How much can you make from a buy-to-let property?
Buy-to-let investment has mushroomed over recent years with the high demand for rental property and changes to pension rules fuelling the rise in popularity. Many see property investment as a route to riches with ever increasing house prices and rents providing a steady income and capital appreciation from their investment.
If you are considering purchasing a buy-to-let property then you need to understand the costs involved and the likely return on your investment, together with the risks involved. In this article I aim to answer these questions and hopefully give a clear idea of how much you can make from a buy-to-let investment?
I have decided to use a case study to illustrate the returns that can be achieved from a buy-to-let investment, the details of which are as follows:
Purchase price - £150,000
Deposit - £30,000
Mortgage - £120,000 2yr fixed rate @ 3.95%, monthly payment £395
The income that you can expect from your buy-to-let investment will vary depending on the type of property you buy and the area in which you buy. In August 2015 UK rental yields were an average of 5.1% (LSL Property Services plc Buy-to-Let Index), the regional yields varied from a low of 3.7% in the South West to a high of 7.0% in the North West.
For the purposes of my case study I am going to use an annual rental yield of 6.0% which means the rental income from my case study property will be £9,000 per annum.
Rental from buy-to-let investments is liable to income tax but I will deal with taxation in a later section.
Mortgage costs and monthly payments
Mortgage fees - £1,800
Survey fee - £500
Stamp Duty - £500 (increases to £1,250 after April 2016)
Legal fees - £700
Mortgage repayments - £395 p.m.
Loss of interest received on £30,000 deposit @ 3% per annum - £720 p.a. (net of 20% income tax)
Letting agent fees (approx. 12% of rental costs) - £75 p.m.
Landlord & rental insurance - £80 p.m.
Estimated repairs - £500 p.a.
Estimated void period rental loss - £500 p.a.
Total monthly mortgage/other costs - £693 p.m.
Additional mortgage setup costs - £3,500
Annual rental yield
Annual rental yield (C) is calculated by taking the annual rental income less annual costs (A) and dividing it by the purchase price of the property plus related costs (B).
A - Net rental income = £9,000 - £8316 = £684 p.a.
B - Total cost of purchasing property = £150,000 + £3,500 = £153,500
C - Annual rental yield = 0.4% gross
Over the past 10 years (2005 - 2015) the average house price in the UK has increased by around 24%. If I assume that house price increases will move in line with the last 10 years then our case study property will increase in value from £150,000 in 2015 to £184,000. This is equivalent to an annual capital growth of 2.4%.
Proceeds from all buy-to-let investments are subject to taxation. Rental income (less some allowances) is subject to Income Tax at the individuals marginal rate of tax. Whilst any capital growth is subject to Capital Gains Tax which is levied at either 18% or 28% on total realised gains on all investments over £10,000 in any tax year.
How can I make from a buy-to-let investment - summary
In the case study above the total return in the first year would be:
- 0.4% in rental yield
- 2.4% in capital growth
This equates to 2.8% gross total return on the investment before taxation. Bear in mind that you won't enjoy the capital growth until you actually sell the property.
As you can see from the case study if you experience high repair costs or long void periods your investment could be costing you money on a monthly basis. There are also upfront mortgage cost of £3,550 which in our cases study would wipe out the first 5 years of any rental yield.
The conclusion is that if you are investing in buy-to-let financed via a mortgage then monthly net rental income is likely to negligible at best. You would the be relying on capital growth to achieve a return on your investment. However a buy-to-let investment without the need for a mortgage can provide both a monthly income and capital growth over time.
- The above calculations assume that a 30% deposit is available and the balance of the purchase price is secured with a mortgage
- All costs are estimates and a may be lower or higher
- House price growth figures are for the whole of the UK and may be lower or higher in specific locations
Update - How new Budget changes will affect buy-to-let returns
- Currently stamp duty on purchases is 0% for properties below £125,000 then 2% for purchases between £125,000 and £250,000 and 5% for purchases between £250,000 and £925,000
- The above rates will still remain in place but for buy-to-let and second home purchases an extra 3% stamp duty will be added to these rates
- The above changes will come into effect from 1st April 2016
- This would increase the stamp duty payable on the property in our example from £500 to £1,250 if purchased after 1st April 2016
- If the property is sold then the amount of stamp duty paid can be offset against any potential Capital Gains Tax liability
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