The ideal outcome from investing in property is you get a good ongoing return from monthly rental profit while the property appreciates nicely in value. That’s what all landlords hope for! But in reality, properties are usually stronger in one return than the other, so the first thing you need to decide is: what kind of return do you want or need?
Once you know what kind of financial returns you’re looking for, the infographic below offers some of the key points to consider before you get started.
Understand how borrowing can increase your returns:
Most people aim to own their home outright, to give them the security of knowing it’s all theirs. It is good to consider when you buy to let that you should understand it is possible to increase your returns by having a mortgage. As the property increases in value, you get to keep all the profit (less tax) and benefit from the growth on the bank’s money as well as your own. As a simple example:
You buy a property worth £500,000. If the market increases by 10%, you make £50,000 subject to tax
Owning outright that's a 10% return on the cash you invested (£50,000 / £500,000 X 100)
Buying with a 75% mortgage and 25% deposit of £125,000, it's a 40% return
Even after deducting mortgage interest and any other additional costs, it's still a better return.
Working out the numbers
The rental yield figures you see quoted are often a gross figure: simply the rental income as a percentage of the property value. As an individual private landlord, two more useful calculations are:
1. Net annual profit. That’s the annual rent you get, less all your costs (including mortgage interest, agent management fees, maintenance costs and any tax that will be due)
2. Net return on investment. That’s the annual net figure as a percentage of the amount of money you’ve invested in the property
E.g. £125,000 deposit plus £15,000 refurbishment costs = £140,000 invested
£10,000 rental profit per annum
7% net return (£10,000 / £140,000 x 100)
By adding any capital growth into your annual profit you can get an overall annual return figure. Factoring inflation into your longer-term plans is imperative.
Please do remember that a Buy to let is a long-term investment, not ideal if you are looking for a quick return. Ensuring that the property is let and managed properly together with keeping the eye on the financials you should expect a good return.
At Lint Group, our lettings team are always ready to assist with any questions on Buy to Lets – You can contact them on 020 8554 9999.