Buying property in areas where there is a high demand for rental properties can be a highly profitable investment. If you are looking for the best areas to invest, factors such as house prices, rental property supply vs demand and average rental yields will be key considerations.
Areas in south east London with excellent transport links into the city, such as Canada Water and Bermondsey, offer good rental yields with lower average property prices compared to more central London areas.
Before you start searching for properties, you can calculate your projected profits by deducting the potential costs from your rental income. We’ve provided a detailed overview of all the different costs to expect as when you become a landlord and start operating your rental business.
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As a landlord, you will have upfront and ongoing costs to rent out a property. While some of the costs can vary depending on whether you are taking out a mortgage, how much deposit you have and what type of property you purchase, many costs are fairly standard across the rental sector.
We’ve provided a breakdown of the costs for renting out a property in south east London:
The biggest outlay will be the purchase of the property, whether that is buying it outright or taking out a mortgage. If you are taking out a mortgage to buy the property, you will usually require at least 20% deposit for a buy-to-let (BTL) mortgage. BTL mortgage interest rates are slightly higher than standard mortgages, but most BTL mortgages are interest-only, so you won’t be paying the capital off.
According to data from the Land Registry, the average property price in the London Borough of Southwark was £600,000 over the last 12 months. A 20% deposit on this amount would be £120,000.
There may also be mortgage arrangement fees of around £1,000, conveyancing fees of around £1,500 and home survey fees that can range from around £400 to £1,000.
If you are using a letting agency to rent out your property, you will pay either a tenant finder’s fee or a monthly percentage of the rental income for full management services. A finder’s fee will usually be around 50% to 100% of the first month’s rent or they may charge a flat fee. For a full management service, agents generally charge between 10% to 20% of the monthly rent income.
As a landlord, you will have tax obligations, including paying income tax on your rental income. The amount you pay will depend on your tax band and much rental income you make after allowable deductibles.
Another tax you will need to pay if you are purchasing a rental property is stamp duty land tax (SDLT). For a property purchase of £600,000, the stamp duty would be £50,000, including the second property surcharge.
Want to be a more informed landlord? Costs aren’t just upfront – weigh up whether rent guarantee insurance is worth it alongside how much you can increase the rent over time.
If your rental property requires a licence, such as an HMO licence, you will need to pay a licence fee. A mandatory HMO licence from Southwark Council is £1,575, while an additional licence fee is £1,365.10.
Maintaining the property is an ongoing cost, with the average UK landlord spending almost £800 per year on repairs and maintenance costs.
To comply with landlord regulations, there are a number of safety certificates and checks you will need to pay for, including:
Private landlords also have legal requirements to install smoke and carbon monoxide alarms, which can cost around £70 to £200 or more for larger properties with multiple storeys.
Buildings insurance will be a requirement from your mortgage lender, but most landlords also take out additional landlord insurance cover for legal fees or even missed rent payments. Insurance cover can range between £150 to £800 per year, depending on the level of cover.
As a minimum, landlords supply appliances such as a cooker but if you are providing a furnished property, the cost of buying beds, kitchen appliances, sofa, wardrobes etc. can stack up to over £3,000. When deciding whether to rent as furnished or unfurnished, consider the ongoing costs of replacing items and whether your ideal tenant is likely to have their own furniture.
At some point, landlords will usually face void periods, where they are not receiving any rental income. With a good agent, these should be kept to a minimum but if your property is empty for a month between tenants moving out and new tenants moving in, you’ll lose a month’s rent and need to pay for council tax and utility bills.
In addition to licensing application fees for HMOs, there may be additional costs related to fire safety measures. For example, a requirement of the HMO licence may be to install fire doors and a high-standard fire alarm system.
If your rental property is leasehold, you may also need to pay ground rent to freeholder and there may also be service charges to maintain communal areas e.g. for leasehold flats.
Take a look at this advanced calculator for property costs if you’d like to know exactly how much you are due to spend on your transaction.
Letting agent fees are a major cost, so it’s worth knowing your rights if you want to change letting agent mid-tenancy, and how to manage void periods to limit lost income.
While the majority of costs that landlords are likely to incur are covered above, regulatory changes can introduce new, unexpected costs for landlords. For example, the upcoming Renters’ Rights Bill will make it mandatory for landlords to join an Ombudsman membership with a fee to be paid. There are also future plans to increase the required minimum EPC rating for private rented properties to C, which could mean landlords need to pay to make energy performance improvements.
While you may be able to save on agent fees by managing the property yourself, you should consider whether you have the time and legislation knowledge to make this approach worthwhile. Agents take care of a lot of the work involved in managing the property, from advertising, tenant screening and writing up the tenancy agreement, to collecting rent, handling tenant communications and arranging maintenance and certificates.
If you are happy to manage the property yourself, you may have to spend time to get up to speed with all the legal responsibilities that come with being a landlord.
Looking for property management services in Borough, Vauxhall or Wapping? We are specialists in letting and property management in south east London – contact us to find out more.
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Lee Whitelock
Director
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