Should Landlords Aim for Rental Yield or Capital Gain?
When you invest in a buy-to-let property you can expect to receive two different forms of income. One will be immediate and that’s rental income (and which is referred to as a short-term gain (ie you will receive this on a monthly basis).
The second is the capital accumulation from the value of your property and is typically long-term. The way the UK market works in terms of inflation is that the longer you have the property, the more it tends to be worth.
Rental Yield Explained
Your annual rental yield is what you’ll get in rent every month x 12, divided by what you paid for the property and multiplied by 100.
So, if your property cost £140,000 to buy and your annual rental income came to £8,400 (£700 rent per month) then your yield would work out at 6%.
The higher the yield, the more lucrative the investment. Better yields are found in affordable areas – particularly those where regeneration is planned but hasn’t take place yet. Once the area is regenerated it’ll become more in demand and you’ll be able to charge a higher rent. Commuter towns tend to have a higher rental yield because property there is less expensive to begin with.
A typical yield for a buy-to-let in the UK last summer was around 4.5%, in London it was slightly lower, at 4.1%. That’s likely to be because property is more expensive to buy in London and there’s a lot of competition.
It’s worth mentioning that the above calculation gives you a gross yield. This is the one your potential lender will want to see. To get your net yield, you have to deduct expenses, such as solicitor’s fees to buy the property, letting agent costs, any maintenance, insurance costs etc.
Capital Gain Explained
Capital gain, also referred to as ‘capital appreciation’ and ‘capital growth’, is just as it sounds. It is how much your property gains in value over the years so that when you come to sell it should be worth far more than what you paid for it. The difference between the selling price and the buying price is your capital gain. However, that’s not the end of the story. Landlords do have to pay Capital Gains Tax on their buy-to-let at either 18% or 28% (depending on your tax band).
Most landlords go for either a high rental-yield or capital gains. It’s possible to have both but on the whole it’s best to choose between them. At the same time, look at the rental demand in the area you are thinking of investing in. You can tell this quite simply by checking out how quickly properties are snapped up.
Other factors in finding a good location to invest in include good public transport links into town, schools (if your target market is families) and plenty of green spaces around.
Last year the best areas for rental yields in England and Wales were Nottingham’s NG1 postcode (11.99% yield) and Liverpool’s L7 postcode (9.79% yield). Both cities fared again in the top 5, with Liverpool postcode L1 boasting a 9.33% yield and Nottingham’s NG7 at 8.89%. In London the highest yield was around 4.81%, according to the website Totallymoney.
Best Locations for Capital Gain
Top of the league for capital gains investment in the UK between 2018 and 2019 (again, England and Wales) was the southern city of Canterbury with 7.83%. Next was Sutton, 6.47%, Coventry with 6.36%, Stockport, 6.34% and Stevenage, 6.15%. Last on the list of 10 was the former seaside resort of Southend on Sea with a rental yield of 4.89%.
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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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