Landlords who do not understand how to work out whether a buy to let is a profitable investment could be throwing thousands of pounds away maintaining a money pit.
Property investors sometime get caught between two scenarios - investment and speculation.
Buy ing a property with the hope of making a profit from selling at a higher price is speculation, while buying a property to generate and income is investment.
Working out whether a property is a good investment is not down to luck - it’s down to calculating yield.
Yield is simply taking the rent received in a tax year and returns the result as a percentage of the cost of the investment.
For buy to let landlords, investment is measured by gross or net yield.
For example, the average home costs around £165,000, while average rents are around £713 per month.
Calculate gross yield by dividing annual rent (12 x £713) of £8,556 by £165,000, which works out as 5.18 per cent.
Net yield considers fees and running costs in the same calculation.
Fees cover expenditure like stamp duty, legal and valuation charges, while repairs, maintenance, service charges and buildings insurance are included in running costs. These are not definitive lists, just examples of the kinds of costs many landlords will incur.
Property investors can calculate net yield as income less running costs divided by property value.
The best time to calculate yield is at the end of the tax year when the total rent and expenses are available.
Calculate an average yield for a portfolio and then per property - those with a yield falling below the portfolio average need a closer look because they are failing to perform.
The reason could be simple - like an expensive refurbishment during the year or rental voids.
Looking deeper, the rent could be too low or the property is too expensive to run.
Yield will not give property investors the answers why a property is profitable or a poor-performer, but the calculation will flag areas of concern.
