Buy-to-let landlords in London can generate healthy returns, despite the government introducing a 3% stamp duty surcharge on second homes.
This extra charge pushes the tax payable on a £534,785 home (the average price of residential property in London, according to the Land Registry) from £16,739.25 to £32,782.80.
Whether you have a buy-to-let investment in Tooting, Tottenham or Thamesmead, its rental yield can be calculated by working out the rental return as a percentage of the property’s purchase price.
LendInvest reports that rental yields between 2010 and 2016 in the whole of the UK was 5%, although this climbs to 7.4% in certain postcodes in London.
To calculate your buy-to-let investment’s rental yield, take the total rent received over a year. New data reveals that tenants in London pay an average of £1133 per month for a one-bed flat, but this rises to an average of more than £1500 per month for all properties.
Assuming your £543,785 BTL investment property can be let out for £2000 per month, your annual rental income will be £24,000 before tax.
Next, take the purchase price of the property (£543,785) and add that figure to its buying costs (£32,782.80 stamp duty plus £2000 professional services fees). That gives you a total of £578,567.
Now perform the following calculation: 24000 ÷ 578567 x 100 = 4.15%.
However, the above calculation assumes the investment property was purchased without the need for a mortgage.
To work out your annual return or yield taking the property loan into account, the annual mortgage costs must be subtracted from the £24,000 received in rent.
Let’s assume the investor takes out an interest-only buy-to-let mortgage for 80% of the purchase cost (£435,028) at a rate of 3%. That would result in monthly payments of £1087 or £13,044 per year.
Subtracting that figure from the annual rent receipts of £24,000 leaves a pre-tax profit of £10,956 per year.
To calculate the yield, take the deposit put down (£108,757) and add that figure to the buying costs (£34,782). This gives a total of £143,539.
Now perform the following calculation: 10956 ÷ 143539 x 100 = 7.63%
A quick glance at the best savings rates available on easy access accounts, reveals no more than 1.3% is currently available. Not only that, the value of property in many parts of London is likely to appreciate in value if the investment is held for 10 years or more.
It is wise to bear in mind, however, that a landlord’s true income from a buy-to-let investment is the amount of rent left over after all the other expenses associated with the property have been met. These can include variables such as void periods, maintenance, insurance and the fees charged by letting agents.
But even subtracting 25% from the £10,956 annual pre-tax profit gives a yield of 5.72% on top of any appreciation of the property’s value.
Landlords in London, however, have no need to factor in void periods when it comes to calculating their yield.
Our Guaranteed Rent Scheme gives you the peace of mind that your rental income will be paid every month for up to five years.
We agree an attractive market rental rate for your property, we find you a tenant and then we manage the property on your behalf.
You do not need to provide an insurance policy, we underwrite our guarantee in-house. We work how you want to work – from let only to full management. Whether you own one or two properties or have 200 in your portfolio, Denhan Guaranteed Rent’s business is to help you maximise the return on your investment, with the added bonus of guaranteed rent.