As an example:Purchase Price of Property-£100,000 Monthly Rent Achieved-£1,000 per month (which is equivalent to £12,000 per year). Before taking into account the cost of any maintenance and running costs, the rental yield is 0.12 or 12% The rental yield reduces as maintenance and running costs are entered into the equation: £3,000 of building work offset against the rental income produces a figure of £9,000 of income generated by the property. The rental yield is now 0.09 or 9%.
Next, factor in the cost of the mortgage. If the mortgage payments are £5000 per year the income generated by the property is now reduced to £4000 per year or 0.04 or 4%.
Other factors to take account of include months when the property is not rented (landlords are typically advised to plan for 2 months per year during which the property is not rented (commonly referred to “voids”), advertising fees, management fees, decoration costs, costs of replacing furnishing and “contingency fees” (these being administrative, legal fees and other unexpected one-off costs).
It is important to consider the rental yield before investing in a buy-to let property. Any lender considering you for a buy-to-let mortgage will have the rental yield at the top of their list of considerations.
Profit from a buy-to-let property is made in two ways: firstly by making a profit on the rental income and secondly by capital growth through the sale of the property. In a volatile property market where property prices may drop, capital growth is more difficult to achieve but there may be a greater demand for rental properties due to the fact that in a recession for example, people cannot afford to purchase a property of their own.
It is important to invest a lot of time in researching the area in which you are going to purchase your buy-to- let property. An area where properties are rising or are historically high and where there is a healthy demand for rental properties is a safer bet as the property prices are less likely to be volatile and although the value of the property may dip at times it is not likely to be a significant dip in value. Further, an area that has a relatively high demand for property may enable you to sell the property quickly should your buy-to-let project not work out for you; there is nothing worse than not be able to sell the property which is producing a negative rental yield.
How to Get the Best Rental Yield?
The best rental yield can only be achieved by choosing the right property in the right area. A property which requires renovation will cost less to purchase but will incur greater repair and maintenance costs and usually a lower rent. You also need to consider the fact that whilst the renovations are ongoing, property cannot be rented out and will not therefore generate any income although the cost of the mortgage will continue.
A property in a rundown area is less likely to command a higher rent, there is likely to be less demand for rental properties and the quality of tenant will be lower (lower waged, unemployed and so on) which is likely to result in more rent arrears and neglect of the property.
A property in a sought after area will not only have a greater demand for rental properties, you will also be able to command a higher rent and this is likely to attract a better quality tenant. Properties in a sought after area are likely to cost more to purchase and this may have a negative effect on the rental yield; however you are less likely to have voids (periods of time without a tenant), the tenants are more likely to be employed and will therefore spend less time in the property resulting in lower maintenance costs and of course, you will be able to achieve a higher rent.
Overall the buy to let market is buoyant. This is particularly so, as mortgages are becoming more difficult to get and less people are able to purchase a property of their own. On the other hand, property prices are rising and especially in areas such as London, the capital outlay required to purchase a property is becoming prohibitive. Further the level of rents that can be achieved is not unlimited and has to be looked at in light of the general income of the population: if salaries are not rising, tenants cannot afford rising rents. The danger of continually increasing rents is that this results in more rent arrears and costly evictions. All of this has to be considered when balancing costs against income to achieve the right rental yield. Further, an established tenant at a moderate rent is more likely to take a long-term view of their accommodation and look after it. This is likely to reduce your maintenance costs and advertising/ administrative costs as you will not have to be continually re-letting property.
For information on the conveyancing process for buy-to-let properties call iConvey’s expert conveyancers on 01732 758 780.