Making hay when the sun shines: Harvesting the rental yield for your Buy-To-Let PropertySeptember 18, 2017
As the old agricultural adage says, adopting a carpe-diem attitude to crop production is both imperative and lucrative. Only by reaping the rewards in the short term can you expect to benefit in the long run.
Can these lessons be applied in the context of Buy-To-Let properties? Much like the Farmer who plans their activities to maximise the rate of return on their last harvest, Landlords should and can get real time returns to be of immediate benefit, instead of the forward-looking concept of ‘cashing in’ on selling their property when the market is good. Landlords should not buy their property with only an exit strategy in mind; it would be a wasted opportunity.
The need to narrow the focus of your rental strategy as well as the benefits of doing so can be highlighted by the rental yield calculable for your BTL Property.
The rental yield of a property is the annual income a Landlord receives shown as a percentage of the initial investment. In other words it represents the rate of return a Landlord receives for the property per annum. Axiomatically, the higher the rental yield, the more your property is paying you back. The Northern Ireland average rental yield as of June 2017 is 4.53%, putting it in the top ten yield rates in the UK. However, as with any average, this does not account for all the externalities that may impact an individual property and it is important to note a number of factors when calculating the rental yield for your property:
- Include costs and charges
When calculating the rental yield for your property you must subtract all your costs (insurance, repairs, maintenance etc.) whilst also allowing for a little extra each month for any unexpected costs. Additionally, it is wise to allow for one or two months a year when the property may be empty and no rent is being collected to give you a reliable rate of return.
- Don’t be greedy
Calculating the rental yield of your property can give you a fair idea of what to charge as rent to allow you to cover costs and make some sort of beneficial return. Whilst there may exist temptation to charge higher rent (and therefore drive up your rate of return), this can in practice be counterproductive and result in you being unable to rent the property. Conversely, choosing to rent in an area with a continuous stream of tenants (i.e. Student areas) may ensure your property will always be rented but it can result in high turnover costs each time you gain a new tenant.
Markets can change with the weather and much like a particularly wet winter can be ruinous for even the most diligent farmer, market changes can negatively impact your rental yield if you are not careful. Ensure to adjust your rents for inflation otherwise you might see a decrease in rental yield as the nominal but not the real value of the house increases. Thus if you were simply to look at the sale price of the house, this would be a misleading representation of the actual value of your investment.
This article has been produced for general information purposes and further advice should be sought from a professional advisor.