Common costs of being a landlord by FreeAgent

So you’re thinking about becoming a landlord and whether it’s worth it. Some landlords manage to have a strong rental income that results in large profits, while others struggle to break even. Wondering what kind of costs you should factor in, after the up-front cost of purchasing the property? Take a look at our breakdown of the different types of cost you’ll encounter as a landlord. 

Mortgage

This is probably the cost you’ve already got your head around, but buy-to-let mortgages have a few key differences compared to other types of mortgage. They are considered ‘higher risk’ for the lenders and so they often:

• have higher fees

• have higher interest rates

• require a deposit of at least 25%

• have additional conditions (like already owning your own home)

The amount you can borrow from the lender is likely to be linked to the amount of rental income you can expect. Lenders typically want to know that your rental charge will cover the mortgage repayments, plus 20-30% extra. 

If you have an existing mortgage on a property that wasn’t initially bought as a buy-to-let, you must contact the lender to notify them of your intent to let the property. They may require you to transfer your existing mortgage to a buy-to-let mortgage. 

The legal stuff

As a UK landlord, there are a few different legal requirements you’ll have to fulfil before you can let your property, and these will all cost money. 

You’ll need to get the following for your property:

• An Energy Performance Certificate (EPC) showing the property’s energy efficiency - this is valid for 10 years and costs up to £120

• A Landlord Gas Safety Record document which proves your property’s gas appliances are safe. This needs to be renewed annually and the cost depends on the company you use to test the appliances

• An Electrical Installation Condition Report (EICR) is required if your property is in England or Northern Ireland, or is a house in multiple occupation (HMO) in Scotland or Wales. This proves that electrical appliances and fixtures are safe, is valid for five years and costs an average of £200 (depending on the property size)

• Smoke and carbon monoxide alarms that are fitted and tested

For more detail on the certificates you’ll need, take a look at our blog on safety certificates for landlords.

Depending on your local authority, you may also need to get a landlord’s licence for each of your properties. For example, landlords of rental properties in Edinburgh must register with the council, which includes paying a fee of £80 plus £18 for each property they let in the area, and declaring which agent, if any, they intend to use to manage their property. Each local authority may charge different fees and you should check this on your council’s website. 

Insurance

Getting insurance isn’t a legal requirement for landlords but buildings insurance is a prerequisite for most buy-to-let mortgages. You can customise your insurance, adding additional protection like contents insurance, rent guarantee insurance, liability insurance or void periods cover. You can find out more about the types of landlord insurance here. 

Fees

Using a letting agency isn't essential for landlords, but by acting as a go-between for you and your tenants, they can save you a substantial amount of time.

You can choose to get a full management service or pick and choose which services you want the agent to take off your hands. Some of the services letting agencies offer include:

• advertising the property

• conducting viewings

• vetting prospective tenants

• liaising with tenants 

• arranging repairs

• creating property inventory

• end-of-tenancy cleaning

Some of these will be levied at a percentage based on the monthly rent you’re charging, others will be a flat amount for specific services. According to Which?, average fees tend to range between 10-20% of monthly rent plus VAT. 

Admin

As well as tenant admin taking up a considerable amount of time, sourcing suitable tenants can also bring a few extra costs.

While listing your property on sites like SpareRoom and Gumtree is free, others like Rightmove and Zoopla require you to go through a letting agent. Plus, you might go through quiet periods where you don’t get as much interest and decide to boost your listing to get it in front of more people. The cost of these will depend on the agent - you can find some that offer listing bundles for around £30. 

Once you have some prospective tenants in mind, you should get their references checked to make sure you’re trusting someone responsible with your property. You can carry out some of these checks yourself, or there are tenant referencing services that do these for you. These can cost around £10-40 per tenant.

Once you ask for a deposit, you’ll also be legally required to protect this by depositing it in a tenancy deposit scheme within 30 days of receiving it. Tenancy deposit schemes are government-backed schemes that offer reassurance for your tenants - ensuring they get their deposit back as long as they have kept to the terms of your agreement and left the property in an acceptable condition. Using one of these schemes tends to cost under £20 per deposit. 

Maintenance

Some maintenance costs are regular and predictable. For example, if you cover building fees or service charges, gardening or window cleaning on behalf of your tenants, you can plan these into your budget. 

But most maintenance comes in the form of wear-and-tear repairs, accidental damage, cleaning or redecorating - and this is tough to plan for. Research quoted by the British Landlords Association suggests you should save 1% of your property’s value for maintenance costs, which is an average cost of £2,344 across the country - much higher in expensive areas like London. 

It can help to use cashflow forecasting to plan for unexpected maintenance costs - this can help you understand how much money you need in your repairs contingency pot. 

Tax

As a landlord, if you earn more than £1,000 in property rentals each tax year, you’ll need to file a Self Assessment tax return for the tax year, which runs from 6th April until the following 5th April. You’ll need to fill out at least the main return page as well as the UK property pages (SA105), and any other supplementary pages you might need, such as SA102 if you earn income from a job. Filling in the SA105 pages will be much easier if you’ve kept track of your rental income and expenses throughout the year. 

Note: Furnished Holiday Lets have different tax rules until April 2025 - we’ve got another blog on tax rules for FHLs to help you figure those out. 

Income Tax

You’ll need to pay Income Tax on your rental income (plus any other income you earn, such as from a job or self-employment) minus allowable expenses. Allowable expenses do include many of the costs listed above, like repairs, letting agent fees, and insurance. Mortgage interest on residential property is no longer fully deductible, you can only claim part of your finance costs (usually 20%). Here’s our full guide to allowable expenses for landlords. 

Stamp Duty Land Tax

When you buy a property or land over a certain price, you’ll have to pay a land tax on the purchase price. The tax depends on the country your property is located in:

• Stamp Duty Land Tax (SDLT) in England and Northern Ireland

• Land and Buildings Transaction Tax (LBTT) in Scotland

• Land Transaction Tax (LTT) in Wales

You’ll only have to pay SDLT if you purchase a property for a price above the relevant thresholds, which are £425,000 for a first-time buyer’s residential property (as long as it is worth £625,000 or less), £250,000 for any other residential properties, and £150,000 for non-residential land and properties. 

If you are due to pay one of these land taxes, your rate will be calculated based on several factors - including if you are buying an additional property to one you already own. You can use HMRC’s SDLT calculator, Revenue Scotland’s LBTT calculator or Welsh Revenue Authority’s LTT calculator to figure out how much you’re likely to pay. 

Capital Gains Tax

The opposite of Stamp Duty Land Tax, Capital Gains Tax (CGT) is a tax you’ll only need to worry about when you come to sell one of your properties as an unincorporated landlord. CGT is typically due on the difference between the amount you bought the property for and the amount you sell it for and the rate it is taxed at will depend on your Income Tax bracket. 

For more information, take a look at our guide to Capital Gains Tax for landlords.

Take the stress out of tax with FreeAgent for Landlords

If you want help handling income, costs and tax obligations, try FreeAgent’s accounting software. FreeAgent for Landlords will help you manage your property finances and submit Self Assessment to HMRC. 

You can get a 30-day free trial of FreeAgent for Landlords and take the fuss out of managing your property finances.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.