Property is the first place most people look when they want to invest some cash to boost income.
But I am always dubious if property can provide a gush of money most investors expect.
Most would-be landlords are raising the money for their projects from their pensions.
Unless they have a huge pension pot, they are likely to pay tax and possibly early exit fees to grab the cash from their retirement savings.
Few beermat business plans I have seen include this loss in the figures. Another drawback is this cash tied up in bricks and mortar that can’t be spent.
If you are thinking about buy to let, here are a couple of tips on how to figure out if the deal works.
This is the level of income a landlord can expect from a buy to let. To make sense of the number, I scout letting agents local to the property and work out a benchmark yield for a neighbourhood based on advertised rental asking prices and property values.
You can find the property values for a street or postcode area on Rightmove or the Land Registry web sites.
To work out yield, I take the monthly rent and times by 12 to give an annual figure.
Divide the annual rent by the property value, then multiply by 100.
For example, a house worth £200,000 has a monthly rent of £750.
The yield is 12 x 750 divided by £200,000 = 0.045.
0.045 x 100 to then give a yield of 4.5%
Don’t forget this is a gross yield and does not include running costs, such as insurance, letting agent fees or mortgage interest.
If the yield is less than the return where you have the cash invested, then you have to consider whether the deal is worth it.
The property above is a peach and needs little work to bring it up to letting standard, but down the road is another identical house on the market for £185,000, but it needs a £5,000 face lift.
Which one do you go for?
You know the rent a tenant will pay and the asking price of a house in good condition.
The doer-upper is carrying a £10,000 gain in value, but you need to factor in the costs of the place standing empty while you renovate and look for a tenant.
The other house will probably let sooner and generate an income earlier.
I’d go for the doer-upper because it’s a blank canvas, the owner might drop the asking price if I haggle and as soon as I finish the refurbishment I have an instant gain in the value.
Buy to let is a long term business – and the key word is business.
Don’t buy on a whim and do not put all your cash into property unless you understand how the finances work and the return is better than your money is earning somewhere else.