Landlords generate income through property letting by two ways- through rental income growth and capital growth. Let us examine each one of them
Capital Growth is when a property increases in value over time it is also known as capital appreciation. Capital Growth has been growing strong recently, but property value goes up as well as down constantly, and of course the local conditions surrounding your property have a huge effect in how this plays.
Rental income is what you get from your tenants. But bear in mind that you will also need to budget for various miscellaneous costs. It is important that you set them aside for necessary expenses you might need. This is vital as eventually you are accountable for these expenses regardless of the property being rented or not.
Costs for properties insurance differ by location, type and property size but mostly range at between 2% to 3% of the rent. For properties that are furnished, it is estimated at around the range of 1% and 4% income rent based upon on the degree of furnishing.
Replacing fixtures and fittings
Set aside 10% of your income from rent yearly to change worn out fittings, furnishings and fixtures. Additionally plan to re-decorate every few years.
Wear out are common on properties and requires to be maintained over time. As a property owner, you should allocate a percentage of the rent to cover this. The property's age, type and condition plays a huge role and obviously has an impact on maintenance and repair of the property, so you should consider them before choosing your property let alone purchasing them.
Ground rent and service charges is another thing to take in consideration especially when the property is leasehold; then you as the owner have to pay for these charges.
Expect empty periods-'Void periods' in landlord’s jargon is inevitable. This is when your property is empty. Set up a budget yearly for when the property is empty.
Letting agency fee differ but an excellent agent could get you a better rent than if you find a tenant by yourself. Keep in mind that they have more market know-how and a better choice of renters for you to select from which will more than make up for their charges.
Of course, your biggest cost is likely to be your mortgage.
Many buy-to-let mortgage loan lenders will only offer up to 80% of the property value, so you'll need to provide the rest of the money yourself.
As soon as you have subtracted all these expenses from the rent, you end up with your net estimated rental income.
If you split this into the value of the property, which includes all the costs related to buying it, you will have your 'true' or 'net rental yield'.
“So, assuming your net rental income is £10,000 and the property cost £200,000, the net rental yield is simply £10,000 divided by £200,000 which equals 0.05 or 5%.”
When you do the numbers, you may discover that the net rental yield amount is significantly less than the cost of your mortgage, leaving you with a shortfall. Nevertheless, if you have purchased well, you should assume the rental income to slide up in due time – furthermore you should see some capital growth too.