It pays to add up the cost and the ben­e­fits of buy-to-let

Yorkshire Post - Property - - PROPERTY - Sharon Dale

RENTAL yields on buy-to-let prop­er­ties have held their own over the past three years, de­spite the eco­nomic down­turn.

Chris Bag­u­ley, di­rec­tor of Auc­tion Fi­nance Lim­ited, says: “Ac­cord­ing to the As­so­ci­a­tion of Res­i­den­tial Let­ting Agents (ARLA), the av­er­age rental yield on houses in quar­ter one of 2009 was 5.1 per cent. This has re­mained con­stant over the past three years, while rental yields on flats have in­creased from five per cent to 5.2 per cent.

“The most sig­nif­i­cant fig­ure, though, is that av­er­age rental yields on houses of mul­ti­ple oc­cu­pancy (HMOs) has reached an all-time high of 10.7 per cent, es­pe­cially in cities with large stu­dent pop­u­la­tions. Of course, this fig­ure can be en­hanced even fur­ther by buy­ing a prop­erty at auc­tion.

“With prop­erty prices and in­ter­est rates still low and rents pro­jected to in­crease over the next 12 months, bricks and mor­tar pro­vide an at­trac­tive al­ter­na­tive to poorly per­form­ing sav­ings ac­counts.”

Al­though prop­erty can give a long-term cap­i­tal gain, most in­vestors also ex­pect it to de­liver a reg­u­lar in­come.

Mr Bag­u­ley has the fol­low­ing ad­vice for would-be prop­erty in­vestors to cal­cu­late the likely re­turn.

1. Make sure you un­der­stand yields. Many fi­nan­cial def­i­ni­tions ex­ist, some con­fus­ing. The only one you re­ally need to get your head around is net yield.

This is the an­nual rental in­come you ex­pect from a prop­erty mi­nus the an­nual out­go­ings such as in­sur­ance, re­pairs and agency fees di­vided by the pur­chase price. Here’s a sim­ple ex­am­ple to il­lus­trate the point: An­nual rental in­come (12 x £600) = £7,200. Mi­nus an­nual run­ning costs (£1,200) = £6,000. Di­vided by pur­chase price (£100,000) = six per cent net yield

2. Be re­al­is­tic with your cal­cu­la­tions. It is far bet­ter to err on the side of cau­tion than over­in­flate your likely re­turns. So, don’t for­get to take into ac­count things like empty pe­ri­ods. Us­ing a sim­ple spread­sheet, look at the net yield you can ex­pect based on full 12 months oc­cu­pancy, right down to six months.

3. Bench­mark your yields. Yield lev­els vary re­gion­ally and by the type of prop­erty. Stay abreast of changes in the mar­ket. ARLA and the Es­sen­tial In­for­ma­tion Group (EIG) both pro­duce quar­terly sta­tis­tics which are worth keep­ing an eye on.

4. Buy at auc­tion. Fig­ures from EIG show that prop­er­ties bought at auc­tion de­liver sig­nif­i­cantly higher yields (8.52 per cent for ter­raced houses and 8.54 per cent for flats). This is be­cause the prices of prop­er­ties up for auc­tion are gen­er­ally lower than the prices set by agents and be­cause less fees are in­curred.

If you’re new to auc­tions, at­tend a cou­ple to get a feel for how they work. And re­mem­ber, if you are tempted by a bar­gain but haven’t got your fund­ing in place, Auc­tion Fi­nance Lim­ited will be able to help you there and then.

5. Set a sen­si­ble rent. Do your re­search and get a feel for the go­ing rate for sim­i­lar prop­er­ties in an area. Re­mem­ber, over-pric­ing and un­der-pric­ing can be equally dam­ag­ing to your in­vest­ment plans. Make sure you set the rent at a sen­si­ble level to at­tract ten­ants and hit your yield tar­get.

6. Big­ger isn’t nec­es­sar­ily bet­ter. All the ev­i­dence shows that smaller prop­er­ties de­liver higher yields. If you have a bud­get of £100,000, far bet­ter you buy two smaller prop­er­ties than one big one.

7. Go out of town. Don’t be wooed by the bright city lights. It is of­ten bet­ter to buy a prop­erty out­side the city cen­tre where pur­chase prices are lower but de­mand re­mains high. Again, do your re­search and know the area you are con­sid­er­ing. A cou­ple of streets can make a huge dif­fer­ence to the ap­peal of a prop­erty and the rental you can ex­pect. Take into con­sid­er­a­tion things like prox­im­ity to bus routes and shops.

8. Weigh up the ben­e­fits of im­prove­ments. Do they make fi­nan­cial sense and do they make the prop­erty more de­sir­able?

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