RENTAL YIELDS ARE AN EFFECTIVE PROFITABILITY BAROMETER

New investors to the buoyant, residential buy-to-let sector enter for one of two reasons. Either they’re investing for small rental returns in an area with large capital growth or they’re investing in an area and property known to produce a high income. Either way, 'rental yields' are crucial to measuring their success and need to be fully understood and properly calculated.

They come in two forms – gross and net – and whilst neither are 100% accurate, they are the most useful barometer a landlord can have.

Phil Pinkney of leading UK lettings specialist Belvoir, which has an office on Winchester Street in Andover says: “Newcomers to the buy-to-let market must be prepared to look in detail at the expected 'yield' from a property and have realistic expectations for the return on their investment."

“Whilst we acknowledge that some property purchases will always be made by the heart, it is essential to be ruled by your head. Quick and easy rental yield calculations will provide just that and at Belvoir, our staff are always happy to advise landlords on how to formulate them,” he added.

Belvoir has a structured investment advice plan which it presents to all prospective landlords and offers the following public explanation of rental yields:

Gross Rental Yield:

What is it? In short it’s the expected annual rental income of a property expressed as a percentage of the total property value.

Why is it useful? Whilst not being wholly accurate in terms of what you receive, it is easy to formulate before purchase, provides a good yardstick for comparison and increases the likelihood of a successful venture.

How is it calculated? In four simple steps.

1. Establish the probable monthly rent – this can be done by looking at similar properties in the area. If you’re unsure, ask at your local Belvoir office or visit www.belvoirlettings.com

2. Establish probable yearly rent – Very easy, just multiply the monthly rent by 12

3. Divide the yearly rent figure by the sale price of the house

4. Multiply by 100 to get a percentage. This is your gross rental yield.

What do I do now? Once you’ve calculated the gross rental yield for a property look at how its yield compares with other properties in the area, the area average and the national average.

“We advise all landlords to conduct gross rental yield calculations on a number of properties before making a purchase. The first property you see may have been the one that tempted you into the sector but it may not always be the best investment. Buy-to-let can be very profitable but only if treated like any other business opportunity,” added Phil.

Net rental Yield:  

What is it? In short it is a post-purchase calculation of the total rent received minus the expenses the property incurs expressed as a percentage of the total property value.

Why is it useful? If the figures for expenses are correct this is a very easy way to monitor the profitability of your purchase.

How is it calculated? In seven simple steps

1. Establish the monthly rental amount – this should be listed in the tenancy agreement.

2. Multiply by 12 to establish a yearly income.

3. Subtract the percentage of the year that the property is unoccupied – if applicable

4. Add together the yearly outgoing costs - insurance premiums, replacement of fixtures and fittings, periodical property redecoration, maintenance, ground rent if the property is leasehold and the lettings agency fee (for a very competitive fee and service contact Belvoir).

5. Subtract the total outgoings from the yearly income to get your net income

6. Divide your net income by the total property value.

7. Multiply by 100 to get a percentage – this is your net rental yield.

What do I do now? Once you’ve calculated your net rental yield you need to compare it with the initial target you set. If it’s higher, you need to analyse why in order to be confident the trend will continue. If it’s lower, the root cause needs to be identified. If you cannot reconcile them, you should seek expert advice to help resolve the issue.

“A landlord is more likely to be successful if they adopt a professional approach. At Belvoir, we recommend all our landlords conduct regular rental yield calculations and store their results on an excel spreadsheet for year on year analysis. It is good practice and something we are happy to help with and advise on,” added Phil

“In this current economic climate, buy-to-let investors have the potential to achieve much higher returns than by putting their funds into a traditional bank account with very low interest rates.

“At Belvoir we always strive to achieve the best return for our landlords and we can offer friendly and expert advice on how to maximise yields,” he added.

If you’re a prospective landlord keen to know more about rental yield information or any other aspect of buy-to-let investment, then please call Belvoir on 01264 366611 or email andover@belvoirlettings.com. One of our team will be happy to assist you.

BUY TO LET INVESTMENT – AS EASY AS ABC!

There has never been a better time for investors to take full advantage of the resurgent and profitable Buy-to-Let property market.

And to help novice investors with their first step on the rung of the property ladder, leading lettings specialist, Belvoir Andover has produced its own “ABC‟ on the language of Buy-to-Let, with tips and advice on how to get started.

The current market remains buoyant, helped by George Osborne's April budget announcing wide scale changes to Stamp Duty Land Tax and the abolition of the 5% tax rate for multiple property purchases over £1m.

Independent financial research by Datamonitor indicates that Buy-to-Let mortgages will flourish more than any mortgage in the next three to four years.

To help new investors make the right decisions about their property purchase, Belvoir offers free, initial advice and guidance to anyone wanting to understand more about what and where to buy in their area, the risks and rewards of Buy-to-Let and the “mechanics‟ of property letting, such as referencing tenants, letting the property legally, on-going maintenance and protection of the property.

The four key stages for any investor are:

• Buying the investment property
• Preparing the property to let legally and for maximum rent
• Letting the property
• Cashing in on the investment, by selling or taking income

“A knowledgeable Buy-to-Let investor is more likely to be successful financially,” said Greg Greatbatch the co-owner of Belvoir Andover. “In line with other types of investment such as cash, bonds and share ventures, people interested in Buy-to-Let are generally a lot more savvy now than they were ten years ago. But the market has changed and investors need to understand fully what they are entering into and what they can expect to get out of it.”

To that end Belvoir Andover has compiled the following A-Z glossary to help future Buy-to-Let investors understand the key phrases and issues they need to be well briefed in.

Assured Shorthold Tenancy Agreement – A contract between the landlord and the tenant which provides limited security of tenure to the tenant and an absolute right for the owner to take possession.

Below Market Value – In theory this is buying a property at a price lower than it would sell on the open market. In reality a property is worth what someone can afford to pay for it at the time of sale.

Capital Growth – The rate at which the value of a property increases over a period of time. (According to Nationwide this is around 3 per cent net of inflation annually.)

Deposit – A sum of money paid by the purchaser towards property purchase. Currently averaging at around 25% for new buy-to-let mortgages (Council of Mortgage Lending).

Equity – The current market value of the property less outstanding mortgage.

Fire Safety – An essential consideration for any Buy- to-Let landlord. Definitive guidance on a landlord‟s responsibilities is provided by the Local Government body, LACORS (www.housing@lacors.gov.uk).

Gearing – Describes overall equity levels within a property portfolio and indicates the debt level against its value. If gearing is high there is very little equity in the overall portfolio. If gearing is more than 75% a Buy-to-Let investor may find it difficult to re-mortgage.

Housing Act – Lays out current legislation and standards for housing conditions and the assessment of hazards.

Inventories – Carried out at the start and end of a tenancy, they not only list all fixtures, fittings and furnishings, but also record (photographically) the condition - and any subsequent damage to - each item. Important in disputes.

Joint Application – Proposal for shared ownership of a property by two or more people who subsequently take joint responsibility for repayment.

KFI (Key Fact Illustration) – Explains all terms, conditions and features of the mortgage - cost of the mortgage, monthly payments amounts, interest rates, penalties etc.

Licenced House in Multiple Occupation (HMO) – Landlords with properties let to five tenants or more, who are unrelated and not from the same direct family, and who share facilities such as toilet bathroom and kitchen need to check with their local authority about an HMO licence, since there is a variance in the definition of an HMO by different authorities.

Monthly Repayment – Set money paid each month to the lender for the outstanding loan balance.

Net Rental Yield – This is a post-purchase calculation of the total rent received minus the expenses the property incurs, expressed as a percentage of the property‟s value.

Outgoings – Current outstanding debts such as mortgage, insurance, maintenance fees etc.

PAT Safety Testing – The Electrical Equipment (Safety) Regulations 1994 requires that all mains electrical equipment (cookers, washing machines, kettles etc.) supplied in rented accommodation must be safe. Landlords should have all equipment checked at the start and end of each let and obtain and retain test reports.

Qualified Mortgage Broker – Qualified to provide expert advice on the mortgage products available to a landlord. Some are independent whilst some are tied to a financial institution.

Rent arrears – Payments received after the date due or after the services have been provided.

Stamp Duty Land Tax – Payable when land/property is purchased for more than a set price.

Tenancy deposit schemes – Since 2007 all deposits taken by a landlord must be safeguarded by one of three Government approved schemes. Landlords are free to choose which one they use.

Utility bills – Landlords must provide the essential services of gas, electricity and water, but tenants are responsible for the fuel and water they use. These utility bills can be paid by the tenant, or the cost included in the rent. Care must be taken by landlords not to be left with unpaid bills.

Voids – Any time during which a property is not let out to tenants and not producing rental income.

Wealth management – A service offered by a qualified financial advisor that helps landlords look after all their personal finances, including existing income streams, assets, insurances and finances related to your property portfolio and overall tax implications.

X-Ray Examination – When a landlord assesses all operating costs before making a decision.

Yield – Yield is the rate of return on your Buy-to-Let investment and is calculated by taking the gross or net income and dividing it by the value of the property.

Zero mortgage balance – Investors looking to maximise income should aim to fully repay the mortgage as soon as possible to achieve maximum returns.

Having predicted growth in the market throughout 2011 and into 2012, Belvoir is expecting a major influx in landlords over coming months and looks forward to preparing them for long term investment and reward.

“Buy-to-Let is and always has been, a highly profitable market for well organised, well informed landlords. We predict that in this next period of growth, responsible lending, borrowing and property management will combine to make it one of the safest and most viable investment options in the UK today,” added Greg.