Understand investment costs to maximise profit potential
Property investment could be the game changer that transforms your future, but to get started you must be financially prepared. You must budget for your investment. In this article, you’ll learn more about the upfront costs that I outlined in my article “How much does it really cost to invest in property?”
How much deposit will I need to invest?
The minimum deposit required by lenders on a buy-to-let property investment varies from lender to lender but is usually 25% of the purchase price. This means that to buy a property valued at £200,000 you will need at least £50,000 as a deposit.
Where could I raise the deposit?
There are several ways that you could raise the deposit to invest in property. The most common are:
- From cash in the bank, which is losing value in real terms – especially with savings interest rates at below 2%
- From a work-related bonus payment
- From an inheritance
- From equity in your current home – it’s money sat there doing nothing
You must budget for the Stamp Duty Land Tax (SDLT, or stamp duty) you’ll need to pay the property’s purchase price. This is charged at an increasing rate depending on how much you pay for your investment property. It comes in two portions:
- Residential stamp duty
- Stamp duty surcharge on investment properties
Residential stamp duty starts at 0% for properties valued under £125,000 and rises to 12% on properties over £1.5 million. The rate levied is charged in bands as follows:
|Property or lease premium, or transfer value||SDLT rate|
|Up to £125,000||Zero|
|The next £125,000 (the portion from £125,001 to £250,000)||2%|
|The next £675,000 (the portion from £250,001 to £925,000)||5%|
|The next £575,000 (the portion from £925,001 to £1.5 million)||10%|
|The remaining amount (the portion above £1.5 million)||12%|
The stamp duty surcharge is set at 3% and paid on the entire value of the property.
For a property valued at £200,000, you must budget for £7,500 SDLT, made up as follows:
- Residential stamp duty of 0% on the first £125,000 = £0
- Residential stamp duty of 2% on the next £75,000 = £1,500
- SDLT surcharge of 3% on £200,000 = £6,000
You’ll need a solicitor to conduct property searches, ensure that contracts are in order, and do the conveyancing of your property investment deal. A solicitor’s fees will typically fall between £800 and £1,500, though does depend upon the complexity of the investment opportunity.
Buy-to-let mortgage fees
It’s usual that the lender will charge a range of fees when extending lending for buy-to-let investment. These may include:
|Fee levied||Typical charge|
|An arrangement fee||Up to £2,000|
|Booking fee||Between £100 and £250|
|Valuation fee||Dependent on the cost of the property, but usually around £500|
|Money transfer fee||£25|
|Mortgage account fee||Around £200|
The average buy-to-let mortgage fees paid by a property investor investing in a £200,000 property with a 25% deposit are around £1,600. These are normally added to the mortgage.
Refurbishment, furniture, fixtures and fittings
If you buy existing property to renovate, the costs of doing so can run into tens of thousands of pounds. Whether you buy existing or new build, you should decide if you plan to let the property furnished or unfurnished – and allow for the cost of white goods, furniture, fixtures and fittings.
What total should I budget for to invest in property?
How much you should budget for to make an investment in property depends on several factors. But, as you can see, when buying an investment property valued at £200,000, you may need to budget for an extra £7,000 to £20,000 or more. The higher end is, of course, payable by those investing in existing property, and taking on board the costs of renovation.
How can I keep upfront costs to a minimum?
If you invest in off-plan property, your stamp duty may be wrapped into the purchase contract. You may also benefit from a discount to market value. By using a mortgage broker to source your buy-to-let mortgage, you should be able to find a great mortgage deal and keep initial costs to a minimum.
Property investors who understand the costs associated with investment will plan for them, reducing or even eliminating some, and keep costs to a minimum. Be a savvy investor by budgeting for your property investment, and it will be more likely that your property investment will produce the income and profit you expect it to.
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