Guide type: Buy-to-Let
27 June 2013
Last year I ran some buy-to-let investment seminars in London. From the feedback received, it was clear that there is a big demand for advice on buy-to-lets from both first time investors and those looking to build their portfolios.
This is no surprise, as there are now 4.8 million people renting in Britain, compared to 2.5 million 10 years ago. A special report into the rental market by Savills last year concluded: “Rental Britain is here to stay.” I agree.
Starting today, I will be writing a series of monthly articles on how to create a profitable buy-to-let strategy.
This month I am talking about some of the fundamentals, such as what is meant by "yield" and "capital growth". Over the next few months I will cover:
I hope you find the articles useful. All the articles will be available at [www.news.galliard.co.uk] so that eventually you will have a complete guide.
A buy-to-let is an income-producing residential investment, with the potential for making a capital gain when the property is sold.
The starting point for anyone dipping their toe into the buy-to-let water is to understand the terminology. For example, what is the "yield" of a property and how do you measure "capital growth"? Knowing what these, and other, terms mean is one of the key basics of buy-to-let investment.
The yield of the property tells you the annual return on your investment. The gross yield is calculated by looking at the rental income you receive as a percentage of how much the property costs.
So, if your annual rental income is £10,000 and the property cost you £100,000, your gross yield is 10%. This is a basic example and does not take into account all your costs such as mortgage, repairs, service charges, etc. Once you take your costs into account, you are left with your net yield.
In the examples below, we have included the cost of mortgages of different amounts based on LTVs (loans to value) of 60% and 70% to show how your net yield can change depending on how much you borrow.
|Annual Interest Rate||3.88%||4.49%|
Gross Income − Costs = Net Income
Net Income ÷ Capital x 100 = Net Yield
Next is "capital growth".This is simply the increase in value of your property since you bought it, expressed as a percentage.
So, Sales Price − Purchase Price = Increase
Increase ÷ Purchase Price x 100 = Capital Growth
If you bought a property for £200,000 and sold it for £250,000, your Increase is £50,000 and your Capital Growth is 20%.
£50,000 ÷ £250,000 x 100 = 20%
Next month I will be looking at 'return on investment', 'leverage' and 'mortgage funding'.