The true return on your buy-to-let property investment

in Property

 

To start with the yield is something you need to be thinking about.

So what is and how do you calculate the yield? Well simply said the yield is the income you generate from your property relative to the value invested in it. This is the total amount of rent, less your running costs of the property, divided by the total invested in the property including all buying costs.

So let’s take an example:

If your annual income on your property is say £12,000 (£1000 pcm), your running costs £2,000 per year and the total value of your property is £200,000 then the yield is calculated as:

£12,000 – £2000 running costs / £200,000 = 0.05, or as a percentage 5%. Thus your yield is 5% on your £200,000 property per year.

If you want to keep your yield as high as possible, make sure you steer clear of voids, even for one month. In the example above, if you had only one month where you had a void (costing you £1000), the return on your investment would reduce from 5% to 4.5%. You might actually want to consider reducing your rents in order to evade voids. For more on this see why it is better charge less rent than risk a void.

And remember the above costs do not take into consideration actually buying the property. So if the property is £200,000 you will need to add a mortgage arrangement fee, solicitor’s costs, survey fee, and furnishings etc which are likely to take your £200,000 property costs to at least £205,000.  These costs will reduce your yield in the first year of your property purchase.

Continuing the example above, the running costs were estimated at £2000 per year. This is an arbitrary figure but here are some additional running costs you might want to consider:

Letting agency fees – these can typically be around 10% commission plus VAT to find a tenant, carry out a reference check, arranging a contract. Usually this 10% commission is taken with the first month’s rent of the new Tenant. In our above example this would be £1000. You could however reduce these costs by using an online letting agent. These internet based companies do not have expensive shop window overheads and therefore can charge a fraction of the costs of traditional methods, as they do not charge a commission and do all the necessary services you need to let your property from marketing to credit checks.

Insurance Premiums – you will need to account for building and contents insurance. You can also take out premiums for tenants defaulting on rents and landlord insurance for anything that goes wrong like plumbing, drains etc.

Ground rent/service charges – If your property is leasehold you will have to pay ground rent and service charges, so make sure you know what these will be.

Furnishing – You will need to budget for replacement furnishings. These include fridge freezers, washing machines, cookers etc as well as furniture for the property. Even if your property is not furnished then you will need to consider general maintenance such as boilers and plumbing.

Personal costs – and finally don’t forget your own time and incidental expenses like phone calls, travel costs etc.

 

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The true return on your buy-to-let property investment

This article was published on 2011/03/16