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Prudent investors will also need a cash reserve for maintenance costs and unexpected gaps in rental income, says Robert Jones of Property Investments UK.
He said: “We recommend investors have a separate pot for surprise costs. In the best case scenario this would be enough for six months of mortgage payments on top of maintenance and repair costs.
“A middle ground would be enough to cover unexpected repair and maintenance costs, without enough to cover mortgage payments in the event of a rental void.”
As a rough guide, landlords should set aside 1pc of the property’s value to cover annual repairs and maintenance. So in the case of an average £213,000 rental property, ringfence £2,130 for upkeep each year.
The initial cash injection in an investment property will be higher if it requires renovation or has a poor Energy Performance Certificate (EPC) rating. However, landlords can breath a sigh of relief – for now.
Earlier this month, the Government u-turned on its energy efficiency requirements for landlords.
Until now, landlords had been working on the assumption that new lets would need to have an EPC rating of at least “C” by 2025, and by 2028 for existing lets.
These deadlines have now been scrapped and it is not clear what, if anything, will replace them.
The average gross yield on a new buy-to-let purchase was a healthy 6.2pc, according to Hamptons. That is in contrast with a target 4pc rate of income from a typical pension pot in drawdown.
It is possible to make good money in bricks and mortar, especially if you benefit from house price growth which significantly boosts returns. The average landlord in England and Wales sold their buy-to-let in 2021 for £91,270 more than they bought it for, having owned the property for just less than 10 years, according to Hamptons.
But investing in buy-to-let is not without multiple pitfalls that have serious consequences. Getting it wrong can lead to heavy losses and, if you fail to protect your tenants, fines and legal troubles.
The rulebook for landlords is vast and there are more than 160 pieces of legislation which investors must abide by, according to the National Residential Landlords Association. This is also likely to grow in the coming years with new energy efficiency standards on the horizon.
Landlords also need to factor in the emotional strain of their investment. There is a risk that problematic tenants damage a property or stop paying rent, leading to rental voids and sleepless nights for the landlord. It is a far more hands-on investment than placing your money in the stock market.
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