Working Out if a Buy to Let Property is Profitable

Working Out if a Buy to Let Property is Profitable

16:14 PM, 27th October 2011, About 11 years ago

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A key skill for landlords is knowing how to work out whether an investment is profitable.

Yield is the tool that gives the required result – it is worked out by taking the rent received on a property in a tax year as a percentage of the cost of the investment.

For buy to let landlords, that simple calculation gives the gross yield – that’s without taking running costs in to account.

For example, an average home costs around £165,000, while average rents are around £713 per month.

The yield is calculated by taking the annual rent (12 x £713) of £8,556 and dividing by £165,000 to leave a percentage of 5.18%.

That figure is the gross yield, while the net yield takes account fees and running costs.

Buying costs such as stamp duty, legal and valuation charges are fees; repairs, maintenance, service charges and buildings insurance are running costs.

Net yield is income less running costs divided by property value.

Yields have three uses for a property investor:

  • Portfolio comparison – Net yields show the underlying performance of an investment property in comparison to other properties in a portfolio. Just judging an investment by rental income or value dies not necessarily give a true picture of investment is best.
  • Buying new property – Yields do the same job when comparing the merits of two properties when deciding to expand a portfolio
  • Comparing with other investments – Yields work for other investments by replacing rents with interest received. For instance, working out the yield will give a comparative result between cash in the bank and buying a buy to let.

Take an investor with £100,000 cash – the yield in a savings account paying a net rate of 2.5% after tax is 2.5% while a house generating £600 rent a month has a yield of 7.2%.

A good time to run yield calculations is at the end of a tax year when all the income and outgoing figures are available.

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