Buying an investment property to rent is a process which is often made far more complicated than it really is. There is obviously an array of other factors to consider when looking at renting property to domestic tenants/businesses but if you keep it simple it is much clearer. So, what other factors to take into consideration?
The rental yield is simple, the gross rental income divided by the value of the property. For example, a rental value of £1000 a month would bring in £12,000 in rental income. If the property was valued at £120,000 then the gross rental yield would be 10%. You tend to find that properties with a relatively high rental yield have limited opportunity for capital appreciation and vice versa.
Rental yields are fairly simple to work out, look at the local vicinity and what similar properties are charging their tenants. The matter of investing for long-term capital appreciation is a little more difficult to maximise. Some of the factors to consider for capital appreciation include:-
- Any local property value “glass roofs”
- Prospects for the local employment market.
- Potential changes/improvements to the transport network
The subject of “glass roofs” is often difficult to explain detail. It simply refers to the maximum value for a particular type of property in a particular neighbourhood. The idea being; if the value of a property is at or near the top end of the range then any additional developments may not create the expected capital appreciation. It is worth noting that “glass roofs” do change a regular basis due to changes in the local economy.
In a perfect world the rental income from a property would cover mortgage costs and eventually the mortgage will be paid off at no additional cost to the investor. While this type of self-funding investment may seem like fools gold, it is actually possible if you do your research. Initial finance may need to be calculated using personal income, as opposed to potential rental income, but once this hurdle has been cleared it can relieve significant financial pressure.
Expanding your portfolio – remortgaging
The idea of mortgaging remortgaging assets to invest in additional rental properties can be extremely lucrative in the longer term. For example, if you have paid off the mortgage on one property, which still has a rental income stream, then you might consider remortgaging the property to buy a new one.
The rent from the original property would go towards the mortgage but there would also be additional rental income from the second property. When remortgaging in this manner it is sensible to be fairly conservative in order to leave significant headroom in the event that you need to raise capital at short notice in the future. It also protects property investors from a sizeable drop in property prices.
Monitor taxation changes
The UK government has introduced a number of tax changes regarding rental properties in the UK. The gradual removal of mortgage interest relief together with additional charges for second homes has not gone down well. We’ve also seen a number of changes to the tenant/landlord relationship with many landlords believing the government has handed too much power to tenants. Those with a sizeable rental property portfolio will often look towards company status where there are some subtle, but very useful, tax advantages.
The idea that buying investment property to rent is a dying skill is simply wrong. Yes, there have been changes to the taxation system and mortgage affordability calculation. However, there are still significant long-term benefits from investment in rental properties whether this is residential or commercial. Do your research, crunch the numbers you might be surprised at the potential going forward.