What buy to let costs are there? Expat guide

If you are serious about buy to let, there is one question, more than any other, you need to answer: What’s it going to cost? Spoiler alert: Expats will almost always pay more when they buy property in the UK.

Does that mean you shouldn’t buy? Of course not. It just means you need to be aware of your costs.

If you don’t know what they are, you can’t calculate your income or outgoings. And without those you can’t truly get any kind of feel for your investment returns. Even worse, in many cases, you won’t even know whether or not you can afford your buy to let in the first place.

Fees are critical to a property business because they eat into your profits. If your outgoings are too high compared to the rent coming in, you’ll have a one hell of a job of making any money at all.

Let’s get into it.

Insurance costs

First on the list are insurance costs. Rumours of landlords that don’t have insurance perpetually circulate around property investment circles. Insurance companies make things so complicated that it wouldn’t surprise me if some people just get so overwhelmed by the whole thing that they put off sorting it out.

Don’t let that happen to you. A flood, fire, storm, bad tenant or even a good tenant that has a serious accident on your premises could seriously damage your property business, if not your whole life!

You can read more about the different types of buy to let insurance and get an idea of how to choose which types to pay for here. However, in summary the type of insurance you need, the location of the property and where you live matters. I’m sure you can see where I’m going with this.

Expats can often pay more, if they can find insurance at all. Whilst I can’t find the exact number of home insurance providers in the UK, according to Go Compare there are at least 70. I can only find 1 that will provide me with insurance for the simple reason I live abroad. You may have more options depending on where you live, but its unlikely you’ll have 70.

The lower your options the more you can expect to pay. As an example, an unfurnished studio apartment is likely to cost a lot less than a 6 bedroom house let out to different tenants no matter where you live. As a very rough average expect to pay somewhere around £200.

Tax costs

The next thing to consider are tax costs.

When you run any kind of business, you quickly find all kinds of little (and big!) taxes you need to pay. These are taxes that you are totally oblivious to before you find out you have to pay them. The big three for property are capital gains, stamp duty and income tax.

Capital gains tax only comes into play when you sell a property so I’ll ignore it here but if you are planning on selling a property in the near future you can read more about it here.

As for stamp duty, that is something you pay when you buy a property. There were some major changes in 2020/2021 which we cover in detail here. It’s definitely worth a read if you are thinking about buying anytime soon.

The headline from that article being British expats and other non residents can now expect to pay 5% over standard rates when buying a BTL in the UK.

Though to some this won’t sound like much, believe me, to others it definitely will be. Take a £295,000 property as an example. A UK resident buying somewhere to live would pay £4,750 stamp duty, whereas an expat purchasing a buy to let would pay £19,500. Ouch!

That’s nearly 4 times as much (You can see the calcs here.)

That’s a lot of money in anybody’s book, but believe it or not, it’s still unlikely to be the most important tax you need to worry about.

That role usually gets taken up by income tax.

And that’s because unlike capital gains and stamp duty which are one offs, income tax needs to be paid continuously throughout the life of a buy to let.

And unfortunately, as with stamp duty, there have been some updates to this recently. In the good old days you could deduct mortgage interest and other allowable costs from rental income before calculating any tax liability. However, from 6 April 2020 that is no longer the case. Tax relief for finance costs is restricted to the basic rate of income tax (20%).

Essentially, relief is given as a reduction in tax liability instead of a reduction to taxable rental income. The bottom line being landlords now pay more, especially higher or additional rate tax payers.

And all expats take note, unless you want your tenant or agent deducting tax from your rent you really need to sign up
to the Non Resident Landlord Scheme (which we’ve covered in more detail here).

The good news is, the old days of paper form filling, piles of receipts, the postal service, and dealing with HMRC over the phone have been replaced with a totally online service i.e. the UK Government’s ‘Making Tax Digital’ initiative.

UK residents can use HMRC’s online portal for this. Non residents cannot. However, as a non resident you do have some good options available. These days, there are some great software options available that turn days of messing around with forms into an hour of being led through the process with tips.

Alternatively, if you are busy you can pay a tax accountant to do everything for you. We’ve talked about how you can go about finding one here.

Maintenance costs

At least there is some kind of continuity to tax. Once you’ve figured out what you pay, you can easily plan it into your business.

It’s a shame the same can’t be said for maintenance. There’s simply no way of knowing when or how much you are going to be required to pay.

You’ll find lots of sources quoting the 1% rule. With this rule of thumb, you expect to pay an amount equivalent to 1% of the property value per year. If you have a £400,000 property, you’d expect to pay £4,000 for maintenance for example.

While this is useful to include in your initial calculations to help you decide what return you can expect from a potential property purchase, it isn’t ideal by any means.

That’s because you never know when you are going to have to pay up for maintenance. Not only that, but there is no guarantee that when something does go wrong the price of getting it fixed will be limited to 1% of your property price.

In fact, it’s more likely that nothing will go wrong for 5 years in a row, only for everything to break down together and require much more than 1% of your property price to get fixed.

If you buy a new flat, particular one off-plan, you can probably get away with saving an amount equivalent to 1% of your property price in a pot, hoping that by the time you need it, you’ll have enough.

However, if you are buying an older property, there’s nothing to say everything won’t pack in together the day after you get the keys.

As a result it may make sense to have some extra cash available for maintenance. My rule of thumb is to keep 3-5% of the property price tucked away for when the the proverbial hits the fan.

Another thing worth taking into account for expats is that you often find yourself having to pay for small things you could have done yourself, simply because you don’t live locally.

Agency costs

Fortunately for us, agency costs don’t usually depend on where you live. Instead, they will depend on exactly what your agent does for you.

If you just use an agent to find you a tenant expect to pay somewhere between 5 and 10% of the entire tenancy contract for this service.

For example, if the agent finds you a tenant that signs up for 12 months on a £1000/month contract you will normally pay somewhere between £600 and £1200.

Many agencies also offer a rent collection service. This will typically set you back in the region of 9-14% of the monthly rent. So £90-£140 a month or £1080 to £1,680 a year based on the above example.

Without hard data, I can’t be sure, but I expect most people opt for full management. With this you get pretty much everything done for you, and don’t usually pay all that much more than you would with rent collection alone. Expecting to pay 10-16% for full management shouldn’t see you too far wrong. On our example above, buy to let agency costs should sit somewhere between £100 and £160 a month or £1200 to £1920 a year.

Additionally, it’s also worth noting that you will also usually pay a renewal fee, if the tenant signs a contract extension. I assume £150.

Service charge costs

If you buy an apartment, the chances are you will have service charge costs. Generally these include for costs related to buildings insurance, lighting, cleaning, maintenance of common parts of the building, gardening and any staff that may be required for the daily operation of the building.

Of course property type, location and the exact services provided will all impact the price you pay. I like to assume 20 – 25% of the rental income for service charge costs.

Ground rent costs

When you buy most types of property you become the freeholder. But with some, particularly apartments, you don’t. Instead you lease the ground the property is built upon and as such must pay a freeholder to occupy the land.

It’s annoying if you’ve only ever owned freehold properties but rest assured it shouldn’t break the bank. Experience suggests 1% of monthly rent is a good ball park figure to assume.

That said, it isn’t that long ago, that UK newspapers were filled with scare stories about situations where people’s ground rent was doubling at set periods.

Even though the UK government is supposed to be looking into putting the kibosh on this, it pays to make sure you fully understand how much ground rent you need to pay before you buy.

And it also pays to run a mile from any property where the ground rent is expected to keep doubling at set periods of less than 15 years in the future. (We’ve gone into a lot more detail about why 15 is the magic number here).

Mortgage costs

Mortgage costs aren’t essential for running a property business, but they help. Let me explain.

Yes, some sensible people buy property entirely with hard currency. If you don’t like debt or can’t get a mortgage for some reason and have some cash to burn then why not. However, from a purely financial standpoint taking out a mortgage makes more sense.

As a quick example, a 10% price increase on a £100,000 property means I should be able to sell it for £110,000. In other words, I’ve made £10,000. Not a bad return in anybody’s book.

However, I could have done a lot better if I’d taken out a mortgage to go along with my £100,000. 75% loan to value (LTV) is common for determining how much you can borrow for buy to let mortgages. Essentially, that means you can borrow three times your deposit.

That would give you £300,000 to go with a £100,000 deposit. It also means a starting figure of £400,000 for house price growth (Not £100,000). And most importantly, it means a 10% increase becomes £40,000 as a 10% increase on £400,000 means my house is now worth £440,000.

That’s a far greater return on investment than what you would get without a mortgage. Think of it this way, whereas you get a 10% return on your £100,000 without a mortgage, you get a 40% return with one. Taking out a mortgage juiced gains fourfold! But just to be clear, in practice you’d have all your fees and expenses to know off that so you wouldn’t get all that. But you definitely get more with the mortgage than without it.

I should also point out at this point that though unlikely, it isn’t beyond the realms of possibility for that example to work in reverse. A drop of 10% on a £400,000 property is a £40,000 loss! That leaves just £60,000 remaining from your £100,000 in our example above.

House prices don’t crash regularly, but on occasion they have been known to crash hard like they did in 2008. Some landlords never recovered from that event.

Doing your research, avoiding taking out a bigger mortgage than you can handle, and being in it for the long term, should all help to reduce the risk of this kind of occurrence happening to you.

If that hasn’t put you off and you still intend to take out a mortgage (most people do!) then a quick glance at the table below from the Money Advice Service should give you a good idea of what and how much you can expect to pay.

Fee or charge?	Typical costs
Arrangement fee	Anything from £0 to *7% of mortgage value
Booking fee	Around £99-£250.
Valuation fee	£150-£1,500 depending on the value of the property.
Telegraphic transfer fee	Typically £25-£50.
Mortgage account fee	Typically £100-300.
Missed payments	The penalty for missed payments depends on each lender’s rules. Failure to keep up with mortgage repayments could also result in your home being repossessed.
Mortgage broker fee	On average £500 or a commission depending on the value of the mortgage.
Higher lending charge	If applicable, this is usually 1.5% of the mortgage.
Fee for own buildings insurance arrangements	Usually £25.
Early repayment charge	Typically 1-5% of the value of the early repayment.
Exit/Closure fee	Typically £75-£300.

Arrangement fees used to top out at about £2K. However, recent interest rate rises have left lenders trying to find ways of offering lower rates on their mortgage deals. The most common being increasing initial arrangement fees. Sometimes this might work in your favour sometimes it might not. Its one of those things that you should discuss with your mortgage broker to ensure a particular deal is right for you.

Where there is a range, you might not be surprised to find expats often get quoted at the higher end.

Extra

There are a number of small costs associated with a buy to let property business that people tend to forget about. Will they break the bank? No! But you still have to pay them so it pays to know what they are. None of them should be any higher for expats.

• Tenancy Deposit Fees – from 6th April 2007 it has been a legal requirement for a landlord to hold a tenant’s deposit in one of the government approved schemes or to obtain the correct tenancy deposit insurance. Most people go for option one. If you join them expect to pay around £40 every time you get a new tenant.
• Gas Safety Certificate – if your property has gas, it is essential that you have a gas safety certificate and renew it once every decade. This will set you back in the region of £80.
• Energy Performance Certificate – an Energy Performance Certificate (EPC) is intended to inform potential buyers or tenants about the energy performance of a building, so they can consider energy efficiency as part of their investment or business decision to buy or occupy that building. Expect to pay another £80 to get one.
• Landlord Licenses – in some parts of the UK you need to get hold of a Landlord License if you want to let out property. £50 for 5 years is typical.

The Bottom Line

That’s a lot of buy to let costs to consider whichever way you frame it.

That said, some are definitely more important than others. The additional buy to let costs listed above, along with insurance and ground rent are probably going to pale into insignificance in the scheme of things.

On the other hand service charges and agency costs are always important and either one of them can make or break a buy to let’s investment returns.

Maintenance and tax will depend on what kind of property you buy. Some people don’t pay either, but for others this could be their key outgoing.

As ever, it pays to due your due diligence before you purchase a property and make sure your income, either rental or otherwise is great enough to cover all your costs.