With the ultra-low interest environment we’re experiencing in the developed world, there’s no mystery why there is growing interest and demand for residential property investments, especially considering the headline rental yields spouted by the papers. However, before you jump on the bandwagon, here are ten costs that are regularly forgotten during the property investment frenzy.
1. Void periods
Void periods can form a considerable hidden cost, as well as a negative weight on rental yield. Most rental properties will experience a void period where there are no paying tenants residing in the property. That’s to be expected, but if you invest in an area that has a surplus of rental properties, or if you demand too high of a rental price, you might find these void periods stretching out into the blue yonder.
2. Maintenance and repairs
Every property requires regular maintenance and repairs. Depending on the age of the property and the type of tenants that occupy it, you might find that much of your rental income is ploughed right back into the property to keep it in a reasonable condition. Boilers and pipework can be a property investors worst nightmare.
If you invest in a run down or drab property, then hopefully, you’ve factored in any refurbishment costs. What some property investors do forget about is that regular wear and tear of the property will also require regular refurbishment to keep tenants happy and to attract future tenants. Also, if you plan to keep the property for a number of decades, then at some point you may need to carry out a complete refurbishment to keep up with local competition and to continue attracting suitable tenants.
No self-respecting tenant will move into a dirty property, so you might occasionally find yourself either on your hands and knees cleaning it out, or forking out a small fortune to hire a contract cleaner.
At the very least, you’ll need to obtain building insurance to cover against the most serious risks to your property investment. Some landlords also choose to buy rental guarantee insurance and emergency cover, which are all additional costs that will have to come from somewhere.
6. Advertising and travel
If you’re going to let the property out yourself, then you’ll of course need to factor in advertising and travel costs. Hopefully, if you’re a DIY property investor, you’ve selected a property nearby so that a) you can leverage your knowledge of the area, and b) keep an eye on your valuable investment. If you have gone DIY, keep in mind the legal requirements for deposit protection and prepare a detailed inventory of the property for tenants to sign.
7. Letting, management and inventory fees
On the other hand, if you leave it to the professionals, then you’ll need to factor in the costs of using their services, which could be as much as one month’s rent, plus 5-15% of the monthly rental (oh, and don’t forget all the hidden ‘administrative’ costs as well). You can control these costs by shopping around, always checking the small print of the letting agent’s agreement, and negotiating on fees.
8. Gas and electrical safety certificates
Regular safety inspections (annual in the case of gas safety inspections) are a legal requirement for which you could pay hefty fines and face prison time if you neglect to have them done. Even if you use a letting agent to manage your property, you’re still responsible for ensuring these are carried out.
After taking into account all your expenditures and rental income, you then get to pay the tax man his fair share (depending on your circumstances). Forgetting to declare your rental income will also add to your property investment expenses.
10. Bad tenants
But, if I were to put money on the number one cost many would be property investors forget to take into account, it’s the notorious tenants from hell – those that don’t pay their rent on time, leave with substantial debt and significant damage in their wake. Lost rent, eviction costs and repairs can seriously dent your rental yield and your enthusiasm, turning a promising investment into a loser.
Property investments can prove a valuable addition to most investors’ portfolios, both as a method of diversification and as a method to boost overall returns, but it is not a sure-fire solution, nor is it risk-free. Great care should be taken when planning your property investment, and that includes taking into account all the potential costs that will come with owning a residential property investment.