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Investors need to get their finances in order

Monday 20th May 2013

Many property investors are not factoring in the costs of owning a buy-to-let property with a contingency fund and this is leading to an upward trend in repossessions.

Recent statistics show that 20% of all repossessions during the first three months of 2013 were on buy-to-let properties, according to the Council of Mortgage Lenders. In the last quarter of 2012, landlord properties represented 12.8 per cent of the repossessed total.

Buy-to-Let repossessions are on the rise because of a number of major causal factors including rising rent arrears and void periods.   If investors do not have a contingency fund in place to cover these unforeseen circumstances, then they could fall into financial difficulty and potential lose their property.

As a general guideline, 30-35% of one year’s gross annual rental income should be put aside to cover rent arrears, void periods, maintenance, repairs and refurbishment, white and brown goods replacement and the ongoing rental costs, such as gas safety certificates and letting agent fees. This contingency may not be used and should not be seen as an additional annual cost, just part of the investment business plan from the outset for investment protection

Redecoration may be needed every 3– 5 years. Kitchens, bathrooms, boilers, interior doors etc will probably have to be replaced every 5–15 years. New windows, external doors, barge boards, guttering, pathways, driveways, radiators etc will be required every 15–25 years.

Depending on the age of the property and the length of time you retain it, rewiring and re-roofing may be necessary at some point. Major renovation work like this can be expensive, so unless you have budgeted for it in your investment calculations, you may not be able to afford to carry out essential work when required.

Buy-to-let is very profitable in the long term, but only if you do your sums properly and structure your investment wisely. A property investment is similar to running a business, so you need a business plan, cash-flow forecast, finance and funding. Therefore it’s sensible to budget for all the costs you’re likely to encounter during the life of your investment. The maintenance costs for a new or recently refurbished property are likely to be minimal at first. But over time, those costs will grow in significance, particularly when larger scale refurbishment is required.

Below is a starting list of some of the costs to be considered when owning a buy-to-let property which should be catered for from rental income and an appropriate contingency fund:

•EPC certificate

•Gas safety certificate

•Letting agents fees

•TDS scheme fees

•AST fees

•Landlords insurance

•Void allowance

•Council tax

•Ground Rent

•Service Charge

•Buildings insurance

•Utility bills

•White goods

•Furnishings

•Repairs

By Charles Brittain, Invest Connect.

              

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