. And you frequently have to pay a to prove that this is the case.

You must have yearly checks carried out by a Corgi registered engineer.

All furniture must be certified fire resistant (to appropriate government standards)

These jobs are very important, but relatively minor in terms of time and money requirements.

Usually arranging these checks can be passed on to your letting agents, but the legal liability will remain with you.

Also in the legal category, we need to include insurance – buildings, and contents if the place is furnished. Additionally, you can take out insurance against tenants defaulting on rent payments, or insurance against the need to carry out repairs to electrical goods or plumbing, etc.

Of course, if you haven’t yet bought your property, you must factor in solicitor’s costs, stamp duty (if any), survey fees, council tax until the property is let (unless the property is unfurnished and empty and exempt), utilities connection charges and so on. This list is by no means exhaustive.

6) Mortgage costs

This is pretty self-explanatory, but don’t forget to factor in arrangement fees, commissions, special insurance charges, application fees and so on and so on!

Copyright © Property Secrets 2007

“Property Management Secrets”
Reproduced with the permission of Property Secrets.

Further information on this topic can be found in “Property Management Secrets”

For extensive, regularly updated information about UK and Overseas property investment and to purchase this book, go to http://www.propertysecrets.net

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