Costs To Budget For Before Renting Out A Property

The rent a property brings in each month isn't the actual profit you will walk away with as a landlord. If you are looking at whether or not the venture is worth embarking on, it's really important to know this difference.

There is a long list of costs that actually need calculating into the amount that lands in your bank. And getting this wrong can land you in all kinds of financial trouble.

Before you jump the gun and go all in on your first property, let's take a look at some of the costs you'll be expected to pay as a landlord.

Landlord Insurance Premiums

Standard home insurance does not cover a rental property, so landlord insurance is a separate policy covering things like building damage, loss of rent and possibly if a tenant is injured on the property. If you're trying to get away with standard insurance, none of these will be covered, and nothing will be paid out if uncovered; the policy will likely be cancelled, making it harder to gain further insurance at a low price.

Premiums for rental properties vary depending on the property's value, location and the level of cover chosen. Then there are the add-ons you can choose to bolster the premium, including rent guarantee insurance, which pushes the cost higher. And skipping this in favour of standard insurance will come back to bite you.

Gas Safety and Electrical Certificates

Landlords are legally required to have gas appliances checked annually by a Gas Safe registered engineer every year the property is let. Electrical installations need checking every five years under current regulations, with a qualified electrician issuing an Electrical Installation Condition Report confirming the property meets safety standards. Both certificates cost money to obtain and to renew, and failing to keep them current carries the risk of fines that far outweigh the cost of the inspection itself.

Energy Performance Certificate Fees

An Energy Performance Certificate rates a property's energy efficiency and is a legal requirement before a property can be let. The certificate lasts 10 years, so this is not an annual cost, but it's one that is worth bearing in mind as it needs renewing once it expires. Typically this ranges from £45 to £120 on average, but it can change depending on when it needs renewing.

But the thing to bear in mind with this one isn't the cost of the renewal; it's the cost of the work required to bring the property to the right standards. These things like loft insulation or double glazing and cavity wall insulation etc. can add up so they need factoring into the budget too.

Deposit Protection Scheme Costs

Tenant deposits must be placed in a government-approved protection scheme within 30 days of receiving them, and while the schemes themselves are typically free to use for a standard deposit, some insurance-backed schemes charge a fee instead of holding the deposit directly. This fee usually sits somewhere between £15 and £30 per tenancy. 

This is a small figure compared to some of the others on this list, but if you end up having m multiple properties this can add up, and it is still something worth factoring into your costs as it's not free despite it being legally required. Failure to protect a deposit correctly will impact things like your ability to serve certain eviction notices or land you with a penalty of up to three times the deposit amount.

Property Management Fees

Landlords who don't want to handle tenant enquiries, rent collection and maintenance coordination themselves typically pay a percentage of monthly rent, or in some cases a flat monthly fee for a company to manage the property on their behalf. 

Options like flat fee property management services exist as an alternative to traditional percentage-based fees. This gives landlords a fixed, predictable monthly cost to budget around for more manageable costs compared to percentage-based fees, which can vary.

Repairs and Ongoing Maintenance

A huge expense for landlords is the ongoing maintenance for general wear and tear for a property. Even if you've just renovated and the property is in good condition when tenants move in, there will still be wear and tear as the property accommodates people living in it. These costs can appear at any time and will massively differ in costs and severity of the repairs.

It's a good idea to set aside a portion of monthly rental income specifically for this rather than treating all of it as a profit so you have funds available when you need them rather than having to put off repairs until you can find the money to cover the cost. This is even more important for older properties or ones with an ageing boiler, roofing, or wiring, as these will generally need a larger reserve to account for increased repair frequency or having to replace them sooner than you expected.

Void Period Losses Between Tenants

A property that's sitting empty between tenancies still comes with costs including mortgage payments, insurance and council tax even though no rent is coming in to cover them. The idea here is to budget for at least a few weeks of vacancy per year rather than assuming a property will always be tenanted. This will give you a more realistic picture of annual income rather than basing figures on 12 months or continuous rent. A property that takes three weeks to re-let, for example, loses more than 5% of its annual rental income in that gap alone, and that's before you account for things like cleaning or repairs between tenants.

Income Tax on Rental Profit

Rental income counts as taxable income, and after all allowable expenses are deducted, like mortgage interest, letting agent fees and maintenance costs, you still need to pay tax on the remaining profit at your applicable tax rate. It's also worth knowing that mortgage interest relief has been restricted in recent years, meaning the full interest payment can no longer be deducted before calculating taxable profit. And this can push the resulting tax bill higher than you might have initially estimated.