Before investing in a buy-to-let, take the time to look at and understand the rental operating costs of a property investment. The type of buy-to-let investment, whether single let, HMO or serviced accommodation, will determine the rental operating costs that are relevant for a specific property.
Checking the operating costs of a buy-to-let helps investors understand all of the costs related to a property investment deal. And this is especially important as operating costs can make or break a deal. If a property investment deal you’re looking at is missing any of the relevant information, you should ask the property sourcer for more information and clarification.
Common operating costs for all buy-to-lets
First, we’ll look at the operating costs common for all buy-to-let property investments that investors should consider with any buy-to-let property deal.
Buildings insurance is necessary to protect your tenant(s) and property investment. If your property is furnished or you have other items in the property, you’ll likely want to also get contents insurance. The cost of buildings and contents insurance varies widely; however, it is reflective of the value of the property. For simplification, insurance can be estimated per annum as 0.1% of the estimated value.
Void periods are when the property is not let and does not generate income. As a property investor, you’re bound to face a void period at some point, and it’s important to be financially prepared for this. We recommend planning an estimated two to three weeks of unrented periods per year, which amounts to approximately 5% of the total yearly rental revenue.
Maintenance costs cover any renovations, repairs or replacements that need to be made, such as fixing a boiler or leaks. On average, 2% to 5% of the annual rental income can be estimated to cover maintenance of a property for a year.
Management services can help you run your buy-to-let properties with less hassle. It’s your choice whether you want to use a management company or not. The market rate for a specialist agency to fully run and manage an HMO typically ranges from 10% to 15% of the gross rental income. However, since HMOs can be extremely time consuming, there are less letting agents that manage multi-lets.
Additional operating costs for HMOs and serviced accommodation
Now, we’ll cover the other operating costs predominantly related to HMOs and serviced accommodation.
Utility bills include water, electricity and gas. Estimated utility costs will need to be based on the number of tenants in a property.
Internet & TV license
In this digital age, tenants of HMOs and serviced accommodation expect high speed Internet and a TV license to be included in the rental price. Currently, high speed broadband is estimated to cost £360 per year, while the cost of a yearly TV license fee is £155.
Council tax is another operating cost to consider. Visit MyCouncilTax.org.uk to find an estimate of how much council tax you would owe for a specific property. On this website, you enter the postcode, and then properties in that postcode are listed with the Council tax band and the estimated annual council tax amount. It’s important to note that these are approximate amounts only. Check the council’s website to get the exact charge.
To estimate the cost of cleaning a property investment, multiply the cleaning requirement by the cost of cleaning per hour. Housekeeping is typically provided with serviced accommodation and cleaning is necessary before a new guest or tenant arrives, which can be a substantial cost for this type of investment.
Calculate operating costs
To quickly calculate the potential estimated operating costs of a property investment, use PropertyMenu’s deal calculator. It will instantly estimate the relevant operating costs based on information about the property. The deal calculator doesn’t provide 100% accuracy, but provides an educated estimation.
Using the deal calculator helps investors understand the estimated operating costs that need to be taken into consideration when assessing a property investment deal. This will reduce the risk that comes with unclear and confusing property investment deals and can help you make more informed decisions on property investment deals.