Last year we 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-Let from both first-time investors and those looking to build their portfolios.
This is no surprise, as there are now 4.8m people renting in Britain, compared to 2.5 million 10 years ago. A special report into the rental market by Savills last year concluded that “Rental Britain is here to stay.” We agree.
Part 1: Buy-to-Let Fundamentals
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.
If you feel you already understand Buy-to-Let terminology, please see our more in-depth Buy-to-Let guide.
Let’s Start With "Yield"
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.
For Example:
| Property Value | £250,000.00 | £250,000.00 |
| LTV | 60.00% | 75.00% |
| Loan | £150,000.00 | £187,500.00 |
| Annual Interest Rate | 3.88% | 4.49% |
| Annual Interest | £5,820.00 | £8,418.75 |
| Deposit | £100,000.00 | £62,500.00 |
| Gross Income | £12,500.00 | £12,500.00 |
| Costs | -£5,820.00 | -£8,418.75 |
| Net Income | £6,680.00 | £4,081.25 |
| Yield | 6.68% | 6.53% |
The Formula to Work Out Your Net Yield is:
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%
To read more about Buy-to-Let property please see our Buy-to-Let Property page.
