If you are new to being a landlord, or you are considering getting into buy-to-let, it's a great idea to familiarise yourself with the two main ways to make money from your investment. So here is a quick overview of capital growth and rental yield.
Guide to Capital Growth
Capital growth is the simplest of the two, so we'll start with this one. Essentially, capital growth – also called capital appreciation – is the amount that the property increases in value.
No one knows what this will be because property prices go up and down. For example, London prices have shot up over recent years, but while some areas are continuing to increase in value rapidly, other areas are now slowing down.
This is why it is such a good idea to follow the property market in your area before making a decision. Ideally, you will want to purchase a property that continues to increase in value so that if you decide to sell it, you will have earned some money from your investment.
Guide to Rental Yield
Rental yield is more complicated, but it is essential to have a good understanding of this when entering the buy-to-let market.
Rental yield – also known as rental income – is a percentage that shows you how much you will earn from your rental property each year. This takes into account the amount of rent you charge over the course of the year, and the amount that you invest in the property.
There is a simple calculation you can do to work out your rental yield. You just divide the total annual income from rent by the amount you invest in the property, then multiply it by 100.
For example, if you buy a property for £250,000 and rent it for £1,000 a month, the total rent is £12,000, and the sum to work out your rental yield is:
(£12,000 / £250,000) x 100 = 4.8%
Before you go ahead and work out the rental yield of a property, however, you have to remember that there are other expenses involved in running your property:
- New furniture & fittings
- Property insurance
- Agency fees
- Annual gas safety checks
- Mortgage payments
- Stamp duty, survey fees and other legal fees
Your rental yield will also be affected by whether or not you are buying the property with your own money or taking out a mortgage. If you take out a mortgage, your investment will be smaller, and your rental yield may be larger as a result.
You also have to remember that you may not be able to rent your property all the time. Periods of no rental income can affect your investment, so try to factor in one month a year of no occupancy as a general guide.
This Is Money provides a good guide to rental yield that is worth reading. You may even want to seek some professional advice if you are having difficulties with it.
Whatever you do, make sure you work out the rental yield of a potential property before you invest in it. By comparing rental yields, you will have a good idea about which property will make the most suitable investment.
Use These to Choose Your Property
Rental yield and capital growth are not the only factors to consider when deciding which property to buy. However, they can provide you with some extra information to help you make a better decision when choosing your property, so always keep them in mind.