As a property investor, ‘buy to let’ is the name of the game. Although I enjoy the rewards of the occasional ‘flip’ (which is to sell a property on before completion), the core of my property portfolio is buying properties to rent out. This increases my chances of maximising ‘property profit potential’, as any hiccups in the property market, such as price falls, should level out in the long term.
The principle of buy to let is that the investor purchases the property in order to enjoy long-term capital gains, while the tenant pays the mortgage. However, there are many factors to consider before plunging in and buying a property. This chapter will highlight some of those factors and concentrate on key issues: where to buy, what to buy and who to buy for.It is also important to decide before choosing a buy to let property whether you are investing for yield, capital gain, or in an optimistic market – both!
The Buy To Let Market
The buy to let market has seen a large increase in the number of re-mortgaging applications. Investors understand the theory that house price increases coupled with rental income is an attractive proposition, compared with returns from pensions or other forms of investment. However, as expected, the rate of growth is now slowing. This trend is expected to continue over the next couple of
years, so it is important, when choosing property as an investment, that you research the market thoroughly.
What Is Yield?
Your yield is basically your profit, a percentage of what you earn from renting out your buy to let property, after all the expenses of purchasing and the running costs are subtracted. For example:
£100.000 purchases an apartment.
A 10% rental income would be £10.000.
This would represent a 10% (gross) yield.
A Simple Formula For Working Out The Yield
Weekly rent × 52 = annual rent.
Say the weekly rent is £150 × 52 = £7,800.
Subtract the agency fees. Agency fees of 10% = £780.
Deduct £780 from £7,800 = £7,020.
Subtract the property out-goings. Say property out-goings are £520.
Subtract £520 from £7,020 = £6,500.
Multiply the figure remaining by 100.
£6,500 × 100 = £650,000.
Divide that by the purchase price.
Say the purchase price is £100,000.
£650,000 divided by £100,000 = 6.5%.
What remains is the net return = 6.5%
Compare the net return to the current interest rate.
What Are The Property Out-Goings Likely To Be?
It is advisable to consider the points listed below when working out your profit margin, as these will affect your overall yield.
Voids
A void is when the property is not rented out. It would be prudent to include a six week void period when calculating the overall anticipated yield for the investment property.
Service Charge/Ground Rent
You will be expected to pay the full service charge and ground rent, whether the property is occupied or not. Both these charges will have to be subtracted from your gross yield.
Set Up Costs
These will include furniture (should you chose to let the property furnished), stamp duty and legal fees.
Maintenance/Repairs/Redecoration
You, as the landlord, will be responsible for maintenance, repair and redecoration. You should estimate a ‘what if things go wrong’ budget, to cover any unexpected repairs, such as the boiler breaking down, for instance. It is always wise to have a contingency fund and you should subtract this from your ‘gross’ yield.
Insurance
This will be another expense to deduct from the ‘gross’ yield and you should budget for both contents and building insurance (if this is not included in a service charge).
Electricity And Gas Safety Inspections
All rented accommodation is expected to have annual checks on
its services. You will need to get safety certificates from a qualified electrician and a Corgi registered plumber, in respect of gas.
Cleaning
The property will have to be cleaned to a professional standard at the beginning of each tenancy.
Council Tax
You will be responsible for ‘empty rate’ council tax, when the property is unoccupied.