buy to let yields

Buy to Let yields

explained

Buy to Let yields are one of the main reasons behind the buy to let boom of the past few years. Analyzing potential yields of a buy to let investment should be the start point of any investment decision, closely followed by long term price predictions. But what exactly are buy to let yields and how do you work them out?

Buy to let yields: an example

In the example below let us assume we are considering the purchase of a property for £200,000. Having researched the local market we are reasonably confident that we can let the property out for £1,200 per month. Annualized this works out to be £14,400 per annum, which is in fact the annual income. In order to work out the yield you simply need to divide this annual income by the purchase price (£14,400 / £200,000) which in this example gives us a yield of 7.2%.

Property purchase price: £200,000
Expected Annual Rental Income: £14,400 (£1,200 x 12)
Buy to let yield: 7.2% (14,400 / £200,000)

On it's own this yield percentage doesn't really give us enough decision to base our decision upon. Lets now factor the cost of a buy to let mortgage into the equation. Lets assume we need to borrow £150,000 to purchase the property and have found a buy to let mortgage that has an interest rate of 5.5%. Lets also assume we are opting for an interest only mortgage.

Loan required: £150,000
Interest Rate: 5.5%
Monthly repayment: £688
Net monthly income: £513 (£1,200 rent - £688 mortgage repayment)
Net yield: 3.08% (£513 x 12 months / £200,000)

As can be seen above our net yield is worked out to be 3%. Again this number is relatively meaningless on its own. As a potential investor the figure should be used as a comparison to other properties or investment opportunities.

Other factors affecting buy to let yields

As well as rental yields another attraction to prospective landlords is the prospect of buying a property that in effect pays for itself keeping it for several years and then perhaps selling up in a few years making a tidy profit in the form of capital growth. The large increases in property prices over the last few years have put many landlords into positive equity on their properties. However as with all property investments a buy to let property should be thought of as a long term investment. By treating this as a 10-20 year investment you would hope to survive any short term fall in property prices as in the long term prices are expected to rise.

The calculations above have all been based on the assumption that the property will be let for 365 days per year, which as any landlord will tell you is highly unlikely. When appraising properties it is worth considering adjusting your calculations to work on the basis of only receiving income for 11 months a year. This allows for a period of having no tenant between lettings. Just remember that you still have to pay the mortgage even when the property is empty so ensure your expenses are still based on 12 mortgage repayments.