Some key calculations to help us figure out whether or not buy to let can make a profit. Gross Yield, Net Yield and Return on Investment (ROI).
can buy to let make a profit?
In the last post, we figured out that a house which cost £300,000 with a mortgage payment of £600 a month and a rental of £950 a month would leave us with £311 profit. We made up figures so they are proper guestimates.
We also learned that the profit from buy to let happens in 2 ways. Short term is what you have left each month after paying all the bills. Long term is the money that the house makes just by sitting there and letting the market value go up.
Making a profit, means that both of these conditions have to be met. This will give us a short term monthly income which we can use to live on or save to buy more properties as well as being an asset that can be sold for profit later.
Gross Yield
The gross yield percentage will indicate whether or not a short term profit is possible. A yield of above 5.5% is good. People calculate gross yield in a number of ways. We will be using the consensus calculation which is this: Annual Rent / (Purchase Price + Refurbishment Cost).
4800/(46000+1000)
=0.10 or 10%
£400 rent per month
Net Yield
We will use net yield as an indication of how much money might be left each year. This will be as cash to spend or as savings. It doesn’t really help when figuring out whether or not to buy a property (as far as we can tell). We can calculate net yield by dividing the annual profit by the purchase price. The annual profit is the rent minus the monthly outgoings. It looks like this: (annual rent – annual outgoings)/purchase price.
(4800-2505)/46000
=0.05 or 5%
£400 rent per month
£208.75 outgoings per month
Return on Investment
This is the calculation which tells you how well you did in minimising what you had to spend to buy the property compared to what you’re actually making in profit. We can calculate the ROI by dividing the annucal profit by the initial outlay.
The initial outlay includes things like the deposit, purchase fees, stamp duty and refurbishment costs. Our calculation for ROI looks like this: (rent-monthly outgoings)/(initial outlay). Anything above 10% is good.
(4800-2505)/15380
=0.15 or 15%
Assumes a purchase through an estate agent using a mortgage