How to Work Out Rental Yield
When considering investing in a buy-to-let, the rental yield for the property is a big consideration. It’s also something your buy-to-let mortgage lender will want to know.
But what is rental yield? Well, it’s how much money you’ll make on renting out a particular property. It’s calculated as a percentage and anything over 4% is usually considered a decent yield. The higher, the better.
So, what are the sums involved in the calculation? It’s quite simply really. It’s how much you paid for your property, compared to how much annual rent you’ll get for it, minus any expenses such as solicitors fees for buying it in the first place and any repairs or maintenance you have to spend money on.
The yield can be calculated as a ‘gross’ figure or a ‘net’ one. The latter takes in all running costs for the property. It’s the gross yield your mortgage lender will want to hear.
A typical gross yield is found by dividing your annual rental income by the value of the property.
For example, if you paid £70,000 for a flat and you received £400 a month in rent. This would bring your annual rent to £4,800
£4,800 / £70,000 = 0.0686
Multiply by 100 = 6.8%
Capital appreciation is the amount of money by which your property increases in value over the years. This can often be pretty spectacular when considered over a couple of decades.
Capital is the bricks and mortar (the physical side of the property). Property pretty much always increases in value as it keeps in line with inflation and the economy as a whole. The only times it doesn’t, and can actually lose value is when we’re going through a recession. But even then, the loss is usually short-term and it tends to balance out after a couple of years then start rising again. It’s why many investors see property as a long-term investment (unlike stocks and shares).
Expenses to Calculate in Your Net Yield
This could cost up to 3% of the annual cost of the rent. But it is essential – especially for the building itself. You could consider both Landlord Insurance and Rent Guarantee Insurance, for instance.
Repairing Fixtures and Fittings
Natural wear and tear dictate that there will items to replace at the end of a tenancy (particularly if it’s been a long one ie three years). If your inventory is good and up-to-date then use this to gauge replacement items. You can then claim them back as replacement expenses when filling out your self-assessment tax form.
No doubt after three years the property could also do with some decorating.
Maintaining the Property
You’ll need to get your roof and guttering checked every couple of years, keep the boiler in tip top condition and get a gardener in to tidy up the garden. You might also want to get a damp proofing course – or at least, do a regular check for damp, especially if your property is a Victorian or Georgian tenement and/or more than 100 years old.
Leaseholders may not have the freehold which means there will be the cost of a ground rent to factor in too.
Your flat may not always be let out. When it’s empty it’s regarded as a void period. Rent Guarantee Insurance can cover this for a certain number of months, but that’s a cost in itself.
If you don’t have the time – or even the inclination – to maintain your property yourself then you can always use a letting agent. This too will cost and is usually anything from 10 to 14% of your annual rental income – and which will also eat into your rental yield.
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As a landlord you will gain passive monthly rental income from your buy to let and capital appreciation as the years flit past. And it’s exactly this capital appreciation ...
February 12, 2021
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