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Understanding and calculating rental yield

Understanding and calculating rental yield
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The buy to let market can be a really lucrative one, especially as demand has soared as more people are unable to make it onto the first rung of the property ladder. Understanding and calculating rental yield is important in making future decisions on your buy to let property purchase.

Many people cannot afford to buy their own homes at the moment so they rely upon rental properties. This is a problem that’s only set to get worse thanks to predicted stamp duty rises by 2018.

While it may be bad news for those looking to buy to sell, buy to let properties can make the most of the current housing crisis.

How buy to let owners benefit

When you own a buy to let property, you’ll gain profit in two ways. Firstly you have the rental income growth – the money you receive from the tenant each month. It increases over time if the rental market increases. Secondly you have capital growth. If your home increases in value over time, it’s referred to as capital growth. Obviously the house prices can fall too so this would cause capital losses.

The costs involved

It’s important to note that while buy to let properties can be really profitable, they also come with a lot of costs. Even in the property is currently unoccupied you will still be required to pay some costs.

Calculating and understanding rental yieldThe main costs involve include:

• Insurance premiums

• Ground rent/service charges

• Fittings and fixtures replacement

Maintenance costs

• Letting agency fees

• Mortgage

The amount you pay on your insurance premiums will be dependent upon the size of the building and whether or not it comes fully furnished. As a general rule you should expect to pay around 2-3% of the monthly rental. The furnishings will add anything from 1-4% on top of that.

If you’ve got the property on leasehold you’ll need to pay any charges associated with this. Perhaps the main costs you’ll incur are the fittings and fixtures replacements. It’s advisable to set aside 10% of the annual rent to cover any replacements. You should also aim to re-decorate the property at least every other year. The same rule applies for maintenance costs. Set aside a small portion of the rent to cover maintenance such as burst water pipes or boiler problems that may crop up.

Your mortgage is going to be the biggest cost you incur. It’s possible to get a mortgage up to 80% of the home’s value, meaning you’ll need to pay for some of the property yourself.

Working out your rental income

In order to work out how much you will earn from your rental properties, you need to deduct the above costs from the annual rental income figure. Once you’ve divided this figure by the value of the home, you’ll be left with the net rental yield.

An example would be if you got a total rental income of £10,000 after costs have been deducted. The value of the property is £200,000. You need to divide the £10,000 by £200,000 to be left with the rental yield. This would leave you with 0.05 or basically 5%. If your net rental yield is less than your annual mortgage repayments, it would leave you with a shortfall.

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About Jemma Porter

About Jemma Porter

Jemma Porter is an experienced content creator who has written for a number of online publications. A self-confessed penny pincher; she's often found seeking out the best personal finance deals.

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