When it comes to running costs for your rental property, you can try and budget for every last key, stamp and phone call, but the only certainty is that you’ll be wrong. We try to be wrong in the right direction, with broad but pessimistic estimates of:
Mortgage repayments. If you have a mortgage, this will almost always be your biggest cost. To make sure you can afford it if interest rates rise, stress test for a 7% repayment rate. (The historical UK base rate averages 5%, with typical variable-rate mortgages at 2% above that.)
Maintenance. You never know when the boiler will go belly up or the shower sprout a leak. Costs are hard to predict and vary hugely by property type. You can use 5–10% of the annual rent as a starting point.
Service charges and ground rent. You’ll have to pay these annually for a flat or leasehold property. Costs vary depending on the building’s style and age, number of flats, state of repair and facilities. Stucco facades, lifts or underground parking all mean you’ll cough up more.
Agent fees. If you use an agent to let and/or manage your property, this will set you back 8–20% of the rent.
Insurance. You’ll need landlord buildings insurance as a minimum, or you could be left with nothing but a mortgage to pay if your place burns down.
Empty periods, also known as ‘voids’. Factor in the cost of lost rent when your property stands empty between tenancies or to do works. Some landlords assume this will not happen, but it’s prudent to budget for at least 1–2 months of lost rent a year.
Utility bills. Only if you pay them, for example when you rent out your property by room.
No, we haven’t forgotten that tax is a cost. You will be taxed on all property income less allowable expenses. However, because tax varies so much depending on your circumstances, we have not dealt with it here.