Buy-to-let property is continuously seen as a secure and lucrative investment option for those looking for a retirement fund or extra income. So how do you achieve the best return on your investment property?
London estate agent Portico has put together some tips to help landlords get the best returns.
Making money from buy-to-let
There are two ways that landlords can make money from a buy-to-let investment – through capital growth and rental yield.
Capital growth is the amount that the property increases in value, while rental yield is a percentage of how much you earn from the property each year.
To calculate your rental yield, divide your total annual rental income by the price you paid for the property, then multiply it by 100. For example, if you purchase a property for £400,000 and rent it out for £1,800 per month, the total annual rent received is £21,600. The sum to work out your rental yield is therefore: £21,600/£400,000 x 100 = 5.4%.
If you are using a mortgage to purchase your buy-to-let property, make sure you choose a location with high rental yields so that your income from rent covers your mortgage each month.
If you are aiming for strong capital growth, consider buying in an area with high levels of investors, as the property will always be in demand.
High yields and capital growth
The key to a really successful long-term buy-to-let investment is finding high rental yields and the potential for strong capital growth.
The latest Buy-to-Let Index from LendInvest states that the most profitable area to invest in the UK is London. Landlords in east London can expect to achieve the highest yields in the country, at 7.4%, followed by Manchester at 6.8% and southeast London at 6.7%.
London also offers the highest capital gains in the UK, with house prices in southwest London rising by 13.8% per year between 2010-16.
If you’re looking to achieve both a healthy monthly rental income and see your property appreciate in value, London is therefore likely to be the best option.
Although finding an area that offers high yields is important, you won’t make any money unless you attract tenants.
The location that you choose must be a popular spot where tenants want to live. If you buy in an area with little demand, you’ll likely experience many void periods, which will dampen your return on investment much more than a slightly lower rental yield.
Good transport links and local amenities are what matter most to the majority of tenants, so invest in up-and-coming areas that are undergoing infrastructure improvements.
Picking the right property
Once you’ve found an area that offers a good yield, potential for capital growth and strong tenant demand, you need to decide what type of property to buy.
Portico reports that 72% of its tenants are either employed couples or employed sharers and are nearly always looking for one and two-bedroom properties.
If you are thinking of buying a larger property, you should ensure that the location is popular with students or families.
Decorating your rental property
It is always advised that you decorate a rental property with neutral colours and modern furnishings to appeal to the maximum number of tenants.
If you’re looking to increase the value of your rental property, these tips will help you decide how to take on a refurbishment project: https://landlordnews.co.uk/refurbishment-surefire-way-landlords-increase-value-rental-property/
Bringing your property onto the market
Rent prices are typically around 11% higher in summer than in winter, so you would boost your rental income considerably by timing when you bring your property onto the market. Portico advises marketing your property in August, with a view to getting it let in September.
Protect your income
The wisest way to ensure the best return on investment is to protect your rental income. Rent Guarantee Insurance makes sure that you still get paid, even if your tenant defaults on the rent. Our policy covers you for up to £50,000 in late rent and also for any legal expenses you incur through taking your tenants to court.