BTL costs

[Guv10]

My parents were selling their rental. Buyer pulled out so they are thinking of going back to renting. Spoke to my dad and he thinks that he doesnt make a lot of profit from it. Done some quick maths (im not experienced in BTL) but would apprciate some input :

Income from rent : £1600

Expenses

Mortgage £377 (interest only)
Insurance £60
Letting agent fees £192
Tax at 20% £320

Remaining £651

I know there will be maintanence costs involved but is that about right? I know laws have changed over the past few years on what tax you can claim back so i've done the tax at 20% of total income.

[Eric Mc]

You do not get full tax relief on the mortgage interest - or other finance costs. So, the taxable profit will be higher than what you have calculated.

[Guv10]

I've calculated the tax on the full income which is £1600.

[Eric Mc]

That's wrong too

[Guv10]

Eric Mc said:

That's wrong too

haha. What is the correct calculation?

[Froomee]

You can use openrent or spareroom to find tenants so there is no agency charge.

If you must use an agent, you should be able to nearly halve those costs if you negotiate.

[Eric Mc]

Guv10 said:

Eric Mc said:

That's wrong too

haha. What is the correct calculation?

Here it is. I am assuming the landlords have other income which is taxable but they are only basic rate taxpayers.

Gross rental income - £1,600.00

Allowable costs -
Insurance - £60.00
Agents' Fees - £192.00

Total Costs - £252.00

Taxable rental income - £1,348.00

Tax at 20% - £269.60


Tax relief on mortgage interest - £377 @20% = £75.40

Net Tax - £194.20 (£269.60 less £75.40).

[Kickstart]

Guv10 said:

My parents were selling their rental. Buyer pulled out so they are thinking of going back to renting. Spoke to my dad and he thinks that he doesnt make a lot of profit from it. Done some quick maths (im not experienced in BTL) but would apprciate some input :

Income from rent : £1600

Expenses

Mortgage £377 (interest only)
Insurance £60
Letting agent fees £192
Tax at 20% £320

Remaining £651

I know there will be maintanence costs involved but is that about right? I know laws have changed over the past few years on what tax you can claim back so i've done the tax at 20% of total income.

I think you would need to know how much your Dad has invested into the place to work out if its worth continuing with it - there is often a lot of appeal in selling up as one gets older and avoiding the hassle of dealing with tenants unless it is really profitable
There is also some headwinds on the horizon with the purported removal of section 21 and the requirement to make the property energy efficient which may or may not cost a few thousand depending upon the property

[kOi12]

Eric Mc said:

Here it is. I am assuming the landlords have other income which is taxable but they are only basic rate taxpayers.

Gross rental income - £1,600.00

Allowable costs -
Insurance - £60.00
Agents' Fees - £192.00

Total Costs - £252.00

Taxable rental income - £1,348.00

Tax at 20% - £269.60


Tax relief on mortgage interest - £377 @20% = £75.40

Net Tax - £194.20 (£269.60 less £75.40).

Maintenance costs can be offset as well correct?

[UrbanAchiever]

Correct

[Soir]

It’s a £650pm income they wouldn’t be otherwise getting
£850pm is they self managed the property

I wouldn’t worry about the tax side of it. It’s an income and income is taxable so best treat it like any other

I’d be happy with £850 after tax

[Soir]

Insurance seems high.

£1600 rent
£20pm insurance
£377 mortgage

£1203 per month
£14436 per year

[dmahon]

Agency fees are typically 8-10% of rent in my experience. I negotiated to 8%.

As per the poster above, you’ll be paying tax if you invest elsewhere so you can discount that depending on the plans for the proceeds.

Edited by dmahon on Friday 6th May 19:49

[xeny]

Soir said:

I’d be happy with £850 after tax

Doesn't that rather depend how much capital is tied up?

[superlightr]

you need to factor in the capital growth. each year it is hopefully increasing in value as well.

[Guv10]

Thanks for all the replies!

I'll try and answer some of the comments / questions

My dad has put a fair amount of effort to keep the house in a good condition, the section 21 wont effect too much as its a student rental so they know at the end of every July the contract ends. The house is quite modern in terms of energy so cant see any issues there

the house is worth around £375k and the mortgage is £185k I believe.

He can definetly save on the insurance, he is contemplating not using a letting agent for managing but only using them for finding tenants.

[Eric Mc]

kOi12 said:

Maintenance costs can be offset as well correct?

Yes - if there are any during the year.

All the property running costs are allowed, except for mortgage interest and finance charges which are now offset as a very much reduced "tax reliever" rather than a simple deduction against rental income.

[B9]

Are they definitely 20% tax, as that extra 20k pa could push a lot of earners into 40% territory

[dmahon]

Guv10 said:

Thanks for all the replies!

I'll try and answer some of the comments / questions

My dad has put a fair amount of effort to keep the house in a good condition, the section 21 wont effect too much as its a student rental so they know at the end of every July the contract ends. The house is quite modern in terms of energy so cant see any issues there

the house is worth around £375k and the mortgage is £185k I believe.

He can definetly save on the insurance, he is contemplating not using a letting agent for managing but only using them for finding tenants.

He therefore has £180k of equity in the property generating approximately £10k a year before tax.

5.5% yield isn’t spectacular but better than a kick in the teeth.

That’s by far the main figure I care about as a BTL investor.

[Flog123]

Thought it might be helpful to add, over 4 terraced properties around the wigan area, Insurance, certs and maintenace comes in at 14.15% of the total rental income.