Understanding rental yield and capital growth
There are two ways landlords make money through property letting - capital growth and rental income growth. Let's take a look at these in more detail.
When a property increases in value over time, it is known as 'capital growth'. Capital growth, also known as capital appreciation, has been strong in recent times, but the value of property does go up as well as down, and of course the local conditions surrounding your property have a big effect.
Rental income is what the tenant pays you - hopefully this will grow over time too. In addition to the all important income, you will also need to budget for a number of necessary costs. It's worth highlighting what these costs are so you can budget for them. This is especially important as ultimately you are responsible for these costs whether the property is occupied or not.
Premiums for buildings insurance vary by area, type and size of property but allow for between 2 and 3% of the rent. For furnished property allow between another 1 and 4% of the rent depending on the level of furnishing.
Replacing fixtures and fittings
Allow for 10% of the rent each year to replace worn out fixtures, fittings and furnishings. Also, be prepared to re-decorate every few years.
Things break down and need to be maintained over time. You will need to allow a percentage of the rent to cover this. The type, age and condition of the property will obviously have an effect on repairs and maintenance of the property, so this should be taken in to consideration when choosing your property to purchase.
Ground rent and service charges
If the property is leasehold you'll have to pay these charges.
Allow for empty periods
Don't assume the property will always be occupied with a rent paying tenant. Budget for a month each year when the property is empty - 'void periods' in landlord jargon.
Letting agency fee
Fees vary but a good agent could get you a higher rent than if you find a tenant privately - remember that we have more market expertise and a greater selection of tenants for you to choose from which will more than make up for our charges (which in most cases are tax deductable anyway).
Of course, your biggest cost is likely to be your mortgage.
Many buy-to-let mortgage lenders will only lend up to 80% of the property value, so you'll need to put in some money yourself - which of course has a cost too!
Once you have deducted all these costs from the rent, you end up with your net expected rental income.
If you divide this into the value of the property, including all the costs associated with buying it, you have the 'true' or 'net rental yield'.
So, if net rental income is £10,000 and the property cost £200,000, the net rental yield is simply £10,000 divided by £200,000 which equals 0.05 or 5%.
Once you do the maths, you may find that the net rental yield figure is less than the cost of your mortgage, leaving you with a shortfall. However, if you have bought well, you should expect the rental income to creep up over time - plus you should see some capital growth too.
Understanding your legal responsibilities as a landlord
There are some legal requirements you will have to comply with as a landlord. This section introduces some of these responsibilities.
The law states you must maintain the property and undertake any major repairs that are required. This includes anything that affects the structure and exterior as well as the electrical, heating, hot water and sanitary conditions.
In addition, there are special rules that apply to soft furnishings, gas and electrical safety, tenants with disabilities and shared houses. These rules can be found below.
All soft furnishings must comply with the Furniture and Furnishings (Fire) Safety Regulations 1988 and be fire safety compliant. Look for the fire safety label on all furnishings. For further information visit:http://www.firesafe.org.uk/html/Legislation/furnregs.htm
- The Gas Safety (Installation and Use) Regulations 1998 say landlords must ensure that gas appliances, fittings and flues are safe for tenants use and that installation, maintenance and annual safety checks are carried out by a Corgi-registered gas installer. If everything is OK, you'll be given a certificate called a CP12 and you must give a copy of this to the tenant. Gas safety checks must be carried out on a property annually. For further information visit: http://www.hse.gov.uk/pubns/indg285.pdf
- The Electrical Equipment and Safety Regulations say you must ensure that the electrics are safe, with operating instructions and safety notices supplied before a letting commences. Get your electrics regularly checked by a qualified electrician.
- Landlords should make 'reasonable adjustments' to their property to accommodate a disabled person.
- Certain types of shared houses (called Houses in Multiple Occupation) have to be licensed under special rules, which also require the property meets certain extra fire and electrical safety standards. These rules also set a limit to the number of people who can occupy a property. Whether or not you need to get a license depends on the size of the property and varies by council - ask your local authority's housing department for more information.
A good general Government guide to all the regulations can be found HERE:
If you are in any doubt what your responsibilities are, Oakwood lettings will be able to help and advise - however, as the landlord it's your legal responsibility to ensure the regulations are complied with and that safety checks have actually been carried out - failure to do so is a criminal offence so seek advice and guidance.
Also, if you own a flat, some leases require you to tell the freeholder of your plans to let or may prohibit certain types of lettings - check your lease agreement carefully for any possible restrictions.
Finally, if you are planning to let your former home, a standard home insurance policy will not cover you properly and may result in claims being rejected - you'll need a special landlords' insurance policy. But don't worry - premiums are not much higher than on a standard policy.