Although we can see that historically there have been huge increases in property values and rental return there are no absolute guarantees for the future. If you are risk averse then investing in vehicles such as fixed rate deposit accounts may be a better option.
The first step to understanding how you go about investing is to do the maths.
Before even starting to look around at properties investigate the cost of houses you are looking at and the rent you are likely to achieve. Zoopla.co.uk & Rightmove.co.uk are essential research tools as not only will they allow you to see the asking prices and rental values of properties on the market, but you can ascertain the actual sale price of properties (rather than the asking price).
One of the features that makes Buy to Let an attractive investment is that the interest you pay on your investment mortgage is tax deductible.
ROI (Return on Investment)on Buy to Let properties
Remember, if you are buying with a mortgage, rent-to-property price yield will not be the return you get.
To work out your annual return on investment subtract your annual mortgage cost from your annual rent and then work this sum out as a percentage of the deposit you put down.
There are many people who are enjoying considerable capital gains and a passive income from property investment. Buy to Let does however involve tying up capital and there will be periods when property prices dip.
See our example below that illustrates a simple investment calculation.
For a £100,000 property that could rent for £500 per month, you would need a £25k deposit and roughly £2,000 in buying costs.
-£75k mortgage at 3% interest rate = £188pm = £2,256pa
-£500 rental income x 12 = £6,000pa
-Deposit + buying costs = £27k
-Difference = £3,744
-Annual return = 13.8%
Don’t forget tax, maintenance costs and other landlord expenses will eat into that return.
We have all read the stories about buy-to-let millionaires and their huge portfolios.
The days of double-digit house price rises are gone, however historically property prices have increased and there has been healthy capital growth. However always remember that house prices can fall as well as rise.
Calculating property yield
To compare different property’s values use their yield: that is annual rent received as a percentage of the purchase price.
For example, a property delivering £5,000 worth of rent that costs £100,000 has a 5% yield.
Rental yield is calculated as follows:
Annual Rental Income divided by Property value x 100 = yield%
Eg £5,000 / £100,000 x 100 = 5%
Rent ought to be the consideration for buy-to-let. Most buy-to-let mortgages are taken out on an interest-only basis, therefore without overpayments the mortgage will still be outstanding at the end of the mortgage term.