In this guide, we explain the various costs you need to be aware of – and of course, the returns you can expect too.
The primary return you’ll see as a landlord is rental income. We are dedicated to ensuring you receive the highest possible rent while remaining realistic, and we will help you get the property in the best condition to attract high-quality, reliable tenants.
When investing in a buy-to-let property, most people focus on the property's rental value. While this is an essential factor in determining the immediate return you will receive on your investment, there is another potential for profit: capital growth.
Capital growth is the difference in value from when a property is purchased to when it is sold. Assuming the property market maintains an upward trend, the longer an investment is kept, the greater the potential for capital growth and the greater the return. You will pay tax on the profit you make – see our explanation of Capital Gains Tax later in this guide. Of course, there are no guarantees regarding the growth of the property market, and we recommend that you seek advice from a financial advisor.
As members of the Association of Residential Lettings Agents, we pride ourselves on transparency. We are completely upfront about the costs involved in using our services – please speak with one of our expert team who will be happy to provide a full breakdown of the costs.
Landlords must pay income tax on the profit they make – i.e., the amount of money left from the rent once expenses have been deducted. It’s vital that you make sure all allowances and lower rate bands of tax are used to their full potential, as losses can affect profits. We recommend speaking to an accountant or financial advisor, as they will be best placed to advise you on this.
Second-Home Stamp Duty
Almost every property purchase involves paying stamp duty unless the property is purchased for less than £250,000 (or £300,000 for first-time buyers).
When purchasing a second property such as a buy-to-let, you must pay second-home stamp duty. This starts at an additional 3% on top of the standard rates, depending on the band the purchase price falls into.
Landlord buildings insurance
Landlord insurance is not essential, but it’s the best way to cover your investment and it will protect you from a range of risks. If you decide to put insurance in place, make sure it’s not standard home insurance – it must be landlord insurance for you to receive the relevant coverage. You’ll be protected against unpredictable events like fires and floods, and you’ll also be insured against claims in the event of a tenant injuring themselves on your property and you being found liable.
If you’re the landlord of a leasehold property, the freeholder will likely have insurance in place but do check to be sure.
Rent and legal protection
The Rent and Legal Protection we can offer to our Fully Managed and Rent Collection landlords to safeguard their rental income is one of the most comprehensive warranties on the market. This warranty provides you with:
- Cover up to 100% of rent owed, with zero excess
- Up to £100,000 of legal expense cover
- 75% rent payment for up to two months after vacant possession of the property.
If you would like to discuss your rent and legal protection options, please get in touch with us.
You will need to pay for the following certificates to be issued:
- Electrical Installation Condition Report (EICR)
- Gas Safety Record (GSR)
- Energy Performance Certificate (EPC) with a rating of E or above
- HETAS Certificate – if the property has a solid fuel-burning stove or working fireplace that will be in use during the tenancy
We can instruct local contractors to come to your property and complete the required checks, or you are welcome to make the arrangements yourself. For more information, speak to one of our team.
Block agent fees (if applicable)
If you are the landlord of a leasehold property, you will need to pay:
- Maintenance fees
- Annual service charges
- Your share of the building's insurance
- Ground rent to the freeholder.
Maintenance fees are used for keeping communal areas clean and tidy, ensuring lifts are serviced and maintained, upkeep of gardens and outdoor spaces, and maintaining entry phone and CCTV systems.
As of 30th June 2022, buyers of new leasehold properties will no longer have to pay ground rent, but if you already own a leasehold property, you won’t be affected by the change in the law and will have to continue paying the agreed ground rent.
Maintenance and repairs
Hopefully, the property won’t need many repairs or items replaced during a tenancy, but you should still be prepared for all eventualities, no matter how small you think the risk may be. The cost of repairs can vary significantly, from a small amount to replace the seal on a tap, for example, to thousands of pounds for repairing a roof.
With our Full Management service, you have peace of mind that we will instruct contractors and prepare quotes to complete any required work. However, you may want to make these arrangements yourself, so contact us to discuss the best option for you.
Unforeseen costs, e.g., void periods and unpaid rent
Although rent arrears and void periods are not technically costs, they do have an impact on the income you receive as a landlord.
The void period is the time between one tenant leaving and a new tenant moving into a property. It is possible to reduce void periods by ensuring any works that need to be completed are scheduled as closely as possible to your tenant’s move-out date and marketing the property to ensure that a new tenant is ready to move in as soon as possible.
Thankfully, circumstances, where tenants might fall behind with their rent payments, are rare. As mentioned previously, our Fully Managed and Rent Collection landlords have the option of our Rent and Legal Protection cover, which safeguards you from the financial losses associated with unpaid rent.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax you pay when you sell or dispose of an asset that has increased in value. Like income tax, you only pay tax on the profit you make – i.e., the difference between the buying price and selling price, and on the total gains made above the tax-free threshold. In simple terms, if you bought a property for £200,000, then sold it a few years later for £400,000, you would pay CGT on your profit of £200,000 – after deducting any allowable expenses, such as legal fees and stamp duty (but not things like the property’s upkeep costs).
There are steps you can take to reduce your Capital Gains Tax bill, but again, we recommend you take professional advice on this.