When you’re investing in a buy to let property, it’s essential that you have at the forefront of your considerations just how much you’ll get as a return by doing so.Don’t buy to wait or flip – that’s not investment
Property is a funny game, trust us – we know all about it! There are property “investors” who flip properties for a profit; this is risky and doesn’t always provide a significant return on investment. That isn’t a slight on people who flip properties, but they’re not investors as much as renovators or developers. To invest in property, you’ll want to ensure that there’s an ROI coming from it over a period. That’s where rental yield is important to know.
The most common mistake is to assume that high rents = high yields. This has burned many investors in London over the years who felt they would be investing in something with high returns. Because of the price of the property, the expected yields have been far, far lower than expected for investors. It’s for reasons like this that we’ve chosen the North West as our property development hotspot rather than moving further afield.
What is rental yield?
Rental yield is the calculation of what returns you’ll get by renting out your buy to let property against the cost price you paid or negotiated for.
In the UK you can expect to see net rental yields typically above 3%. This changes by area, with some as high as 10% and you can see as low as 1% dependent on demand and area. If you’re ahead of the curve, you can identify high growth investment areas such as the North West. Although the property itself may not be as high value upon purchase and sale – the period it’s let for will yield a much higher return than another elsewhere.
This is where rental yield comes in. The way to calculate this is:
(Yearly Rent / Property Price) x 100
For example: if you buy a 2-bedroom apartment property for say 500k in London and receive £1,500 a month in rent, your net rental yield would be 3.6%. However, if you buy the same property in Manchester for £200,000 and charge £850 per month, your net yield is 5.1%. This is far more favourable for the investor. This is, however, Gross Rental Yield. Net rental yield has other considerations such as the initial capital outlay against a mortgage interest, insurance and maintenance costs.
- Insurance: £560 yearly
- Ground rent: £250 per year
- Service charge: Variable (won’t use for this example but is to be considered)
- Tenant finder’s fee: typically 50% of a month’s rent (not included but should be considered)
- Maintenance: £500 yearly (conservative estimate)
- Management: 10% + VAT (£175 for this example)
- Mortgage fixed interest: 1.5% (initial capital outlay £150,000 making the loan payments on £350,000 per month over 25 years £1341.66)
This reduces the net yield to around 2%.
If we apply the same rates to the property in Manchester, we see net yield at 4%. This is almost double with no vast capital outlay (it must be 25%+ on Buy to Let mortgages) you can see that it’s more favourable to get the property with the highest returns over some time.
Buy to let or cash purchase?
Obviously buying a property with cash is a much more advantageous approach as you don’t have the initial outlay or repayments to be made monthly but the other considerations are still there. Purchasing with cash means that if you ever did want to sell an investment property, you won’t have to make a settlement with your mortgage provider to do so.
The rule of thumb for property investment is if you’re a first-time investor that getting a buy to let mortgage allows you to spread around what you could buy outright with cash. It depends entirely on your liquidity, but if you have £50k to invest or £100k, then it can often work out better to split this into initial capital outlays on mortgages and get 2/3 properties at a high yield which will then fund future purchases by filling another investment pot. All the while the other properties you’ve purchased are increasing in value, so when you decide to sell, you’ve got a bigger pool of funds for your next venture into property.
This piece was to highlight the importance of understanding rental yield. Not just gross rental yield but considering net rental yield overall. The reason it’s important is because if you’re considering making a property investment – it must be financially viable. To ensure you have a robust investment portfolio when it comes to property, it doesn’t have to be the most valuable property. It must provide the most significant ongoing returns.
Property investment ideally is seen as a “hands-off” investment. We deal with all types who prefer involvement and those that sit back and watch the money come in. But there are other things to consider that aren’t always given to you up-front. At the Heaton Group, we believe in total honesty in this regard.
If you’re ready to make a property investment or wish to discuss your options and future developments, then please do get in touch on 01942 251 945 or email us at firstname.lastname@example.org