When you look to invest in a buy-to-let property, you need to ensure that you understand the financial returns you could get in order to determine whether the investment is one that you should be making.
By understanding the yield and capital growth that a property could make you, it will help you to compare different investments, evaluate the risks and calculate the returns that you can expect to receive. You should be able to better understand whether you can afford a property, whether it will make as much money as your other investments and whether you will be investing in something that will disappoint you in the end.
The most common way to determine the yield of a property is to divide the annual rent and divide it by the purchase price of the property. This will give you a gross yield percentage which you can compare in different properties and also different types of investments. This will help you to understand whether buy-to-let is the best way to make money when there are things like savings schemes and stocks and shares to consider.
The real profit from property investment comes when you decide to sell, and picking the right time will affect how much capital growth you can expect. You can work out how much profit you would make from a property by deducting the purchase price from the current value. By combining this figure with the rental yield you can see which property performs the best. This will show you the total return you can expect and put you in a better place to make decisions.
To calculate your total financial return on your buy-to-let investment, you should add your capital growth to your rental income over the same number of years. You can then divide this number by the amount of years to get a percentage return.
When deciding what type of investment to make, you should consider the risks involved. Whilst savings accounts offer a degree of security compared to the property market, they can tie you in for a long fixed period. Buy-to-let returns can fluctuate each year, so there are no guarantees in what you can make, but sometimes these numbers can fly high as well as crash.
Capital growth and rental yield are the fundamental pieces of information that any landlord needs to understand. However, you should remember that there are other factors that can impact on your income such as taxes, stricter mortgage criteria and the fact that it is no longer possible to offset your mortgage interest.
Understanding these figures can help you to compare the properties you own, and decide if the next one will stand up financially next to the rest of your portfolio. It is important that you involve professionals such as a wealth or tax advisor to make sure you understand the complexities of your potential income when completing your tax returns.
Categories: Real Estate