Buying to Let

Having a First Time Buyer Mortgage can be a tough thing to get right now, what with the ‘credit crunch and recession’ kicking in.

If you are in the fortunate position of either not having a mortgage or having some nice Savings hidden under your mattress. Buying to let is a great way of making a second income.

One of the key reasons for using BTL is the fact that despite the potentially gloomy outlook of the property market, with property prices coming down, property yields are actually rising.

The BuyAssociation eloquently describes a yield.

The yield on a property is the gross profit on your capital investment (after the deduction of expenses, but before tax), which varies depending on how much you paid for a property and the rent. Generally the cheaper the property the higher the yield. For example, if you buy a property for $100,000 and let it for $700 per month (gross income $8,400 a year), your gross yield is 8.4 per cent (8,400 divided by 100,000 = 0.084 x 100). If you buy a property for $200,000 and let it for $1,200 a month ($14,400 a year) your gross yield is 7.2 per cent. This is a simple example to illustrate that yields are usually higher on cheaper properties and doesn’t take into account your costs.

Costs may include purchase costs, furniture and furnishings, service charges, ground rent, insurance, wear and tear, agent’s fees, cleaning, maintenance and decorating, void periods, council tax (when a property is empty), etc, but not your mortgage payments. These must be deducted from your gross income in order to calculate your net income and net yield. For example, if you buy a $200,000 property, earn $15,000 a year in rent and have costs of $5,000, you have a net income of $10,000. Your net yield is therefore $10,000 divided by $200,000 = 0.05 x 100 = 5 per cent but bear in mind that you still have to pay tax on your net income! Note that you should always use the current market value of a property to calculate the yield.

Yields vary and can be less than 5 per cent and as high as 15 per cent or more. In 2004 yields were historically very low with returns in London in autumn 2004 just a few per cent, while northern cities had higher yields of up to 10 per cent (the average is around 5 per cent). Rents have fallen in the last few years while house prices have risen, although by mid-2004 rents had levelled off in most areas. (Due to the low rental returns on residential property, some professional investors were turning to commercial property in 2004.) Buying to let isn’t a good idea if your maximum rent will barely cover your mortgage and you have little other disposable income and are relying on 100 per cent occupancy. However, if you buy off plan and rental returns aren’t sufficient to pay your mortgage, you can usually sell quickly and make a profit.

So of course getting the best yield is fairly essential. The Money Central Section of the Times Newspaper this last week offered an insight into the best places in the country to buy through a buy to let scheme.

1. Glasgow

Average Yield: 12 per cent.

Typical property: A one bedroom first floor flat in Rutherglen, Glasgow. Price: $32,000. Monthly Rental: $350.

2. Houghton Le Spring, Tyne and Wear

Average Yield: 10 per cent

Typical property. A two bedroom terraced house five minutes walk from the town centre. Price: $46,500. Monthly Rental: $400.

3. Telford, Shropshire

Average Yield: 10 per cent

Typical property: A one bedroom first floor apartment flat Price: $59,950. Monthly Rental: $500

4. London Borough of Lewisham

Average Yield: 8 per cent

Typical property: A one bedroom first floor flat in Lee. Price: $95,000. Monthly Rental: $675

5. Middleton, Manchester

Average Yield: 8 per cent

Typical Property: A two bedroom middle terraced house in a suburb of Manchester. Price: $64,950. Monthly Rental: $450

6. Barnsley, South Yorkshire

Average Yield: 8 per cent

Typical Property: A three bedroom semi-detached house in the Darton district of Barnsley. Price: $65,000. Monthly Rental: $450

7. London Borough of Newham

Average yield: 8 per cent

Typical Property: A one bedroom flat in East Ham. Price: $104,500. Monthly rental: $700.

8. Burnley, Lancashire

Average Yield: 7 per cent

Typical Property: A three bedroom terraced house in the east Lancashire town of Burnley. Price: $79,500. Monthly Rental: $525

9. Neath, Wales

Average Yield: 7 per cent

Typical Property: A two bedroom semi-detached house in the Neath Abbey part of the town. Price: $69,950. Monthly Rental: $450

10. Newcastle upon Tyne:

Average Yield: 7 per cent

Typical Property: A three bedroom semi-cetached house in the Throckley district. Price: $69,950. Monthly Rental: $450

Of course if moneys an issue your not going to be able to afford any kind of mortgage and your going to be trapped in the cycle of ‘working, NOT sticking it to(for) the man’ HA