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Is this a good buy-to-let investment?
Management fees
Property needs managing. Either you have to do it yourself or you have to pay somebody to do it for you. Letting agents generally offer two levels of service, the first being just for finding a suitable tenant, the second forfinding tenants as well as rent collection and day to day management of the property. If you intend to use a letting agent then these fees should be allowed for.
Buy-to-let investment
Typically management agents charge a percentage of the rent for managing the property. I have seen this vary from 7% without VAT to 15%+VAT in different areas. In the example of an anticipated rental income of £12,960 annual rent received, a 10%+VAT (VAT at 15%) management fee will be £1490.40 per year.
In addition to the management fees agents will also make other charges relating to finding tenants, credit checking tenants, drawing up or renewing a tenancy agreement or inventory checking. Assuming each tenant stays for an average of 18 months then letting agent fees might be as follows - there is a £250+VAT tenant find fee + £50+VAT tenant referencing fee + £50+VAT inventory checking fee every 18 months.
Many letting agents insist on creating a new tenancy every 6 months rather than allowing the tenancy to become a statutory periodic tenancy. They then charge a fee of perhaps £50+VAT each 6 months that a tenant remains in place simply for arranging a new tenancy agreement each time. In our example this will work out as approximately an average of an additional £345 per year.
Thus the total management costs associated with a rental income of £12,960 per year are not simply the 10% headline management fee but a total of more like £1,835.40 or 14.2% of the rental income.
It is acknowledged that management costs vary dramatically by geographic area and also form agent to agent.
Another hidden cost associated with using a management agent is that they will often use their own preferred tradesmen and in my experience this results in at least a doubling of the maintenance fees to the landlord.