Thinking of becoming a landlord for the first time? Wanting to expand your buy to let portfolio? Unsure how to make a profit?
The good news is that I share 4 practical tips in this blog post to help you make good profits from being a buy to let landlord, from my experience as a landlord.
At a glance
Tip 1: Understand rental yields
If you’re looking to earn income from a property, the rental yield can help you compare the potential return from investments in different properties.
Simply put, the rental yield is the gross profit a property makes, before expenses, as a percentage of its value. To calculate the yield, divide the value of the property by the annual rental income.
When looking to buy a property, I calculate the value by adding the purchase price, stamp duty and any refurbishment costs to show me how much the initial investment would cost. I can then use this to compare properties.
For instance, if a property costs £250,000, the stamp duty will be £10,000 (assuming you already own another property). Add in refurbishment costs of say, £5,000, and the total investment comes to £265,000. Consequently, a monthly rent of £1,000 gives a low yield of 4.5%. To achieve 5.3%, the average yield for a single let property in the South East of England, the rent would need to be £1,170.
Average yields and rents vary enormously over the country. According to Rightmove, in the North East the average yield is 8.1% and the average rent £752. In London, the average rent is £2,257 and the yield is only 4.8%. (Note that Rightmove only use the purchase price in calculating the yield).
Finally, yields for single lets (let to one household) are usually lower than for HMOs. HMOs are houses of multiple occupation with three or more “households” who live in the same property, but rent separate bedrooms. Although HMOs may have higher yields, they are more complex to manage.
Tip 2: Calculate how much profit you’ll make each month
Being a landlord is a business, and it’s important to ensure you’ll make a profit.
Landlords operate on low margins. With average buy to let mortgages approaching 4% (July 2022), you’ll need enough headroom to make a profit after your expenses.
To calculate your net monthly profit, calculate your annual expenses from your annual income (the rent), and dividing by 12.
The first part of this equation is the rent. It’s likely to be higher if it is nicely refurbished and well-maintained. And you’re more likely to attract and keep good tenants if it’s a high quality property..
The second part is the expenses. These include financing costs (eg mortgage), repairs and maintenance, and any fees for letting and managing the property. You can reduce costs considerably by letting and managing the property yourself.
Average maintenance expenses are around 10% of the annual rent. I’d allow for more to begin with, because it can take a while for problems to emerge. Encourage your tenants to report problems as soon as possible, before they become a headache.
Tip 3: Choose your location carefully
It might be tempting to invest where the yields are highest, but yields are only the starting point.
Although the yield is almost twice as high in the North East as London, you’ll need three times the number of properties there to earn the same rent as one in London. This means three properties to maintain and manage, and for things to go wrong.
Also, the lower the rent in absolute terms, the more likely that maintenance will cost a high proportion of the annual rent. Why is this? The cost of replacing a boiler varies little across the country with an online specialist like Boxt. However, the percentage of the rent consumed varies enormously. In London, it will cost less than one month’s rent, whereas it will be almost three in the North East. These costs can have a disproportionate impact on your profit as a landlord in properties where rents are low.
Another issue is the practicality of reaching your rental properties. If they are nearby, they’ll be easier to let and manage them yourself. It will cost around 12% plus VAT of the rent for an agent to manage a property. Also, any maintenance costs are likely to be higher than going direct to the trades. Even if you do use an agent, it’s best visit the property to oversee refurbishment and material repairs. You’ll therefore need to factor the time and expense of driving long distances for inspections.
Tip 4: Prioritise your well-being
Although profit is really important, do also think about the practical benefits of having your portfolio near home. After all, the time spent visiting your properties has an “opportunity cost” on your time and energy. In other words, what else would you be doing with that time?
We all need down-time. I’ve deliberately chosen properties within easy reach of my home so that I can manage them myself. This means I’m not giving margin to a service provider, and keep a close eye on my properties.
I know that I would get a better yield elsewhere. However, I look at total return, which is net profit plus my wellbeing. I’m building my portfolio for the long term, and I want it to be sustainable and enjoyable for me to manage myself. I’m happiest having properties nearby, as it’s makes everything easier. I prioritise my future well-being in choosing where I invest, even if it means I make less profit as a landlord. And I’m OK with that.
Property is a long term investment, and the better condition your property and the better your location, the higher the chances of attracting good quality tenants. In fact, it’s a false economy not to look after your property properly. Penny-pinching on basic repairs will upset and stress your tenants, leading to increased tenant turnover, and ultimately undermining the value of your investment.
Making it easy to get to your properties, makes it easier for you to take care of them and be a good landlord.
It’s good business to be a good landlord.
I hope you’ve found this landlord guide useful in helping you understand the importance of yield and net rental income to calculate whether buying a property would translate into you making a good net profit as a landlord. This understanding will help you set the right foundations to make the most of your future buy to let investments.
* For the full report, see: Rightmove Rental Trends Tracker Q2, 2022
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Great blog posts! Very informative, thank you.
Thank you for the positive feedback, Will. Much appreciated.