Do your cash flow due diligence for property investment success
When you invest in property, it pays to know all the costs upfront. There will be taxes, running costs, and insurances. Then there may be service charges, maintenance, and, of course, mortgage interest payments. Understanding the true cost when you invest in property will help you to choose the best property available for your budget. You won’t stretch your finances, and you won’t suffer from a nasty surprise.
Upfront costs of property investment
· The purchase price
The amount you pay for the property. Unless you pay for the property outright, you will need to consider your financing options.
The deposit will probably come from savings or the equity that has built up in your home. A deposit of around 30% is the norm. The balance will come from a buy-to-let mortgage.
· Stamp duty
The amount of stamp duty (Stamp Duty Land Tax) that you will need to pay depends upon the value of the property. This ranges from 2% on properties valued between £125,001 and £250,000, to 12% of the amount paid above £1.5 million.
There is also a 3% stamp duty surcharge on investment properties, irrespective of their value.
· Solicitor’s fees
There will be legal fees to pay, for your solicitor to draw up contracts and conduct property searches, and conveyancing. How much you pay will depend upon who you use, but you should ensure that you use a solicitor with expertise and experience in helping property investors.
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· Mortgage charges and fees
There will probably be fees to pay when setting up your buy-to-let mortgage. These may include:
- Start-up fees
- Set-up charges
- Survey and valuation fees
As with solicitor’s charges, the amounts will vary depending upon lender and product. If you decide to take advantage of a fixed rate buy-to-let mortgage, you will probably have early repayment charges to pay – if you must sell the property sooner than expected, be wary of these.
· Furniture and refurbishment
If you are planning to let your property furnished, you will need to kit it out with furniture – for the living room, dining room, bedrooms, and, of course, the kitchen.
Also, if you are buying an existing property, it’s likely that you will have refurbishment costs to bring the property up to scratch. This could run into tens of thousands of pounds. When you invest in off-plan property, you don’t have this cost – and the property can be rented immediately, meaning the rental income starts flowing from day one.
(Read our article “Existing or new? My investment strategy”)
Ongoing costs of property investment
· Mortgage interest
How much you pay depends on a variety of factors, including:
- How much you are borrowing
- The LTV (loan-to-value)
- Your credit score
- Whether the loan is interest only or repayment
· Maintenance and repairs
Higher if you invest in an existing property, very low (or even zero) when you invest in new build or off-plan property.
· Service charges
If you invest in an apartment, you may have service charges to pay annually (and ground rent).
· Furniture and white goods
Furniture and white goods have a limited life. Wear and tear take its toll. You will extend life by making sure you have a regular maintenance programme in place, but you should allow for replacement of everything from carpets and curtains to soft furniture, beds and white goods at intervals ranging from three years to 10 or 15 years.
· Landlord insurance
Allow £200 to £300 per year for landlord insurance. The one time you don’t have it will be the occasion when it is most needed.
· Electric and gas costs
No, you won’t need to pay your tenants’ utility bills. However, you will need to pay for gas safety and energy performance inspections and certifications. Testing and certification (as well as maintenance work) must be done by registered and qualified technicians.
· Void Periods
If you have invested well, void periods should be few and far between. It’s unlikely that you will never suffer void periods, though – tenants move on. So prepare to have an odd couple of weeks to a month every year to two years when you have no rent coming in and still have to pay the mortgage, utility bills, and council tax.
Now, all the above seems like a long list of costs, but they are very manageable. Being aware of them and allowing for them will ensure that you assess property investment opportunities correctly – and that you treat each opportunity as a box that makes you money, and don’t get caught out by making an emotional investment decision.
When we assess for investment potential, we examine the upfront costs and cash flow of the opportunity. When we discuss your investment aims with you, we then tailor each cash flow analysis to your financial circumstances.
To find out more about how a consultation with Gladfish could help you find the perfect property investment opportunity for you, contact us today on +44 207 923 6100. You could soon join hundreds of investors who have benefitted from partnering with Gladfish.
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