Performance, Income and Charges
Nearly one in eight landlords fail to consider any additional costs when calculating the profitability of their property portfolio, a study suggests.
More than half do not factor in any repair costs, according to new research from a specialist buy-to-let businesses.
Its study estimated that the total average cost of a buy-to-let property, including letting agent fees, maintenance, repairs, marketing fees and mortgage interest, amounted to £11,359 a year.
Landlords may be overestimating returns by up to 50pc. It said the most accurate way to measure the performance of a buy-to-let investment was 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.
A further cost is “void” periods, when a property is empty between tenants. The study suggested that in any one year, up to 60pc of landlords face void periods, however, only 12pc of these take this into account when assessing returns.
Potential investors can be drawn in by inaccurate or misleading advertised returns, so it is advised that you delve deeper into the detail.
As an example, look at how AVPG show all charges and performances up front, and compare with the example below to see how you could be caught out:
|PI&C||AVPG||Student Pods Example||Car Park Example||London Example|
|Initial Outlay £||54,995||200,000||100,000||400,000|
|Legal, Set up, Admin £||995 Max||4,000||2,000||8,000|
|Stamp Duty (Buying Tax)||3% = £1500||2% = 4,000||0||5% = 20,000|
|Gross Yield/Income Advertised||11% £6,050 pa||12% £24,000 pa||12% £12,000 pa||4%, £16,000 pa|
|Capital Growth Advertised||12%/ 6600||10%/ 20,000||10%/10,000||10%/20,000|
|Service Charges||0||10% pa||20% pa||10% pa|
|Freehold||Yes 999 years||NO||NO||NO|
|Maintenance Charges||0, Guaranteed||10% pa||10% pa||10% pa|
|Void Periods||0, Guaranteed Rental Income Scheme||Approx 5 months pa||na||Approx 3 months pa|
|Management Fees||10% of Income £605 pa||10% of Income £4,800 pa||20% of Income £2,400||21% of Income £3360|
|House/Insurance, Gas Cert, Maintenance||Approx £160 pa||Approx £1,000 pa||Approx £3,000 pa||Approx £3,000 pa|
|Actual net Income £/%||5445/9.9||5,800/ 2.9||3,000/3.0||2,440/1|
|Actual Costs pa £||£160||18,200||£8,000||£13,560|
|Potential Capital Growth||12%/6,600||0||0||0|
|Return Total %/£ pa||19.98%%/10,990||2.9%/5,800||3%/3,000||1%/2,440|