How landlords in Battersea and Brixton can calculate their yield
15th June 2012 | 12:00am
15th June 2012 | 12:00am
The buy-to-let market in Battersea will continue to provide landlords with healthy returns because tenants value the area’s spacious Victorian homes, riverside apartments, green space and good schools.
The shortage of quality rental homes in Brixton, great transport links and thriving community mean this part of London is living up to its name as a buy-to-let hotspot.
This is despite the government introducing a 3% stamp duty surcharge on second homes, which pushes the tax payable on a £650,000 two-bed flat in Belvedere Place, Brixton, from £22,500 to £42,000.
To work out the level of return an investment property will deliver, landlords need to calculate the rental yield – the rental return as a percentage figure of the property purchase price.
LendInvest reports that rental yields between 2010 and 2016 in the whole of the SW postcode was 4.8%.
To calculate your buy-to-let investment’s rental yield, take the total rent received over a year. Assuming the two-bed property in Belvedere Place has a rental value of £1700 per calendar month, that would work out to be £20,400.
Next, take the purchase price of the property (£650,000) and add that figure to its buying costs (£42,000 stamp duty plus £2000 professional services fees). That gives you a total of £694,000
Now perform the following calculation: 20400 ÷ 694000 x 100 = 2.93%. While this is lower than the pre-stamp duty increase figure of 4.8% it is still higher than savings rates available on the high street.
However, the above calculation assumes the investment property was purchased without the need for a mortgage.
To work out your annual return or yield taking the property loan into account, the annual mortgage costs must be subtracted from the £20,400 received in rent.
Let’s assume the investor takes out an interest-only buy-to-let mortgage for 80% of the purchase cost (£520,000) at a rate of 3%. That would result in monthly payments of £1299 or £15,588 per year.
Subtracting that figure from the annual rent receipts of £20,400 leaves a pre-tax profit of £4812 per year.
To calculate the yield, take the deposit put down (£130,000) and add that figure to the buying costs (£44,000). This gives a total of £174,000.
Now perform the following calculation: 4812 ÷ 174000 x 100 = 2.76%
A quick glance at the best savings rates available on easy access accounts, reveals no more than 1.3% is currently available. Not only that, the value of property in Brixton (and also Battersea) is likely to appreciate in value if the investment is held for 10 years or more.
It is wise to bear in mind, however, that a landlord’s true income from a buy-to-let investment is the amount of rent left over after all the other expenses associated with the property have been met. These can include variables such as void periods, maintenance, insurance and the fees charged by letting agents.
But even subtracting 25% from the £4812 annual pre-tax profit gives a yield of 2.07%.
Every buy-to-let investment can deliver a different yield depending on the cost of the property and the rent charged. For this reason, the figures quoted above are for illustration only.
Eden Harper has a database of buy-to-let investors who have expressed an interest in a wide range of property in and around Brixton and Battersea. If you want to maximise the sale value of your property, contact us today and learn what it could be worth.