How To Calculate Buy to Let Yield On A Bristol Property Investment

How To Calculate Buy to Let Yield & Earnings On A Bristol Property Investment

Bristol HarboursideU nderstanding the costs and potential profitability of your investment are probably the most important aspects you will have to consider when looking at buying a Bristol property to let for rental income.

For most property investors and landlords, the investment is worthwhile, but it’s vital that you take the time to calculate your projected expenditure and earnings before making a commitment.

Many inexperienced investors tend to underestimate the costs of Buy to Let property ownership. Here we’ll outline the main items of expenditure you should take into account, and how you can calculate the potential return (or ‘yield’) on your property investment. This example in this case study is based on the purchase a property valued at £200,000.

One-off costs

The first things to consider are your initial, one-off costs. Let’s say the mortgage deal you’re looking at requires a 25% deposit, so that’s £50,000. Most Buy to Let mortgages involve a product or arrangement fee; in this case it’s £1,500. You’ll also have surveyors’ fees and solicitors’ costs, as well as a budget for decorating and furnishing the property.

Deposit £50,000
Mortgage fee £1,500
Property survey fees £800
Conveyancing fees £600
Decoration and furnishing £1,500
Total one-off costs £54,400

 

Annual costs

After putting down the £50,000 deposit, you’re looking at taking out a £150,000 mortgage. Let’s assume a 5% fixed-rate interest-only mortgage, with a monthly payment of £625. Based on your research of the local rental market, you’ve decided to set the monthly rent at £1,000.

To take care of tenant vetting, rental collection etc. you’ve decided to engage a letting agent, whose fee equals 10% of the monthly rental amount. Over a year, this adds up to £1,200. You’ll have to take out a landlord insurance policy, which covers the buildings and contents, and also provides some protection against non-payment of rent. Your annual expenditure also includes a small budget for standard maintenance and repair of the property. On an yearly basis, your monthly costs add up as follows.

Monthly mortgage payment x 12 £7500
Letting agent fees £1,200
Landlord insurance £300
Maintenance and repair £200
Total Annual Costs £9,200

 

Income

Against all this expenditure, you will have only one source of income — rental payments from your tenant. While we’d all like to think that our property will be let constantly throughout the year, the reality is that there may be gaps between tenancies. It’s therefore prudent to assume that in each year there may be a period where the property is untenanted and no rental income is received. In this case we’ll assume a reduction of 5% on the rental income for the year (effectively assuming the property isn’t let for around 18 days).

Monthly rental income x 12 £12,000
Minus 5% -£600
Total annual income £11,400

 

Total annual return on investment

Once all the other figures have been worked out, calculating the annual yield on your property investment is straightforward — it involves subtracting the total annual costs from the total annual income, then dividing by the total one-off costs. In this case:

roi

So in this particular example, the annual return on your initial property investment is a little over 4%. If this were the case, you would have to think about how this might compare with other investment or savings options available to you. When broken down this way, it’s easy to see how various factors will have an impact on your bottom line earnings. It’s also worth remembering that in addition to the rental income, the property itself is an investment and could appreciate in value while you own it.

For first time Buy to Let mortgage applicants, yield calculations can be confusing, but they are important. If you need friendly help and advice on your Buy to Let mortgage options, call today on 0117 325 1130. Outside office hours, fill out the Request a call back form on the right to speak with an advisor at a time convenient to you.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Our fee for mortgage advice is between 0% and 2% of the loan amount payable on completion.  Typically this will be £495.