Have you ever wondered how much profit you should make from a rental property?
In this post I will discuss the various factors that you need to take into account when assessing the profit potential of a rental property. While it is certainly possible to make a good return as a landlord in the UK you do need to take all of these things into account.
I have seen quite a few people invest in the wrong type of property for buy to let and then end up just about breaking even. Some even made a loss. So it is vital that you approach all of your buy to let deals very carefully so that you can make a good return on them.
Some of you may be thinking at this stage “surely the profit from a rental property is just going to depend on the amount of rent that you charge?” Unfortunately it is not quite as simple as that.
I will show you in this post how to properly calculate rental rates and discuss what kind of yields you need to look for when you are considering investing in a buy to let property. I will cover some other details that you need to be aware of as well.
Profit From A Rental Property – Factors that Influence How Much
Treat a Rental Property as a Long Term Investment
If you really want to be successful as a property investor then I recommend that you build a diverse portfolio of properties. This means that you will have a combination of both short and long term projects in your portfolio.
I always consider the purchase of a buy to let property to be a long term investment. In fact any property that you intend to own for longer than 12 months is long term. A property that you intend to sell within a year to flip is a short term investment.
So many investors turn to property for long term investment because over the years it has proven to provide the best returns. How do property investors make good returns with property? Well it depends on a number of different factors.
Property tends to be a volatile asset as it has a dependency on interest rates, the economy, the state of the financial market and so on. This is why I always recommend long term property investment. There will always be a demand for private rental homes and property in general.
Everybody has to live somewhere and the government cannot keep up with the demand for housing. So it relies on the private sector to take up the slack. This is good for us property investors and long may it continue! If you can offer competitive rental prices then you should always be able to make a good return if your property is in the right area.
Capital Appreciation
At some stage you may want to sell your rental properties. The best time to do this is when there is a strong economy and interest rates are favourable. Your property should have appreciated in value since you first purchased it.
The Office of National Statistics have a report that shows average house prices rising from 2009 to 2020 from £154,452 to £239,000 (August 2020). This means in 11 years there has been a 47% increase in house prices.
One of the great things about the capital appreciation of a property is that you don’t have to do anything for it to happen. Just keep hold of your property for a few years and it should go up in value.
Rental Prices
You cannot just charge any rent that you can think of however tempting this may be. There are going to be costs associated with your buy to let property but you have to charge a competitive amount of rent. If your rental prices are too high you will struggle to get tenants.
Some property investors use the services of a letting agency to take care of rental prices, finding tenants and providing maintenance checks and related services. The advantage of using a rental agency is that they have good local knowledge and will know the prices for your type of property and the location it is in.
Of course you do not have to use a letting agent. You can do some research to determine the average rental prices for the area where your property is located. There are some important factors that you must take into account when you are working out what rent to charge.
The exact Location of your Rental Property
In general, you will be able to charge higher rental prices if your buy to let property is located in a city or large town. But you will have to accept that the price of purchasing a property in a city or town is going to be higher than in outlying areas.
You need to look closely at the area that you are considering investing in. What are the average prices of properties that are suitable for buy to let? There is historical data available and a good estate agent can help you here.
In cities and towns rental prices can fluctuate on a street by street basis. Some streets are a lot more desirable than others. If your property is close to transportation links, schools, shops, parks and so on then you will usually be able to charge a higher rent.
Furnished or Unfurnished?
If you are going to furnish your property then you will be able to charge a higher rent. Some potential tenants will see a furnished property as a good thing, while others will prefer an unfurnished property because they want to use their own furnishings.
Do your homework here. Find out what the demand is for furnished versus unfurnished lets. If your property is close to a university and you want to rent to students then furnished is likely to be the best option.
How appealing is your Rental Property?
I have already mentioned that some streets are more desirable to live in. Here I am referring to the condition of your property. If you are not prepared to invest in renovations and your property looks run down then you can expect to charge lower rents. You may find it really tough to find tenants as well.
Spending a sum on renovation is almost always a good idea. The more attractive you can make your property the more you can justify a higher price. There will be a number of prospective tenants that want to live in your newly renovated property.
Costs
If you are going to renovate then this is a cost that you need to account for. You are likely to have other costs as well such as mortgage repayments, letting agents fees, rates, maintenance costs and so on. If you are new to buy to let investment then you need to know exactly what costs are involved.
When you purchase your buy to let property the following costs are likely:
- Stamp duty
- Conveyancing fees
- Survey fees
- Other lender costs
- Safety checks
- Renovations
You need to keep your buy to let property in good order so there will be some maintenance costs every year. Sometimes things go wrong with a property and as a landlord you need to attend to these things promptly.
I recommend that you put a certain amount of money away each year to cover things going wrong with your buy to let property. You can never be sure when these things are going to happen but it is almost certain that they will at some point.
Another thing that you should consider is landlord’s insurance. There are some really good policies available that will help to protect you and your property. You will need buildings insurance too.
Rental Yield
Rental yield is the income percentage against the value of a property. This is very important to you as you cannot assume that a buy to let will be profitable purely on the amount of rent you can charge.
There are two yield calculations used and you need to understand them both:
Gross yield is the most commonly used:
Gross Yield = annual rent amount ÷ property value
Net yield is of more importance to you because it will help you to establish your profit potential. This is the funds that you have remaining after settling all of the costs of your buy to let property:
Net Yield = (annual rent – costs) ÷ property value x 100
I cannot stress how important it is to identify all of your costs. If you forget costs then you will think that you are making more profit than you actually are. As a general rule you want to look for a net rental yield of at least 4%. Any less than this will probably not be worth it for you.
There are some locations in the UK that have rental yields of more than 7% so as always you need to do your research to find the best area. If you have to travel outside of your existing area to find higher yields then you must decide if you want to do that.
You can make alot of profit from a rental property if you treat it as a long term investment and keep a keen eye on the rent you can charge and the costs you incur.
Do you have any experiences of the profit you made from a rental property? Any horror stories or pleasant surprises? I would love to hear about them in the comments below.
