5 hidden costs of an investment property that you must not forget

Remember these costs to assess a property’s real income potential

When considering a residential investment property opportunity, beginner investors often get so excited about the rental income potential that they fail to fully allow for the costs associated with a property. Sure, you will remember to include the costs of professional investment property management. And who can forget the burden of the stamp duty surcharge on an investment property?

In my last article, I provided 24 questions to confirm the rental value of an investment property. Answer those, and you will have an accurate assessment of the rental income you should expect a property to provide. If you’ve found a good property in a great location, that potential income probably looks exciting.  You’re keen to buy and benefit from that extra cash flow.

Before you jump in, you should make sure you have considered the following hidden costs that I find so many first-time property investors forget. Understanding these and factoring them into your costs and cash flow projections will help to ensure that a good investment opportunity becomes a great addition to your investment portfolio.

1.      Electrical and gas appliances

Investors often overlook the upfront and ongoing costs of electrical appliances. Beginner investors especially tend to think of a buy-to-let property in a similar way to how they think about their home. The problem is that it isn’t your home. It is your tenant’s home. As a landlord, you will have certain responsibilities, including ensuring that your tenants are safe in their home.

You’ll want to answer these questions:

  • Does the property include white goods, such as washing machines, fridges and freezers, ovens, hobs, and microwave ovens?
  • Does it benefit from central heating, immersion heaters, ceiling fans, and so on?

If any of these items aren’t included in your purchase price, then you will need to account for them in your set-up costs.

Don’t forget, too, that appliances will need regular maintenance to help them last longer. You may also need safety certificates, and it is good practice to have electrical goods PAT tested regularly. These types of cost should be factored in when you work out your cash flow projections.

2.      Is any plumbing, gas, or electrical work needed on the property?

Off-plan property and new build should benefit from new white goods and unused water, electric, and gas systems. If you buy an existing property, these utility services may never have been checked.

Consider the cost of any work you will need to have done on utility supplies, and plumbing in of washing machines, connecting of electrical white goods, etc. Don’t forget to include the costs of regular maintenance work into cash flow calculations.

3.      Do the flooring, curtains, and blinds need replacing?

Think carefully about the type of flooring the property has. Carpets are warmer than wooden floors but could work out more expensive in the long run. Is the flooring attractive? Does it need replacing or updating?

As you view the property, consider the curtains and blinds. Are they included, or will you need to supply them? Most tenants will expect a home to have good flooring, and certainly curtains and blinds. Would you move into a house without a modicum of privacy?

Flooring, curtains and blinds are items that you could negotiate to be included after you have negotiated on price. By this time, the seller is often committed to the sale. They would rather include fixtures and fittings than being forced to remarket the property. This is a tactic used by experienced investors to negotiate below market value deals and enhance their purchase.

4.      How much is the ground rent, and how much might it increase?

You may be required to pay a ground rent, especially if you are investing in an apartment. A friend of mine was horrified recently when his ground rent was increased by 33%.

Don’t let yourself be caught by unexpected increases in the ground rent. You should have your solicitor check for all clauses that detail how ground rent is calculated and charged. Also, consider whether it might be appropriate to include ground rent as an explicit charge to your tenant.

5.      How much is the service charge?

People are often confused by ground rent and service charges. They are not the same. Ground rent pays for the land on which the property sits. Service charges pay for services like cleaning and maintenance of communal areas (such as gardens).

You will be responsible for paying service charges. Find out if they are likely to increase, and by how much.

Minimise your costs to maximise your profits

Knowing these costs and accounting for them before you purchase a property, and when calculating your cash flow, is essential.

For your investment and The 3+1 Plan to deliver the income and lifestyle you need, you need to minimise the costs that you are going to incur to get your property into a state in which tenants can move in. You don’t want to be forking out fortunes to equip it with white goods. You don’t want to be paying high maintenance or service charge costs after you have invested.

This part of the due diligence exercise is designed to give you a clear picture of the costs you are likely to incur. In many cases, this may make or break your investment decision.

To make certain that your rental cash flow projections are spot on, get in touch with Gladfish on +44 207 923 6100. We’ve helped hundreds achieve their lifestyle objectives with property. You could be the next.

Live with passion

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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