Please Note: This Article is 4 years old. This increases the likelihood that some or all of it's content is now outdated.

UK landlords are failing to take running costs into account when measuring buy-to-let returns

  • Three-quarters of UK landlords don’t factor in the running costs they incur
  • 12% of buy-to-let investors do not take any costs into account
  • Average cost associated with running a buy-to-let property can add up to over half (52%) of gross annual rental income

UK landlords are at risk of overestimating the profitability of their buy-to-let (BTL) investment by neglecting to take into account key running costs, according to new research from Platinum Property Partners, the specialist buy-to-let business.

The total potential cost associated with the annual running and upkeep of a BTL property – including letting agent fees, maintenance, repairs, marketing fees and mortgage interest – amounts to an average of £8,359.

However, almost one in eight (12%) landlords do not take any costs into consideration when calculating the financial performance of their BTL portfolio, leaving them particularly vulnerable to misjudging the returns they will make from their investment.

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The research also shows that for all costs, there is a gap between the proportion of property investors who incur the different types of costs, and those who include them in their portfolio measurement.

Three-quarters (75%) of UK landlords incurring the top 10 most common costs don’t account for them when calculating their portfolio’s financial performance– meaning the returns on their investment could be lower than they think.

PPP Table

Landlords may be overestimating BTL returns by up to 50%

Based on a typical portfolio of two rental properties, the total bill associated with running a BTL portfolio could stack up to £16,718 every year, which in turn equals 52% of gross annual rental income (£32,388).

The most accurate way to measure the performance of a BTL investment is by using ‘Return on Investment’ or ‘Return on Equity’, as these methods take into account gross profit, capital gain, and the costs of running the property – including the amount spent on refurbishment.

 Majority of landlords ignore the impact of void periods on their rental income

In addition to these regular maintenance and day-to-day upkeep costs, encountering void periods is often an inevitability for landlords at some stage.

In any one year, up to 60% of landlords face void periods, however, only 12% of these take this into account when assessing the ongoing health of their property portfolio. This means a staggering 88% aren’t acknowledging the impact this has on their rental income.

By including estimates of void periods in their financial measurements, landlords will have a better picture of the potential net returns they will get from their investment.

 Steve Bolton, Founder and Chairman of Platinum Property Partners (PPP) comments:  

“The buy-to-let market is a hot ticket investment at the moment for budding landlords looking to generate an income and good level of capital growth from rental property. This is particularly the case now that new pension freedoms have opened the gates to alternative financial plans for retirement.

 “But becoming a landlord isn’t a walk in the park, and running a successful BTL portfolio takes continued investments of time and money on top of your initial lump sum investment. Many landlords appear to be burying their heads in the sands and are seriously in the dark about the ‘true’ value of the returns from their BTL investment if they don’t take into consideration regular outgoings such as letting agent fees, repairs, redecoration costs, and mortgage interest. Property investors need to keep note of all these additional expenses to make sure they are evaluating their returns rigorously, as that’s the only safeguard to check if they’re still on course to achieve their goal of retirement income or to supplement or replace their salary. 

 “If landlords don’t have all the information at their fingertips, they can’t properly assess market risk and opportunities to make informed decisions about the future of their portfolio, or plan effectively. It also makes it extremely difficult to compare the performance of a BTL portfolio against other forms of investment.” 

Top Tips from Platinum Property Partners on Buy-To-Let Investment

  • Set financial goals – Determine what you hope to gain from your BTL portfolio. This could be capital growth, long-term income to supplement retirement income or to provide a substitute income now.
  • What asset classes are you comparing your BTL investment to?  – Determine whether you need to compare the performance of a BTL property to an existing portfolio, or alternative asset investment classes.
  • Measure BTL investment consistently and effectively – This enables you to assess whether you are on track to achieve your financial goals, and determine how best to maximise your income. Effective measurement will also help you manage risk and opportunities to expand your portfolio, as well as understand potential tax liabilities and allowances.
  • Assess the performance of your BTL portfolio by Return on Investment or Return on Equity – These measures take into account both income and capital growth, and the actual sum invested. These should be used by any landlord and especially those who want to live off the proceeds of their BTL investment or top up their current level of income.
  • Seek advice on investment measurement – If you are unclear about the meaning of key financial terms and not confident about how to calculate your returns, you should immediately seek out expert advice and do more through due diligence.  

Methodology

The results are based on the responses of over 200 landlords surveyed in February 2015.

Please Note: This Article is 4 years old. This increases the likelihood that some or all of it's content is now outdated.

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