The following is a glossary to those Buy-to-Let investment property terms used
in the calculator. They form a useful standard Buy-to-Let knowledge
base for the novice to intermediate investor.
When making a considered
Buy-to-Let investment property decision the effect of all these factors listed must be taken
into account. Without the Buy-to-Let Investment Property Calculator a time consuming and tedious task.
Property Purchase Price
Offer price you agree with the seller
Deposit
The amount of your own money you will commit as a deposit towards the property. Mortgage providers typically expect a minimum of a 15% deposit (of the purchase price) for a Buy-to-Let mortgage
Deposit %
Automatically calculated as the deposit divided by the property value
Mortgage Interest Rate %
The amount of capital you will need to borrow from a lender. It is automatically calculated as the Property Purchase minus the deposit. Mortgage Interest Rate % - Nearly all lenders link their variable interest to the Bank of England’s published base rate. Lenders adjust the rate up and down as the base rate changes – adjustments downwards reducing your monthly repayment and adjustments upwards making it more expensive. The rate your lender offers you as an investor is likely to be 0.5% to 1% above the base rate, (as a Buy-to-Let Mortgage it is deemed a greater risk by the Mortgage lender). We suggest you enter a rate 1% - 2% above present published BOE base rate. This will provide you with a conservative view of your true cost of borrowings and provide a buffer in case rates move higher in the medium term.
Mortgage
The mortgage is the amount of capital you will need to borrow from a lender. It is automatically calculated as the Property Purchase Price minus the Deposit.
Mortgage Application Fee
A straight forward administration charge levied by your mortgage provider for processing your mortgage application.
Mortgage Valuation Fee
As part of the overall mortgage application process, the lender will send out a valuer to assess the re-build cost of the property. This is done so that the lender has confidence that if the property were sold the mortgage would be repaid. The cost of this valuation (typically £100) is from the mortgage lender (passed on to you) to send out a qualifed surveyor to undertake the valuation. Beware this does not give you the buyer any information about the structural situation of the property. For that you must instruct a qualified RICS (Royal Institute of Chartered Surveyors) surveyor.
Solicitor / Conveyancing Fees
Typically fees will be between £300 - £800 depending upon the complexity of the purchase or sale. This figure is also assumed to be the same when the property is sold. Employ a solicitor who will protect your legal interests, as well as communicate with the sellers solicitors. Make sure your prospective solicitor gives you a written quote as well as confirm they will act on your behalf. Most of your correspondence will be through the post and the telephone. Arranging a first opeing meeting is advisable to establish a personal relationship. Solicitor’s charges relate to the preparation of contracts, local authority searches, payment of stamp duty and land registry charges.
Land Registry Fees
The calculator automatically calculates the correct band based on the
latest Land Registry Fees Order, May 2004 and the Property Purchase
Price entered. The fees are currently as follows:
| Min | Max | Fee | |
| 0 | - | £50,000 | £40 |
| £50,001 | - | £80,000 | £60 |
| £80,001 | - | £100,000 | £100 |
| £100,001 | - | £200,000 | £150 |
| £200,001 | - | £500,000 | £220 |
| £500,001 | - | £1,000,000 | £420 |
| £1,000,000 | + | £750 |
Stamp Duty
The calculator automatically calculates the correct band based on 2005/2006
rates and the Property Purchase Price entered. The fees are currently
as follows:
| Min | Max | % of purchase price | |
| 0 | - | £120,000 | 0% |
| £120,001 | - | £250,000 | 1% |
| £250,001 | - | £500,000 | 3% |
| £500,001 | + | 4% |
Survey
Depending upon whether you chose a full structural survey or just a Homebuyers survey the costs will vary between £500 and £150 accordingly. The cost is determined by the condition, size and age of the property. The ‘Full Structural Survey’ report will provide you with a comprehensive report detailing the structural state, condition and construction of the property. It usually takes several hours checking roofing timbers, floors, testing for damp etc. and is more expensive than the standard Homebuyers Report. The report will list all faults and make recommendations of how to rectify them including the potential implementation of further specialist surveys to be undertaken. If the survey finds unexpected defects the buyer can renegotiate the asking price with the seller based on the estimated cost of undertaking the work. The quicker and cheaper alternative is the HomeBuyers Survey – this is the most popular method of providing basic re-assurance the property is structurally sound. It is presented in standard format – around 10 pages long.
Local & National Searches
Your solicitor will request searches from the H.M. Land Registry office. This details the ownership of all freehold land in the UK, proving the seller (or sellers lender) has title of ownership and can legally sell you the property. The record also describes any restrictions that may affect the sale of that land. In addition your solicitor will undertake local searches checking risks – planning permissions, flooding, subsidence, council plans for the area. These searches involve obtaining local information about the risks associated with the property – basically anything that may impact your ability to purchase or sell the property in the future.
Furnishings
A furnished property will let generally quicker than an unfurnished one and also command a higher rent (as tenants would otherwise need to transport or purchase new furniture if the property is unfurnished). However, most tenants do have some furniture of their own, which they would like to bring to the property. Think back to your target / ideal tenant; a student or single person may not want to go out and buy all sorts of expensive furniture, personal to their tastes. Conversely, the thirty something professional couple will have probably built up a collection of furniture already. Therefore ensure any furniture you buy is what is expected from your ideal target tenant (both in terms of quantity and quality). Most items of furniture are not offsetable “revenue expenses” against tax as the are generally deemed a capital expense. However a wear and tear allowance is allowed to reflect the fact that these items will need replenishing approximately ever 5 years.
Letting Agent Service Charge (% of rent)
Typically an agent will charge between 10%-15% of rent – remember to add on VAT into your % entered. If you do decide to use an agent, their typical ‘full management service’ package is likely to consist of:
Monthly Rent
The amount you are likely to receive each month. If planning to advertise and set the rent at a certain value, investigate the going rate for similar properties in the area, to the one you have purchased. Track the rental values over a period of two months – so begin early, make sure you are confident in the stability of the area. There are no real guarantees you are going to achieve the rent you hope unless you do your homework. Don’t be a greedy landlord in setting your rent too high. It is tempting to set the rental at the highest you think you can get. However, it is always better to have a lower rent (with no rental void periods) than to suffer void periods.
Number of weeks let per year
The number of weeks a year you think you will receive rental income. Assume you will not be able to let all year round which will impact your rental income. Try worst and best case scenarios and view the impact on gross profit. Rental voids may occur because a tenant leaves (following notice periods) because they have unexpectedly lost their job, got divorced etc… During this “rental void” time you must continue to meet mortgage repayments and other letting expenses (repairs and maintenance etc). The average length of a tenancy in the UK in the rental sector is around 16 months. The break period between tenants leaving at that point and attracting new tenants in represents your average void period.
Buildings & Contents Insurance
Enter your insurance premium. Your mortgage provider will insist on you insuring the property for potential complete rebuild anyway (buildings insurance). You may be offered or required to use the mortgage provider’s insurance package or they may let you buy your own. In addition a certain amount of Contents (limited by value) will be protected i.e. furnishings and fixtures. Ensure this is paid before tenants enter the property. Many insurers regard let property as representing a higher risk than owner occupied property, therefore insurers may decline to provide any cover for let property. Some insurers provide restricted cover and will require higher premiums for properties let to students or tenants in receipt of housing benefits.
Income Payment Protection
You may wisely adopt an optional landlord insurance known as “rent guarantee” insurance. This is an optional insurance that protects against loss of rental income. There are usually caveats and limiting conditions attached to these generic polices. This is for the conservative investor. Typically, if you are planning to use a letting agent, part of their service package should ideally include a three-month guarantee of payment equivalent to rental income, in the event of the agent not finding tenants. In practice, a letting should be able to find new tenants very quickly (certainly within three months) anyway. Make sure this insurance is paid for and set up before the tenants enter the property; it costs around £300 per year to cover rental income of £10,000 or so – not a bad investment.
Legal Expenses Cover
This insurance expense pays for legal expenses in the event damage caused by tenants (deliberate or accidental), that needs to be resolved through legal means. The use of legal process should be a last resort but if that worst case did arise, this insurance covers the potentially large cost of using a solicitor. This is an optional insurance but very worthwhile.
Upkeep & General Repairs
Estimate how much you will spend on repairs during the year. It is a fact of life that boilers break, roofs leak, washing machines stop working. These types of unforeseen repairs also include painting and decorating, treatment of wooden furniture for damp, replacing leaking pipes etc. If you’re using a letting agen, they will usually have a pre-agreed responsibility to fix minor problems (up to a certain pre-agreed repair spend limit) using their own approved tradesmen. If you’re not using an agent you must be prepared to accept phone calls at any time and be responisbe enough to sort out angry tenants. If you do not have plumbing, electrical and carpentry skills to make minor repairs (or simply don’t have the time), find a good local handy man or general maintenance company that does.
Annual Gas Servicing (CORGI approved)
By law you must annually employ a CORGI registered engineer to undertake the maintenance of all gas appliances in your investment property. The engineer will produce a Gas Safety Report. Upon successful completion of this report (certificate) details the engineer’s name, the property address, work carried out on each appliance, the location of appliances, defects identified and action taken, the CORGI registration number and the date. A copy of the certificate must be given to the tenants before they enter the property. This report must be retained for reference purposes for at least two years. The typical cost is £100. If you fail to comply with these regulations you could cause a tenants death. The financial impact would be a £5,000 fine and a criminal conviction under Section 33 or Section 36(1) of the Health & Safety Work Act 1974.
Accountancy Fees
You are required by the Inland Revenue to submit your tax declaration yourself. To supplement this data, it is important you get your accountant to produce a P&L, Balance Sheet, Cashflow Statement. The correct presentation and accounting of all items according to statutory guidelines should always be done by a chartered accountant. The typical cost to produce these accounts is £300.
General Administration
Enter a figure to cover your expenses related to phoning, photocopying, office supplies, postage. These are expenses offset against tax. A figure of £50 is reasonable. Remember to keep all receipts.
Letting Agents Fees (inc. VAT)
If you stated in your choices above that you will be using an agent to manage your property, this figure is automatically calculated by using the ‘agents letting charge as a % of rent’ multiplied by the ‘anticipated monthly rent’ figure you already entered.
Annual expenses of managing the property yourself
If not using an agent, enter an estimated annual cost for: credit referencing, inventory checks, preparation and checking of tenancy contracts and advertising and marketing the property yourself. Budget for at least £500 per year. If you are using an agent make sure you zero this figure.
