How much do I need to buy a rental property in the UK?

We are often asked by subscribers ‘How much money do I need to invest in buy to let property?’ The reality is that there is no easy way to answer the question. How much is required to purchase an rental property will largely depend on the type of property you want to purchase.

The best way to answer, is to set out the type of costs that investors are going to have to pay as they purchase and manage their investments.

What are the costs?

Investors should broadly consider costs in two key areas:

  • Purchase Costs – purchasing investment properties requires a significant amount of cash. Investors will need to consider what cash will be required to purchase an investment property.
  • Operating Costs – as well as the cost of buying the property investors will also need to give some thought to how much money will be required on a monthly basis to keep the property maintained.

Purchase costs

There are a significant number of costs involved in buying property for investment, we have summarised these below.

Purchase taxes and charges

As an investor you pay three basic taxes and charges related to a real estate purchase:

  • Conveyancing fees: The legal fees associated with instructing a conveyancer to act on your behalf;
  • Stamp Duty: A tax charged by the government; and
  • Registration and transfer charges: An administrative charge to transfer ownership.

The largest of these three costs is stamp duty, which changes depending on the type of buyer you are (e.g., first-time buyer, owner-occupier, investor), and in some situations, on where you live.

It is difficult to fully cover all of the different taxes which may be levied on investors, as they change from time to time – in the UK, they have changed virtually every year for the past five years!

Conveyancing Fees

The United Kingdom’s property ownership and registration systems are much older and far more complex than in other parts of the world. Adding a further layer of complexity, Scotland and Northern Ireland have different systems and rules to those of England and Wales. Given that the majority of investors are focused on England and Wales, I have focused on England and Wales in this section. Land records in England and Wales are recorded by HM Land Registry.

Conveyancing fees in England and Wales typically have three components:

  • Professional legal fee: The cost of the solicitor’s time. There is no specific convention; however, conveyancers will usually charge either a fixed fee related to the purchase price of the property (which is generally in price bands) or a percentage of the purchase price.
  • Search fees: The cost of obtaining legal information for due diligence such as council and utility information.
  • Additional costs: These costs are generally referred to as disbursements.

Typically, the cost of legal fees is approximately £2,000 to £3,000,

Stamp Duty

In England and Wales, Stamp Duty is generally referred to as Stamp Duty Land Tax (SDLT). The tax is payable by the purchaser immediately after the completion of the purchase of a property.

In England and Wales SDLT is charged via a progressive system that applies to all property, and additional surcharges apply depending on whether the purchaser is buying an investment property or second home, and if they are a foreign purchaser or not. The additional surcharges are added to the SDLT, and are:

  • Second Homes and Investment Property Surcharge
  • Non-resident Surcharge
England and Wales SDLT Rates
Purchase PriceSDLTUK Residents (Second home or Investment Property)Non-Resident Purchasers
£0to£125,0000%3%*5%
£125,001to£250,0002%5%7%
£250,001to£925,0005%8%10%
£925,001to£1,500,00010%13%15%
£1,500,001and aboveand above12%15%17%
* For purchase prices of £40,000 or more.

Transfer charges

In addition to legal fees and SDLT, the purchaser is also required to pay Land Registration fees. These are fees payable to the Land Registry for the registration of the purchaser’s title.

England and Wales transfer charges
Purchase Price of PropertyFee
Between £100,000 – £200,000£190
£200,001 – £500,000£270
£500,001 – £1,000,000£540
£1,000,000+£910
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Mortgage Deposit

In addition to the taxes which are charged to buy an investment property investors who are buying a property with a mortgage will require a deposit against the purchase price. In most scenarios, banks will require investors to have a deposit of at least 20% of the purchase price. However, in most scenarios, purchasers will get more attractive investment terms with a deposit of 25%. We recommend that when you do your sums you work on a deposit of 25%.

Summary of Costs

Based on the costs set out above, we have prepared a summary below based on the costs an international investor would pay.

Purchase PriceConveyancing Fees SDLT (International)Transfer FeeMortgage DepositTotal
£125,000£1,000£6,250£190£31,250£38,690
£250,000£1,500£15,000£270£62,500£79,270
£500,000£1,500£40,000£270£125,000£166,770
£750,000£2,000£65,000£540£187,500£255,040
£1,000,000£2,500£93,750£540£250,000£346,790
£1,250,000£3,000£131,250£910£312,500£447,660

Operating Costs

In addition to the purchase costs, investors will need to give some thought to what the costs are to operate and maintain their investment. The most common ongoing costs of residential property are:

  • Mortgage repayments
  • Service charges
  • Ground rent
  • Management fees
  • Insurance
  • Repairs and maintenance
  • Cleaning
  • Gardening
  • Service contracts and certifications

Mortgage Repayments

For most investors, their mortgage expense will be their largest monthly cost. How much their mortgage repayment is will typically depend on the following:

  1. If the mortgage is interest-only or principal and interest
  2. The Loan-to-Value (LTV) of their mortgage
  3. The interest rate they pay

How much investors pay each month will vary significantly depending on the factors set out above. Investors will need to spend a significant amount of time determining these costs and how much the rental will cover them.

Service Charge

Most apartments will have a service charge element which is required to be paid by the landlord to maintain the property. This is typically quoted as cost per square foot per annum for new build property. Because new builds don’t typically exist when investors purchase them this is typically an estimate of this cost. Investors need to give some consideration to how realistic this cost is and how much they are likely to increase over time.

Ground Rent

The cost of ground rental property is becoming less problematic for investors as the Leasehold Reform Act is due to be introduced later this year. However, investors will need to make an allowance for the ground rental.

Management Fees

Most landlords will use a professional property manager to let and manage their property. It typically costs between 10% and 12% of the monthly rental costs for a professional property manager. In the UK these costs are also subject to 20% VAT.

Council Tax

In the UK, the ownership of residential property or land is not taxed. This is uncommon; but instead, a council tax is paid by the resident of the property, and only in the case of the property being unoccupied does the owner of the property become liable. Full details of UK council tax are available in the Buyer Guide for England and Wales.

Insurance

As a landlord, there are several insurances you will likely pay.

  • Building insurance: You will need to insure your property. This will be a requirement of your mortgage. Even if you do not have a mortgage, you should have insurance in case of a fire or other major event.
  • Contents insurance: You will need contents insurance. This is because building insurance will only cover the physical fabric of the building, not the contents you own such as the carpets, blinds, kitchen, etc.
  • Landlord insurance: You can get insurance against damage caused by tenants, or by tenants who fail to pay the rent.

With insurance, it is important to understand what your specific risks are, and ensure that you have adequate insurance against those risks. Equally, you do not want to over-insure yourself and pay unnecessary insurance premiums.

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Repairs and maintenance

Very few investors allow for repair and maintenance costs. These can be extremely high, particularly for older properties. Even if you have a new property, you should still budget for repair and maintenance.

If the property is brand new, I would suggest that you allow 1.5% of the annual rental. For older properties, the repairs and maintenance could be far more expensive. If you must regularly call out tradespeople to undertake repairs, the bills will soon stack up. For older properties, you need to budget more for repairs and maintenance. I would allow a minimum of 5%. However, the actual total could end up being significantly more.

Cleaning

Whether or not you need to include costs for cleaning will depend on the type of property you have. If you have a house or a larger block of apartments you will need to assume a cost for general cleaning. If you have an apartment, the general cleaning is likely to be covered by the tenant for the interior and by your service charge (strata or body corporate fees) for the common areas of the building. However, even if you do not have to pay for regular cleaning, you should still allow for some cost in between tenants.

Gardening

Gardening costs will only apply if you have one. If you own a single apartment within a block of apartments this will not be a concern, as these costs will be part of the service charge (strata or body corporate fees).

If you have a garden or an outside area, you will need to allocate a cost to maintain it. Even if your lease states that it is the tenant’s responsibility to maintain the garden, you may well find you are better off maintaining the garden yourself.

Service contracts and certifications

If you have air-conditioning or a new boiler, it will likely have a service contract that requires an annual check to maintain the warranty. Many countries require landlords to undertake annual gas and electrical safety checks. Whether this is required or not, I recommend that you have these done.