UK landlords are at risk of overestimating the profitability of their buy-to-let investment by neglecting to take into account key running costs, according to research by a property firm.
Platinum Property Partners (PPP) says the total potential cost associated with the annual running and upkeep of a BTL property – including letting agent fees, maintenance, repairs, marketing fees and mortgage interest – amounts to an average of £8,359.
However, it claims almost one in eight (12%) landlords do not take any costs into consideration when calculating the financial performance of their BTL portfolio, leaving them particularly vulnerable to misjudging the returns they will make from their investment.
PPP says that based on a typical portfolio of two rental properties, the total bill associated with running a BTL portfolio could stack up to £16,718 every year, which in turn equals 52% of gross annual rental income (£32,388).
The most accurate way to measure the performance of a BTL investment is by using ‘Return on Investment’ or ‘Return on Equity’, as these methods take into account gross profit, capital gain, and the costs of running the property – including the amount spent on refurbishment.
PPP claims the majority of landlords ignore the impact of void periods on their rental income despite void periods being inevitable for landlords at some stage.
Steve Bolton, founder and chairman of Platinum Property Partners (PPP) said: “The buy-to-let market is a hot ticket investment at the moment for budding landlords looking to generate an income and good level of capital growth from rental property. This is particularly the case now that new pension freedoms have opened the gates to alternative financial plans for retirement.
“But becoming a landlord isn’t a walk in the park, and running a successful BTL portfolio takes continued investments of time and money on top of your initial lump sum investment. Many landlords appear to be burying their heads in the sands and are seriously in the dark about the ‘true’ value of the returns from their BTL investment if they don’t take into consideration regular outgoings such as letting agent fees, repairs, redecoration costs, and mortgage interest. Property investors need to keep note of all these additional expenses to make sure they are evaluating their returns rigorously, as that’s the only safeguard to check if they’re still on course to achieve their goal of retirement income or to supplement or replace their salary.
“If landlords don’t have all the information at their fingertips, they can’t properly assess market risk and opportunities to make informed decisions about the future of their portfolio, or plan effectively. It also makes it extremely difficult to compare the performance of a BTL portfolio against other forms of investment.”