The dream: owning one or more properties, in addition to the one you actually live in, that sit quietly in the background of your life accruing value, paying themselves off through rental income and maybe even making you a bit of extra money every month. The reality: careful research into an area that will provide you with a property that meets your budget, one that doesn’t need a huge amount of work, will hold its value and attract the right kind tenants to suit your lifestyle and needs.
Here’s a heads-down guide to rental yield, which is the golden number that will help you decide whether to invest in a property or decide if one you already own is doing its job and paying its way.
What is rental yield?
It’s a measure of how much cash an income generating entity produces each year as a percentage of its value. For property, it is the rental income as a percentage of the property’s value. To work out a property’s monthly yield you can use this equation (Yield = MRR*12/i*100) where ‘MRR’ = ‘monthly rental return’ and ‘I’ = ‘investment,’ or you can just use an online calculator. So, for example, if:
Monthly Rental Return = £1,400
Investment = £450,000
£1,400 * 12 = £16,800
£16,800 / £450,000 = 0.0373
0.0373 * 100 = 3.73 % yield
What about extra costs?
Well spotted. Rental properties rarely come with no work required, and even more rarely do they need no maintenance or additional costs during their year. All of which is important to think about. When calculating your upfront costs, don’t forget about stamp duty. Look at gross rental income by calculating how much rent you receive over 12-months, then deduct your mortgage costs. Once you have that figure, your net income, deduct insurance and maintenance and consider any possible void periods where the property might be empty and also take into account repairs and refurbishment.
Does timing matter?
Yes it does. How much you invest in property will obviously define whether your investment is a success. And now is a good time to invest in a rental property in London. A survey from Homelet states that Rents in London rose 1.9% in September ‘17 year-on-year, continuing the recovery that began last quarter after falls throughout the Spring and Summer; the average monthly rent in the capital now stands at £1,593.
Rental yields in London
Take a look at this breakdown of areas in London and the average yields you can expect from a flat, using data from September 2017. Of course when compared to places outside of London such as Manchester, the yields are low. But consider the headspace advantage and potential capital gain that London offers. Also look along the Crossrail route going out as far as feasible. If you’re savvy there’s some great returns to be had, and as they say ‘nowt as safe as bricks and mortar’. Just check the yield
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