Key returns 1
What returns should you be aiming for from your property portfolio?
The reason for investing in Buy to Let is to deliver a financial return either now or in the future. A long standing landlord I work with in Loughborough was selling up his Buy to Let interests and wanted to discuss his overall return/success.
The key returns from Buy to Let breakdown into two areas – income from renting and capital growth from the property. Looking firstly at income from renting, what do we need to know to calculate it?
Firstly calculate the actual income you received to take account of voids as opposed to multiplying monthly rent income by 12 (current average voids in the Midlands = 3 week per year – source ARLA Private Rented Survey 2013 Q2). Next work out your regular annual costs throughout the year. The mortgage is likely to be the highest cost, followed by any service charges (flats), insurance, safety certificates, ad hoc maintenance and agent fees.
You can then calculate your net income on either a monthly or annual basis. Breaking costs down monthly can be helpful as you can see how it affects your monthly cash flow and allow for peaks and troughs.
Another consideration is inflation which can make or break financial investments. For example if your rent in 2012 averaged £700 per month and inflation (i.e. the cost of living) increased by 2.5%, ideally your rent would need to increase by at least this amount to make sure you maintained ‘real’ rental income levels. Based on this example, rents in 2013 should be £717.50 per month.
Once you have calculated your income and capital growth you will need to pay tax accordingly. This is not straightforward as the tax you pay on your property earnings is based on all your earnings from a job or other assets you have. (If you want to find a property tax specialist feel free to contact me).
There is quite a lot to consider and even the cost of routine safety checks can vary a lot. I'll look next at capital growth as part of the calculation.