Never underestimate property investment expenses again

Step-by-step guide to accurate expenses assessment

It continues to amaze me how many property investors fail get their expenses done accurately. They’re investing for income, and end up with a negative cash flow property. If I asked you for £50,000 and a couple of hundred quid a month in return for nothing, I’m pretty convinced you’d tell me where to go. Yet that’s exactly the kind of investment you’ll make if you don’t understand your investment property expenses.

Here I’ll examine what expenses many investors forget, and how to estimate them accurately. It will help you to make sure your next property investment is cash flow positive and not a drain on your finances.

Cash flow positive vs cash flow negative

Whatever your property investment strategy, success will depend on cash flow. In simple terms, your cash flow is your rental income less your expenses. If your rental income is more than the expenses you pay out, then your cash flow is positive. It is the situation that will give you an income from your investment property.

That isn’t to say that negative cash flow is an evil to be avoided at all costs – some professional investors accept negative cash flow as a cost of investing in an asset that;s going to produce an exceptional capital gain.

For the majority of investors like you, the best property investments are those that produce positive cash flow. It is why it’s so important to pin down your expenses before committing to buy any investment property. For at least two years.

Identify the ‘hidden’ expenses of owning an investment property

Your largest expense in property investment is the mortgage payments. You’ll be surprised how many failed property investors based their cash flow assessment solely on their mortgage payments.

Your monthly buy-to-let mortgage payment is a known amount. It may rise and fall as interest rates move, but it is not something that has to be guessed. Other expenses need to be estimated – I’ll call these ‘hidden’ expenses. Some of these costs need to be uncovered, and some need to be estimated. Before I explain how to estimate (or uncover) these hidden expenses, let’s take a look at what they are:


Most likely, it will be your tenants who pay the utility bills. However, I’d always recommend that you have an idea of how much those utility bills might be:

  • If you plan for your tenants to pay them, knowing the probable cost will help you assess the tenant’s ability to pay your rent.
  • If you plan to include them in the rent, an accurate assessment will be essential to ensure you’re not out of pocket.

Council tax

If you rent out your investment property to several people (an HMO property investment), you’ll be liable to pay the council tax. If you rent to a single person or family, the tenant will be liable to pay the council tax.

If your investment property is empty, local councils can charge you the full amount of council tax. However, some councils may offer exemptions or discounts.

Service charges

An apartment in a block will be charged service fees. These are a contribution towards buildings insurance, cleaning, the lighting of communal areas, maintenance and security. You might include these in the rent that you charge to your tenant. You’ll need to know how much the service charge is to allow for tax deductions. Remember, too, that during void periods the service charge still has to be paid.

The sinking fund

Sometimes called a ‘reserve fund’, this is an annual contribution that apartment owners pay towards major repair or maintenance programmes. It’s paid in addition to the service charges.

Landlords insurance

As a property investor, you’ll want to reduce the risks of investment as much as possible. One way to do this is to take out landlords insurance. It could provide protection against fire, theft and financial loss due to tenant damage or non-payment of rent.

Property management

Whether you manage the property yourself or have a property management company do it for you, there will be costs of doing so.

If you’re managing the property yourself, the one thing you can’t expense is your time. Other costs, such as travel between your home and investment property, stationery, and phone calls, can be charged.

If you use a property management company, your time will be your own, though you will be charged a fee. It is usually charged as a percentage of the rental income, though there will be other charges (for example, emergency call-outs, inventories, and tenancy agreements). Make an accurate assessment of these costs by speaking to a property management company early on.

Whether you intend to be a DIY buy-to-let landlord or benefit from professional property management, the total cost is likely to be around 10% of your rental income.

Maintenance and repairs

There will always be maintenance costs, though if you take advantage of off-plan sales, these costs are probably going to be a lot less than the maintenance bills on existing property investments. Maintenance costs also fluctuate. You may find you have a maintenance bill one month and nothing for the next six months. However, over the long term, you’ll find that maintenance costs tend to even themselves out.

Major repairs are a different kettle of fish. These are big expenses that could have the ability to send your investment pear-shaped. Again, new build property is less likely to suffer from these large costs, and any builders’ guarantees will cover any structural problems. Repairs that fall into this category include a new roof, replacement of the central heating system, updating the electrics, and so on. Putting aside around 5% of your rental income into your contingency fund should be enough to build up the funds to cover any big repair needs.

Void periods

No property is tenanted 100% of the time. A recent survey by Direct Line found that a property is tenanted for an average 18 months. It also found that the average time a property remained empty between tenancies is 22 days (though this depends on location). One in eleven tenants move out before the end of their tenancy. If you allow for one month of void period each year, you should be on the safe side when estimating your expenses.

(Read my investment blog on everything you need to know about void periods to discover a strategy that has always helped me keep void periods to a minimum.)

How to assess your buy-to-let property expenses

There are some methods of expense discovery, and you should use all of them. Doing so will ensure that your estimates are as accurate as possible:

Speak to local property managers

Property managers with a good number of properties on their books will have a very good handle on all costs of the typical rental property in the area. They’ll also be pleased to help you – after all; they want your business.

You’ll also be able to accurately assess property management charges while quizzing the company about other costs and fees.

Speak to the bill issuer

Call utility companies, local tradesmen, and the local authority to ask about the costs of their goods and services. Utility companies may provide average bill amounts. Local tradesmen will be happy to provide a schedule of their fees. Local authorities can advise on council tax and their policy for empty properties.

Speak to other buy-to-let property investors

Finally, speak to other investors. Search for local investment clubs on the Internet, or ask local estate agents. You could, of course, speak to one of Gladfish’s consultants – with thousands of clients, we’re pretty clued up as to costs around the country.

Pull it all together

Once you’ve discovered all of the costs associated with a potential property, it’s time to make sure it is one of the property investment opportunities you’d be a fool to miss out on. All our investors have the luxury of getting our two-year cash flow worksheet. Simply plug in the numbers and get an accurate assessment of how your property investment will perform.

Contact one of our team on +44 (0)207 923 6100 to book a meeting, discuss your financial objectives, and discover how property investment could help you achieve the future you desire.

Live with Passion,

Brett Alegre-Wood

Brett Alegre-Wood
December 13, 2016

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