Pauline Davis Blog

Friday 28th October 2011

When considering whether to invest in buy-to-let, it’s surprising how many people only take mortgage repayments into account when looking at affordability.

All too often, they fail to remember that where rented property is concerned – unlike stocks and shares, for example – there is a need for continued, long-term investment in the form of maintenance.

The result? A significant percentage of new buy-to-let landlords end up selling their properties again within a couple of years, simply because they have underestimated the costs involved. Others end up in court, chasing their tenants for unpaid rent which is being withheld due to lack of maintenance.

Luckily, the answer is simple: before you invest in buy-to-let, do your sums properly.

Basically, this involves drawing up both a long- and a short-term investment plan.

Most buy-to-let landlords aim to hold their properties for ten years or even more. During that time, in order to maintain both capital and rental values, you can expect to have to invest in at least one kitchen and bathroom refurb, probably three complete redecorations, and maybe replacement of all the carpeting as well.

All of these are expensive and need to be allowed for when setting out the initial purchase plan. After all, it is wise to focus on the worst-case scenario when looking to invest.  

Oh, and don’t fall into the trap of thinking that you can rely on tenants’ deposits to cover the costs.

Any lettings agent ought to be able to help you with these costings. However, given that many of them consider they’re simply in the business to let as many properties as possible (and may therefore be disinclined to try and dissuade you from investing, just because you can’t afford it!) you might be better advised to do your own sums.

The following are just ball-park figures, but can be used as a general guide:- 

First, rental income is not guaranteed, so it’s a good idea to budget for just ten months of the year. Allow 10% for planned and 5% for unplanned maintenance, plus 10-15% for agents’ fees.

Thus, on a rent of say £10,000 a year, £1,500 should be allowed for agents’ fees, £1,000 for planned maintenance and £500 for unplanned maintenance – a total of £3,000, leaving you with a monthly income over twelve months of approximately £575.

Allowance also needs to be made for buildings insurance, utility bills while the property is empty, an annual gas safety check and the initial set-up costs for the inventory. If the property in question is a flat, there will also be an annual service charge.

Realistically, therefore, the highest mortgage repayment you should entertain ought to be no more than 65% of the rental income – and probably closer to 50%.

Letting property should not be a lottery. Proper forward planning of this kind can help build stability in the market – which in the long term will benefit both landlords and their tenants. 
 

Pauline Davis is operations director of Rushbrook & Rathbone Ltd – partnership providers of outsourced property management