Something that we say regularly at Plentific is that a rental property should never be treated as a turnkey business. If you want to make a real profit, you can’t simply sit back and watch the rent come in; failing to keep an eye on all the little factors that go into being a successful landlord will cause them to slip through the cracks, potentially causing issues with your tenants or even inviting serious financial penalties.
One thing that you will definitely need to get familiar with is your ‘rental yield’: the measure of return on your property investment (in other words, your profits!)
We will say right off the bat that your rental yield is not simply the amount which you charge in rent, but what you have left after making any mortgage repayments and taking into account overheads, taxes and so on.
Knowing exactly how much you are making, or how much you will make, can give you a clear idea of whether you need to find a way to cut costs, reevaluate your property management system or simply wait for the market to pick up.
A number of different factors go into transforming your rental payments into your rental yield. Your profits could actually vary considerably month to month if costly repair bills surface, or if there are sudden changes in the market.
Before you can fully calculate your rental yield you will need to take into account:
Working out your rental yield is much easier if you happen to own your property outright, without any kind of mortgage to repay. In this case, you would simply divide a year’s total rent by the original property purchase price, though you would still need to take other expenditure into account.
If you are still paying back a buy-to-let mortgage, however, things will be a little more complicated. It could well be that your repayments will be higher than your rental yield for the first few years, or you could find that you are haemorrhaging money because of inefficient management practices.
To calculate your rental yield for the past year, use the following steps:
What constitutes a ‘good’ rental yield can be difficult to grasp, especially if you are relying too much on online averages. The truth is that the figure you should be aiming for will very much depend on where your property actually is, as well as how much of your income relies on your lets.
If the majority of your income is made from your properties, you would in theory want to aim for a yield of at least around 10%. However, in certain parts of London expecting this much would be a pipe dream. That said, a lower percentage in these areas could still be considered a success financially.
It is also worth noting that a rental yield can increase over time, such as when you finish re-paying your mortgage or if the local market changes to allow you to charge more rent. Many landlords will be more than happy to break even for a few years if it means greater returns down the line.
What really matters is being able to break down the different factors that contribute to your rental yield so that you can make sure you are not wasting money anywhere.
If you want to improve your property, it can be a good idea to speak to a local estate agent. They may well be able to point out features which would be popular with local renters and warn you about work which could end up devaluing your property.
As we said at the start of this ebook, owning a rental property does not give you a licence to instantly start printing money. Many properties will deliver a low rental yield, sometimes for several years, but this need not be a bad thing. These same properties can become lucrative once enough time has passed for the market to improve, by which time you could have paid off your mortgage and found the perfect long term tenants!
Still, this may not be comforting to read if your own figures are low. It ultimately depends on how long you can afford to wait, which in turn depends on whether or not you rely on your rental properties financially. If they simply boost your income, you should not worry too much about simply breaking even at first.
If you are making a loss and cannot afford to wait, however, it will be a good idea to contact your mortgage broker. They may be able to offer help, such as temporary payment holidays or an extended term for the mortgage.
That said, it is important not to trick yourself into thinking your figures are too low. Online averages will very rarely reflect the intricacies of your local property market, let alone your personal circumstances.
Again, what constitutes a ‘good’ rental yield will vary considerably from property to property. In some parts of London you may struggle to make 5%, while elsewhere you could expect at least 10%.
The trick is not to be too greedy. Try to increase your yield by too much in too short a time and you will risk disastrous void periods, which will almost certainly leave your yield in the negative.