Landlord rental portfolio expenses revealed

Analysis by professional cash buyer and portfolio landlord, Landlord Buyer (part of Open Property Group), has revealed what costs make up most rental property expenses.

Using the Hammock software, the business analysed its portfolio of over 140 properties, which are spread across England and Wales, to establish what percentage of the gross rent is received as the net rent (gross profit) once you allow for typical running expenses but excluding financing costs.

The findings act as a stark reminder to landlords that the management aspects of a rental portfolio alone can make up a large chunk of the monthly rental income, eating into profits, and all on top of additional finance and miscellaneous costs.

Repairs were revealed as the biggest outlay in November, equating to 11% of the total rental income, whilst the cost of full-time property managers employed by OPG came in a close second at 10% of their gross rent.

General maintenance amounted to 7.7% and other ancillary costs such as gas safety, electrical safety and energy performance certificates totalled 5.6%.

This means that the net rent received is 68.5% of the gross rent, although not accounting for any mortgage, insurance, licensing, and other miscellaneous costs as this is sensitive to landlord circumstances.

Jason Harris-Cohen, Managing Director of OPG, commented: “The analysis of our portfolio highlights that there are many costs involved in owning and managing a rental portfolio, over and above the obvious expenses like finance costs if the portfolio was not purchased with cash.

“Even if a landlord doesn’t outsource the management, there is still a value they need to put on their time, and these are the kinds of costs they should be scrutinizing when evaluating the health of property portfolios.  

“With falling property prices, increased management costs and higher borrowing rates, landlords need to ensure they are conducting a thorough review of their rental portfolio profits to understand which properties are still a viable investment.

“Property remains a solid investment over the long-term, but in the current market and with the ever-changing pressures on regulation, it could make sense to invest in other types of investments.”

Negative net rent?

These are just the general running costs of a rental portfolio, but many landlords have several other expenses to consider before they get to a net figure.

The big one is financing costs. Borrowing rates are around 70% higher than they were in December 2021 and this means that the 57% of landlords who have a buy-to-let mortgage (English Housing Survey May 2022) could see their returns turn negative.

In one calculation, it has been estimated that the cost of an interest-only mortgage has more than doubled, costing £521 a month on a £200,000 loan.

When considering the UK average rent excluding London (HomeLet) is £977, this is potentially 53% of gross rent compared to 21%.

On top of that, expenses such as licensing and landlord, buildings and rent guarantee insurance can equate to £500+ a year, which amounts to around another 5%.

When added to our findings above, this would result in a net rent of 11.5%. In many cases, the rising costs of being a landlord would far exceed that and when tax liability is finally taken into account, you could see yourself with a profitless rental portfolio.

With additional pressures on landlords to meet new minimum energy efficiency standards and no doubt, another raft of legislation coming in, it’s time to scrutinise and evaluate the financial health of a portfolio. 

Options for landlords

Selling up may be the only option for some properties in a portfolio, although that comes with costs of its own and may be even more difficult in the current climate.

Landlords have to think about whether they want to evict your tenants and leave the property empty, generating no income while it sits on the market; or sell with tenants in situ, dramatically reducing the pool of potential buyers to investors, of which the number is dwindling fast.

An alternative is to reach out to a professional cash buyer. Companies like Landlord Buyer will make landlords a cash offer for one or multiple rental properties regardless of whether they are tenanted or vacant. The business also guarantees to buy any property regardless of condition, location, EPC rating or length of lease too.

Although they can’t help with any Capital Gains Tax liability, they do provide a fee-free service too, removing the other associated costs of selling such as estate, letting agent and legal fees and can exchange contracts within the landlord’s required timetable.