When making an investment into buy-to-let property, there are typically two ways in which an investor can expect to benefit from financially and they are capital growth and rental income. However, fluctuations in the property market are a common occurrence and cannot be controlled, whereas the rental income that is acquired through an investment can be controlled to a certain degree.
By setting the monthly rental fee at the right price, investors are able to control a constant income from their property. It is, however, very important to charge the right amount. The rental income needs to cover a number of things, including any monthly mortgage repayments, insurance, maintenance, repairs and any other expenses that are linked to the property. These expenses would not be covered and the investor would be making a loss should the rental income not be high enough, yet if you set the rent too high, it may turn potential tenants away.
The rental yield that a property can achieve is an important element that is considered before an investment is made. The rental yield of the property is a percentage that can be expected as rental income, calculated as the cost of the property divided by the annual rent.
By looking at the rental yield of different properties, investors are able to take them into considerations during the process of deciding which investment to proceed with. When comparing properties of the same or similar purchase price, the property with the higher rental yield would be the best option to choose. A combination of a higher rental yield and a lower purchase price would result in a better investment that would see the investor benefit more financially.
When looking to make an investment, it is advised that investors conduct thorough market research into their property type and also property types within a specific location. If they are considering a property and expect to get a certain amount through rental income, they will need to conduct market research to back it up. This is because if an investment is based on achieving £2000 a month through rent, but the same property type within the area is on the market for £1500, it isn’t likely that tenants will opt for the £2000 a month property.
The market research can be used to get an idea on the level of rental income a property can achieve, and also which locations are typically have higher levels of rent. This data could then be used to decide which property to invest in and within which area they would like it to be located, and that is when investors can begin their search for their perfect property.
Taking into account different property types and different locations is important, particularly as rental income can differ massively in various parts of the country. For example, in the north of England there is an average rent of £663 a month, whereas in Central London it can be expected to achieve an average of more than £2500 a month.
Many yields are calculated or displayed based on the yield that would be achieved based on an outright purchase of a property. However, if an investor purchases a property through the use of a mortgage, their rental yield will actually be higher than an investor purchasing the property outright. This is because using a mortgage requires a lower initial outlay of money, based on the fact that the investor is essentially taking a loan for the money needed to buy the property.
To work out the annual yield of the property, you firstly need to take the mortgage repayment fee away from the monthly rental income, covering the mortgage whilst leaving the rest for maintenance, repairs, insurance or profit. With all other property purchasing costs taken into account, an investor purchasing the property through the use of a mortgage would have almost doubled the percentage yield than that of an outright buyer.
Despite such a big difference in percentage yield, it is important to remember that there are other costs associated with the investment such as maintenance and repairs, letting fees, insurance, landlord expenses and of course the possibility of void periods. As well as this, dependant on the terms of your mortgage, you would need to ensure that even if interest payments increased, you would still be making a profit from the property.
In order to be sure that you can make the monthly repayments as well as covering other associated landlord fees, mortgage lenders will typically expect you to charge a minimum of 125% of your monthly mortgage repayments.
If the area is competitive and you can charge more than the 125% then you should do this to boost your profits, however you should not go beneath the 125% expectation. This would mean that if your monthly mortgage repayments were £300 a month, the lender would expect you to charge at least £375 rent per month.
As far as financials and rental income is concerned, there are a number of elements to an investment that need to be considered before any decisions are made:
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