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The Expenses That Come With Owning a Buy-to-Let Property: An Investor's Guide


Jul 05, 2020 by Tara Mastroeni

Many would-be investors think about purchasing a buy-to-let property as a means of generating passive income. However, what people sometimes don't realize is that owning a buy-to-let property also comes with a lot of expenses that must be considered in order to ensure your investment property will be able to generate a profit.

With that in mind, below are some of the most common expenses that come with owning a rental property. Read them over so you have a better idea of what to expect before you invest.

What is a buy-to-let property?

A buy-to-let property is another name for a rented property or a property that's been purchased for the purposes of being rented out to tenants rather than being lived in by the purchaser.

With these properties, the goal is to create a passive income stream by charging more in rent than it costs to finance and carry the property. Additionally, many investors also try to make a profit through capital appreciation or selling the property for more than it was worth when they originally bought it.

Since generating a profit is the main goal behind owning one of these properties, it's crucial to consider the total cost of buying and owning it before you make a purchase.

Expenses to consider before buying a buy-to-let property

The first expenses to consider are the ones that come from purchasing a buy-to-let property. We've laid them out below for your consideration:

Finance costs

One particular expense is finance costs. In terms of those costs, you need to consider the size of the down payment you're making as well as any mortgage costs, including the interest rate you'll receive on the loan. You'll want to talk to your lender about what you can do to secure the lowest interest rate possible.

Closing costs

Closing costs typically run anywhere from 2% to 5% of the property's purchase price and account for any fees accumulated in the process of closing on the property. They usually cover things like appraisal fees and inspection fees, as well as any origination fees that may come with your loan.

Capital expenditures

Capital expenditure refers to any costs you may incur from doing renovations or maintenance on the property in order to get it ready to be rented to prospective tenants. In this case, capital expenditures could include structural and functional updates meant to get the property into livable condition or aesthetic updates meant to increase property income.

Expenses to consider when carrying a buy-to-let property

Once you consider the costs required to initially purchase your residential property, the next thing to think about is the costs associated with carrying the property while it's in your ownership. Again, we've listed them below so you can get a sense of what you need to plan for in your accounting.

Potential for vacancy

While every landlord likes to imagine they'll have prospective tenants banging down the door of their rental property, there is a potential you could experience a period of vacancy. While you're looking for a tenant, you'll need to account for paying the mortgage costs and utility costs on your own.

If you use a real estate agent to help find your next tenant, you'll also be responsible for paying the agent's letting fees.

Maintenance fees

Generally, landlords are responsible for the ongoing upkeep of residential dwelling houses, meaning you need to be prepared to cover any maintenance fees on your own. As a general rule of thumb, you should budget to spend at least 1% of the property's value per year on maintenance costs.

Taxation aspects

As a landlord, you also have to be prepared to pay property taxes on your investment property. However, luckily, the IRS does also allow for some tax relief for landlords. In general, you can expect this tax relief to come in the form of tax write-offs.

You can write off your mortgage interest on first and second mortgages up to $100,000, up to $10,000 in property taxes, any eligible capital expenditure and maintenance fees, any eligible operating expense, and any depreciation.

Expenses to consider when selling a buy-to-let property

Finally, there are some additional expenses to account for once you're eventually ready to sell your investment property. They are as follows:

Mortgage payoff

Put simply, a mortgage payoff accounts for the amount of money it takes to pay off an existing home loan if you haven't paid it off before you put the property on the market. Generally, any money you make from the sale of your rental property beyond the mortgage payoff is considered to be a profit.

Closing costs

As the seller, you also have to account for paying closing costs. Again, these fees typically amount to between 2% and 5% of the property's value. And as the seller, you're responsible for paying the real estate agent's commission. Though, typically, rather than having to worry about paying these costs up front, they're deducted from your proceeds from the sale.

Capital appreciation

If there is capital appreciation, meaning a rise in the value of your investment property between the time you buy and the time you sell, you'll likely have to pay a capital gains tax on any proceeds you receive from the sale of the property.

Though, notably, some investors will try to put off paying the capital gains tax by doing a 1031 exchange and buying another "like-kind" rental property.

After you know your expenses, calculate the net rental yield to see if the property is a good buy

Though this is not truly a cost of purchasing a buy-to-let property, the potential rental yield is absolutely crucial to consider before you decide which property to make your own. In this case, the rental yield is the measure of how much income your rented property will produce. It's typically expressed as a percentage.

You can calculate the gross rental yield by taking the property's annual rental income and dividing it by the purchase price. Once you have that figure, you can also calculate the net rental yield by subtracting your expenses from the annual rental income before dividing by the purchase price.

Though rental yield is only one dimension by which to measure the value of your property, generally, the higher the percentage, the better.

The bottom line

Evaluating the costs behind buying, maintaining, and eventually selling a buy-to-let property is an important part of investing in real estate. For one, you need to know any expenses will be covered by the amount you can charge in rent. With that in mind, use the various expenses listed above to give you an idea of what you can expect to spend on a rental property.

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