Calculate including tenant’s letting agency fees in your expenses
The immediate reaction to the chancellor’s Autumn Statement announcement of a ban on letting agency fees was one of “shock and awe”. It was the piece of investment news that hit the property press headlines. It was a crowd pleaser.
Having digested all the chancellor’s new policies overnight, Brett Alegre-Wood gave his response in his property investment blog “Why the Autumn Statement is good news for property investment”. Still, we’ve had several property investors call and ask exactly how the ban on letting agents’ fees will affect them in hard cash terms.
Here on our property investment blog, you’ll discover how surprisingly small the hit will be on your property investment and how to calculate the cost to you. I’m going to assume that the ban does come into effect (while it’s been announced, there will still be a consultation period during which things could change) as I work through an example to show what you need to know and how to work out the cost on your property investment.
What are agency fees to tenants?
The first thing to learn is how much your letting agent currently charges. The fees cover administration charges that include credit checks, inventory management, reference checks, and other administration. You may find some letting agents might absorb some of the charges rather than pass on the entire cost to the landlord. However, the reality is that you will probably have the entire charge passed on to you.
The average fee an agent charges for all of this tenant administration ranges between £200- £300 or more. It depends on where your investment property is – for example, in London that average is much higher, somewhere in the region of £700.
For the sake of this example, we’re going to make the calculation of cost based on the average tenant fee of £300.
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What is the rent the tenant pays?
You need to consider the rent that your tenant pays. Of course, you’ll know this; but as I’m calculating based on the average letting agency fee charged to tenants in the UK, I’ll be using the average rent across the country. According to the HomeLet Rental Index, this is currently £902 per calendar month.
What property management fees do you pay?
The majority of property investors pass on day-to-day landlord responsibilities to a professional property manager. While there’s a cost to this, you’ll find that doing so allows you to benefit from the income from your property investment without the hassle that some tenants can create.
A property manager provides a range of services, from finding tenants or collecting rent to managing the property and its maintenance. Typically, you’ll be charged around 10% or 12% of rental income by your property manager. Again, you’ll be able to use the exact figure for your personal cost calculation. I’m going to stick with the averages, and use a figure of 11%.
Based on an average rental of £902 a month, the property management charge is £99 a month.
What’s the value of your investment property?
The final factor in the equation is the value of your investment property. Once more, I’m going to take the average value across the UK. According to the Nationwide House Price Index, the UK average house price in October stood at £205,904.
With the average rent at £902 per month, the gross rental income yield averages 5.26%.
Here’s a summary of all the information you need to calculate the cost of the ban on letting agent fees on your investment property:
|Property Value||£205,904||Per Year||Yield/(Yield Cost)|
|Rent||£902 per month||£10,824||5.26%|
|Property Management Fees||£99 per month||£1,188||(0.58%)|
|Tenant Letting Agent Fees||£25 per month||£300||(0.15%)|
Calculate the cost to your investment property
Using these numbers, calculate the yield on your investment property and the yield cost.
To calculate the gross rental yield:
(Rent per year/property value) x 100 = (£10,824/£205,904) x 100 = 5.26%
To calculate the yield cost of property management fees:
(Property management fee per year/property value) x 100 = (£1,188/£205,904) x 100 = 0.58%
To calculate the yield cost of eating the tenant’s letting agent fees:
(Tenant letting agent fees/property value) x 100 = (£300/£205,904) x 100 = 0.15%
Not such bad news after all
If you read all those headlines after the Autumn Statement, you’d have got the impression that this was the end for profitable property investment. However, as you can see, the average cost to your yield and profit is going to be pretty small, and that’s if the agent passes all its fees to you.
If you do your research and buy in the best places to invest in property UK, the relative cost will probably fall.
As a buy-to-let property investor, if your letting agent passes on its tenant fees to you, you’ll have some options available to you. This include:
- Increasing the rent that you charge your tenant, to cover (or partly cover) the extra charge
- Absorbing the extra cost
- Shopping around for lower agency fees
- Becoming a do-it-yourself landlord
The strategy that you adopt will probably depend on how good your tenant is, your cashflow position; the costs passed on to you (if any), and what other landlords do where your investment property is located. If you have an investment property portfolio with several properties, across several areas, you may find that you are able to increase some rents and not others, depending on competitive pressure and market forces. Just be sure to set the right rent.
Putting the letting agent fee ban into perspective
The cost of around 0.15% of your yield – or on average around £300 per year – is small compared to the effect an interest rate rise might have on your cash flow. If interest rates rise by, say, 1% over the next 12 months (which is possible), you would be looking at an extra cost of £1,000 per year per £100,000 of the outstanding buy-to-let mortgage.
In my estimation, it’s way more important to be prepared for an interest rate rise than to fret about the ban on letting agency fees that may not happen yet. Read our investment blog that discusses how to avoid the squeeze on property investment and profit from an interest rate rise.
Contact one of our team on +44 (0)207 923 6100 to find out how the ban on letting agency fees will affect you in your situation, and the strategies you can use to mitigate any rise.