The Detailed Guide to Buy-to-Let Expenses

When investing in real estate, you’d be hard-pressed to discover a strategy as popular as “buy to let.”

What is Buy to Let? 

A buy-to-let property is one that an investor has purchased to rent to tenants.

Buy to let Investors purchase property and profit from the rent paid by tenants. You can purchase a rental property outright or with a buy-to-let mortgage. If you are interested in property investment and buy-to-let costs, this guide is for you!

Buy to Let Costs

As with most investments, initial costs are associated with purchasing a buy-to-let property.

So, for those seeking to update your buy-to-let costs spreadsheet, here are the essential considerations to consider when purchasing a buy-to-let property.

Initial Expenses Buy-to-Let Mortgage

The process of purchasing a buy-to-let property can be broken down into three steps:

1 An investor purchases a property from an estate agent.

2 They find a tenant who agrees to make the monthly rental payments on    time.

3 Then, they will receive a return on their investment through monthly rental income.

Sounds simple, correct? This is merely a summary of the procedure; you’ll need to understand the method in detail to be genuinely effective in this endeavour.

This implies that you will need to familiarise yourself with buy-to-let mortgages, conveyancing expenses, and all taxes associated with the acquisition.

A buy-to-let mortgage is a common choice for investors in buy-to-let properties. This is an excellent alternative if you do not have enough cash to pay a property’s full purchase price.

With the assistance of a buy-to-let mortgage, investors can make a smaller deposit of approximately 25% of the value of the property and borrow the rest from the lender. These mortgages operate similarly to conventional residential mortgages, with the key distinction being that a larger down payment is typically required.

How Much Is the Buy–to–Let Deposit?

Typically, buy-to-let mortgage costs exceed 25% of the property’s value. In general, the more you can provide, the better.

When settling on a buy-to-let mortgage, it’s crucial to determine whether your anticipated rental income will cover the monthly mortgage payments and leave you with a monthly profit.

Can I Obtain A Buy-To-Let Mortgage If I Do Not Currently Own A Home?

This entirely relies on the mortgage lender chosen. Some lenders will approve first-time homebuyers for a buy-to-let mortgage without any difficulty.

Which Taxes Are Applicable?

Taxes account for a sizable proportion of the costs associated with buy-to-let real estate investments.

Stamp Duty Tax

To acquire an investment property, you must pay stamp duty tax. Those purchasing a second property will incur an additional 3% surcharge on stamp duty, regardless of the property’s value.

This applies to you if you already own a home (i.e., you are not a first-time buyer) and are purchasing a second property for investment purposes. You must also pay stamp duty whether you own a freehold or leasehold property. 

Income Tax

Essentially, this is the tax paid on rental income. Investors must report all rental income on their Self Assessment Tax Return.

The amount you pay is entirely dependent on your circumstances and income.

Rental income is taxed at the same rate as regular employment income.

Capital Gains Tax

This tax applies to any profit made from the sale of an asset. This applies to buy-to-let; thus, sellers of buy-to-let properties should anticipate capital gains tax.

The capital gains tax is charged at 18% for basic-rate taxpayers and 28% for additional rate taxpayers.

Professional Advice Cost

Buildings insurance: This safeguards the outside structure, fittings, and fixtures of your residence. It includes permanent fixtures such as doors and bathrooms (though swimming pools may be excluded). The annual average cost of a buildings-only coverage is £113, but this price will fluctuate. It is subject to annual hikes, and since 2017, premiums in the United Kingdom have grown every year.

Mortgage Adviser Cost: You should anticipate to spend between 0.3% and 1% of the loan amount in mortgage broker costs. Depending on the quantity of work required, some scenarios are calculated separately. This is often due to the case’s intricacy.

A home survey in the United Kingdom will cost between £400 and £1,425 on average, depending on the property’s price, size, location, and the type of survey required.

Surveyors cost: A home survey in the United Kingdom will cost between £400 and £1,425 on average, depending on the property’s price, size, location, and the type of survey required.

Legal cost / solicitor / conveyancing: Buying a property typically requires the services of a lawyer or licensed conveyancer to handle all legal matters. Typical legal expenses range between £850 and £1,500 inclusive of 20% VAT. They will also do local searches, which will cost between £250 and £300, to determine if there are local plans or issues.

Other Costs To Consider in Buy-to-Let

Refurbishment / Renovation

Once you’ve bought your property, there are a few costs that you might have to cover. However, you will primarily be responsible for ensuring that the property is fully repaired, cleaned, and equipped with any appliances or furnishings necessary to attract your ideal client.

The cost to renovate a house relies on its condition before tenancy and the amount of maintenance you intend to perform every few years. In addition, the redevelopment will require substantial investment if purchased as a complete property development project.

Letting Agents/Property Management Fees  

This additional fee applies exclusively to people who employ a property management agency. So whether you’re seeking assistance in finding renters and collecting rent or someone to manage the property for you entirely, this is something you should carefully examine and factor into your budget.

The amount you spend on property management and letting agent fees depends entirely on the firm you select. Typical fees estate agents charge is a one-off tenants finder fee of 50% to 75% of the first month rent and 8% to 12% on-going management fees.

General costs when it comes to purchasing a BTL property

Is Investing in Buy-to-Let Properties Right for You?

And there you have it; these are a few of the most significant buy-to-let expenses. Regarding real estate investment, this is merely the tip of the iceberg. If you recall nothing else from this article, keep this in mind: Research is crucial. Keep up with the most recent trends, be cautious with your finances, and study property properly.