A two-minute read to help you quickly determine the return on a buy-to-let property.
If you’re looking for a property to rent out, it’s important to understand the numbers involved.
You may be purchasing a buy2let or you may have inherited a property and are thinking of letting it.
Find the numbers
The simplest way to work out your gross return on a rental is to estimate some numbers. You can have a browse on the property portals to get a vague sense of what properties in your budget sell for and let for. These figures change across the country so it’s important to start with your own research.
Quick and easy
Here’s a simple calculation to get you the basic overview. Let’s use an example of a £150,000 property that rents out for £650 a month.
650 x 12 (months in a year) = 7,800 p.a.
Divide 7,800 by the purchase price of £150,000 = 5.2%.
For some investors, a 5% gross yield would be sufficient. Others look for higher but it’s all rather area dependent. Here in Halesowen we normally suggest looking to achieve around 6% based on this calculation.
If purchasing a property specifically to let out some investors look at these numbers a different way, namely when having a buy2let mortgage. This changes the numbers again, dependent upon how you look at it.
With an example property, again, of £150,000 you are generally required to place a minimum of a 25% deposit on the mortgage. So that would be a total ‘cash’ investment of £37,500. If you work out your return on pure cash investment using the same calculation then your return on that cash investment is 20.8%.
You must remember, however, you are liable for the entire property which could go up or down in value so there is a risk factor, but a calculated one. After all there are not many places you can invest £37,500 cash with a return of £7,800 per annum?
This is why buy2let can be such a good investment.
Deduct your deductions
We’ve worked out your gross figures. But it’s the net figures that are the ‘money in your pocket’ numbers. To work these out, you’ll need to employ a little more guesswork. Better still, ask a local property expert, like us, who deals with these things, day in, day out. Then you’ll be closer to an accurate estimate. The figures you need are:
• Solicitors’ costs including stamp duty
(if you’re purchasing a property and don’t forget the 3% surcharge if applicable)
• Landlords’ insurance and Rent Guarantee Insurance if you want it
• General property maintenance
• Agency fees
• End of tenancy cleaning costs
These can be off-set against your income for tax purposes.
Taxes, taxes, taxes
It’s reasonably straightforward to submit your tax returns yourself. They need to be done annually and submitted by the following January. It’s recommended though to use an accountant. They will be up to date with all the latest options open to you. Not only that, they can often help in other areas, like looking at your pension or investment options.
For rental opportunities in Halesowen and all over the West Midlands, get in touch with us on 0121 550 4151.
Our lettings specialists can help you consider the market and the best options out there for you.