According to a recent survey, over 45% of landlords don’t know what their buy to let property is yielding for them. The majority of which state their main reason is due to their lettings agent takes care of that but they haven’t been communicated too! Around 20% of landlords do not know what their investment is yielding because they don’t know how to work it out. Maybe that is a reason for some of the 68% of landlords who didn’t increase their rents last year despite increased costs.
As well as the number of professional landlords who invest in the Bournemouth area due to the great returns on investment and capital growth, there are a number of new investors and accidental landlords who have buy to let properties in the area. In fact, I have worked with a number of new investors recently all of which have huge amounts of energy, enthusiasm and high aspirations. Now that is all great and will really help them move forward and growing their portfolios. Working with an experienced lettings specialist is vital, and a good one not only tells you what a good investment property will be, they educate you as to why it would be a good investment and how you can work it out for yourself. That is my aim at least.
So, how can you calculate how good a buy to let property will be? Well there are a few ways. The most widely used method is by calculating the gross and net yield of a property. The other main calculation that is widely used is Return On Investment (ROI). Below I explain what they are, how to calculate them and how to use them.
Gross Rental Yield
This is the yearly rental income divided by the house price. It is used to see at a glance whether the rental income is good compared to the investment you are putting in (eg the purchase of the house). As you can see it is a very simple calculation that can be done quickly with only a few pieces of information. It allows you to see whether the investment is worth a closer look.
Here is an example of a £200,000 with rental of £1,200pcm;
Yearly rental Income: £1,200 x 12 = £14,400
House Price: £200,000
Gross Rental Yield: £14,400 / £200,000 = 0.072
Gross Rental Yield %: 7.2%
Net Rental Yield
The net yield is very similar to the gross yield and is often confused with each other. The net yield however gives us a lot more information as it takes into account the expenses of the investment. Some properties have different expenses which you need to consider such as higher maintenance, differing service charges for leasehold properties. The net yield takes these into account so that you can more accurately compare different investments.
Here is an example of the same property as above, but with £150 service charge and ground rent, £300 mortgage and £50 maintenance per month.
Yearly Rental Income: £1,200 x 12 = £14,400
Yearly Service Charge: £150 x 12 = £1,800
Yearly Mortgage: £300 x 12 = £3,600
Yearly Maintenance: £50 x 12 = £600
Net Rental Income: £14,400 – (£1,800 + £3,600 + £600) = £8,400
House Price: £200,000
Gross Rental Yield: £8,400 / £200,000 = 0.042
Gross Rental Yield %: 4.2%
Return On Investment (ROI)
The Return On Investment calculation is not as well known or as widely used as the yield, however it’s very important to know because ultimately this tells you how much your buy to let property is making you based on the money you have put in.
Here is an example of the same property as above, but with a mortgage of 60%, purchase fees of £7,500 and a capital growth of 5% over the year. (Capital growth is how much the value of the property has risen).
Yearly Rental Income: £1,200 x 12 = £14,400
Yearly Capital Growth: 200,000 x 5% = £10,000
Yearly Income: £14,400 + £10,000 = £24,400
Yearly Service Charge: £150 x 12 = £1,800
Yearly Mortgage: £300 x 12 = £3,600
Yearly Maintenance: £50 x 12 = £600
Net Income: £24,400 – (£1,800 + £3,600 + £600) = £18,400
House Purchase Invested: £200,000 x 40% (60% is mortgage) + £7,500 = £87,500
Return On Investment: £18,400 / £87,500 = 0.21
Return On Investment %: 0.21 x 100 = 21%
(Please note that the capital growth is not realized until you sell or remortgage the property).
All of these calculations are extremely useful, and it’s vital that you know the numbers before investing. Speak with an expert who knows this inside out to ensure that you know exactly what your investment can generate for you.
If you would like any help or advice with what I have discussed, or investing in general – please get in touch.
