£250 per month per property. The real cost of buy-to-let?

Sep 23, 2009  |  under Buy-to-let, Property  |  by Lyndon Forshaw

I’m a regular visitor – and occasional contributor – to the excellent 4Walls Property Tribes forum. I recently came across a thread started by Richard Greenland who was amazed to learn that many buy-to-let investors budget on spending up to £250 per month per property on maintenance and other costs. His post generated a response from a number of experienced investors (including yours truly!) The general consensus seems to be that although costs can vary quite substantially between individual properties, £250 is a sensible and fairly accurate reflection of the monthly overheads of an average buy-to-let property… IN ADDITION to the cost of any mortgage repayments.

In percentage terms, it was generally agreed that 30-35% of gross rental income should be put aside to cover management and maintenance costs.

A lot of relatively new investors will probably dismiss this figure as hugely inaccurate and inflated. They will tot up their monthly costs and conclude that their outgoings are much lower. However, as a number of the people who contributed to the discussion pointed out, it’s only after you have owned several properties over an extended period of time, that you realise how the costs begin to mount up.

Regular on-going costs such as management fees, vacant periods, property insurance, gas certificates etc are fairly easy to budget and account for. It’s usually these costs which a newbie investor includes in his budget. However, what’s often overlooked are all those relatively small, regular maintenance and refurbishments costs – repairs to boilers, appliances, ovens etc – which soon mount up to become a major strain on your bottom line.

But that’s only part of the story. The big shock comes when you have to start replacing worn out white goods, cookers, shower units, carpets and furniture. Each item on that list could potentially wipe out several week’s worth of rental income.

However, there’s worse to come. Redecoration will be needed every 3 – 5 years. Kitchens, bathrooms, boilers, interior doors etc will probably have to replaced every 5 – 10 years. New windows, external doors, barge boards, guttering, pathways, driveways, radiators etc will be required every 15 – 20 years. Depending on the age of the property and the length of time you retain it, rewires and re-roofs may be necessary. Obviously this sort of major renovation work isn’t cheap. Unless it’s been budgeted for upfront, many people find that their ‘investments’ turn into expensive liabilities.

Buy-to-let is a long term investment. Therefore it’s sensible to budget for all the costs you’re likely to encounter during the life of your investment. The maintenance costs for a new or recently refurbished property are likely to be minimal at first. But over the longer term those costs will grow in significance, particularly when larger scale refurbishment is required.

Buy-to-let can prove to be a very profitable long term investment strategy. But only if you do your sums properly, budget for the myriad of hidden costs that will crop up along the way and put money aside to pay for them when they do. Many people seem more interested in the number of properties they own, rather than the income they’re generating or the true long term value of their investments.

Due to the high cost and scarcity of finance, making genuine profits from buy-to-let is far, far harder than it used to be. I hope the advice provided on forums such as 4Walls will motivate more investors to take a long hard look at their strategies and to double check their figures. I suspect a fair few people may be in for a nasty shock.

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  1. [...] This post was mentioned on Twitter by Vanessa Warwick and Marcus Ide. Marcus Ide said: The real cost of buy-to-let, £250? http://bit.ly/1krkbb by @lyndonforshaw | Great comment. [...]

  2. Tony Jones September 29, 2009 8:40 am

    Spot on, most so-called experts seem to have been involved with ownership for 2/3yrs and have a vested interest in getting others involved, usually some type of commission or lead generation. Things are definately not as rosey as they make them seem.

    [Reply]

    Lyndon

    Lyndon Forshaw Reply:

    Hi Tony,

    Thanks for getting in touch. I couldn’t agree more. Investors need to make sure they are fully aware of all costs before committing to a deal – and not just short term. Gone are the days where you could buy an sell quickly thereafter for a profit. Property investment is a long term game and costs associated with it should be calculated as such too.
    Cheers
    Lyndon

    [Reply]

  3. Lisa Orme September 29, 2009 6:18 pm

    Hi Lyndon,

    as you know the original debate was sparked by an article I wrote in my newsletter stating this mystical £250 a month figure and it’s caused quite a stir!

    I thank you for reinforcing this message and getting it to a wider audience as the more investors understand the TRUE cost of owning property the more people will be saved from ruin as a result of not running their numbers correctly.

    Just a point to note; the really big cost many underestimate is leasehold properties especially newer built properties. We have service charges that range from £10 a year right through to almost £2000 a year – that’s a lot of cashflow down the drain!

    IMHO very few properties (even HMO’s) genuinely cashflow enough to live off. See property investment as a long term wealth creator but make your living off something else!

    Best wishes, Lisa

    [Reply]

    Lyndon

    Lyndon Forshaw Reply:

    Hi Lisa,

    Great point you make here and I would also add that modern leasehold properties have ground rents that can be significant too. I recently built 21 apartments in sunny Bolton with annual ground rents of £250 which is payable in addition to the the £750 annual service charge per flat. These management costs need to be considered in addition to typical maintenance costs
    Cheers, Lyndon

    [Reply]

  4. Mark September 30, 2009 12:13 am

    Hi Lyndon,
    Current buy-to-let without the fluff – thank’s! The costs and hassles are never ending. The good old days have gone and will not return, we now have to look at making money in property through different ways.
    This site does just that – well done!
    Any news on the sourcing report?
    Thank’s, Mark.

    [Reply]

    Lyndon

    Lyndon Forshaw Reply:

    Hi Mark,
    Glad you like the Blog. I agree and I think it’s also important that those thinking of venturing into ‘buy to let’ fully educate themselves as to the real costs. These “hidden” costs aren’t readily pointed out by many of the investment “gurus” out there giving newbie investors a distorted picture. We have several exciting reports and products out soon – the first of which should hopefully be released early November. As a newsletter subscriber you will be the first to receive details.
    Cheers
    Lyndon

    [Reply]

  5. richard greenland October 3, 2009 10:56 am

    Hi again Lyndon and thanks for the honourable mention. I have a new thread on propertytribes which aims to give useful information on how people can minimise their maintenance costs by future-proofing their building at the start. It is at http://propertytribes.ning.com/forum/topics/minimising-maintenance-costs?page=1&commentId=2886658%3AComment%3A18450&x=1#2886658Comment18450

    It meanders a bit as other folk come and go but I hope there is some useful info in there for people. The original thread it sprung from is at http://propertytribes.ning.com/forum/topics/maintenance-costs?x=1&id=2886658%3ATopic%3A13346&page=1#comments

    Rich

    [Reply]

    Lyndon

    Lyndon Forshaw Reply:

    Hi Rich,
    Thanks for the pointers. I’m all for helping investors save money where they can.
    Cheers,

    Lyndon

    [Reply]

  6. richard Greenland October 11, 2009 1:02 pm

    Hi Lyndon, yes this is an oft-neglected aspect of BTL and it came as a shock to me what other people are paying. My own costs are very low at the moment as the place was only converted a year ago. I acknowledge that these costs will rise in time as minor refurbs become necessary. Meanwhile I also feel my costs are likely to be significantly less than others as I have the specialist knowledge and have taken the trouble to future-proof the building in all sorts of ways. I have updated the thread Minimising Maintenance Costs on Tribes this morning, anyone interested can see the link in my last post.

    Rich

    [Reply]

    Lyndon

    Lyndon Forshaw Reply:

    Hi Rich,

    Thanks for the info and the update. You are clearly very knowledgeable and hands on when it comes to refurbishment projects, which as you point out can certainly help in reducing maintenance costs.
    Cheers

    Lyndon

    [Reply]

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