What’s your rental home’s yield?
New research by the National Landlords Association reveals that families are now the most common household type in the private rented sector.
The findings show that 48% of rental homes are now let to families with children, overtaking the 47% of rental homes let to young couples.
This appears to show that buy-to-let landlords in London who invest in semi-detached properties suitable for families can generate healthy returns, despite the introduction of a 3% stamp duty surcharge on second homes.
This extra charge pushes the tax payable on a £602,084 home (the average price of a semi-detached house in London, according to property portal RightMove) from £20,104 to £38,167.
Whether you have a buy-to-let property in North London, North Greenwich or close to Heathrow Airport in Northfields, the success of that investment is measured by its rental yield.
To calculate your buy-to-let investment’s rental yield, take the total rent received over a year. Assuming your £602,084 BTL investment property can be let out for £2500 per month, your annual rental income will be £30,000 before tax.
Next, take the purchase price of the property (£602,084) and add that figure to its buying costs (£38,167 stamp duty plus £2000 professional services fees). That gives you a total of £642,251.
Now perform the following calculation: 30000 ÷ 642251 x 100 = 4.67%.
LendInvest reports that rental yields between 2010 and 2016 in the whole of the UK was 5%, climbing to 7.4% in certain London postcodes. However, these figures do not take into account the higher rates of stamp duty now payable on second homes.
Beware that the 4.67% yield assumes the investment property was purchased without the need for a mortgage.
To work out your yield taking the property loan into account, the annual mortgage costs must be subtracted from the £30,000 received in rent.
If we assume the landlord takes out an interest-only buy-to-let mortgage for 80% of the purchase cost (£481,667) at a rate of 3%, that would require monthly payments of £1204 or £14,448 per year.
Subtracting that figure from the annual rent receipts of £30,000 leaves a handsome pre-tax profit of £15,552 per year.
To calculate the yield, take the deposit put down (£120,416) and add that figure to the buying costs (£34,782). This gives a total of £160,580.
Now perform the following calculation: 15552 ÷ 160580 x 100 = 9.68%
It is wise to bear in mind, however, that a landlord’s true profit from a buy-to-let investment is the amount of rent left over after all the other expenses associated with the property have been met. These can include variables such as void periods, maintenance, insurance and the fees charged by letting agents.
But even subtracting 25% from the £15,552 annual pre-tax profit gives a yield of 7.26% on top of any appreciation of the property’s value.
Landlords in London, however, have no need to factor in void periods when it comes to calculating their yield.
With Assetgrove’s Guaranteed Rent Scheme we take care of everything, and provide you with a fixed guaranteed rental income for up to five years. To find our more, contact Assetgrove today.