Warning for landlords and investors over size of contingency fund needed for buy to let
Residential investors and landlords in the UK 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, it is claimed.
Recent statistics show that one in five 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% of the repossessed total.
According to Invest Connect, a leading property investment specialist firm, 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 and landlords 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,’ said Charles Brittain, the firm’s business development director.
He believes that as a general guideline, some 30 to 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,’ he explained.
He added that redecoration may be needed every three to five years. Kitchens, bathrooms, boilers, and interior doors may need to be replaced every five to 15 years. New windows, external doors, barge boards, guttering, pathways, driveways, and radiators may be required every 15 to 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,’ said Brittain.
‘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,’ he explained.
‘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,’ he added.
Invest Connect has put together 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. These include electric and gas certificates, letting agents fees, insurance, council tax, void allowance, ground rent, service charges, utility bills, white goods, furnishings and repairs.
Article courtesy of Property Wire