There are two aspects to buy-to-let property investments, rental yield and capital growth. The gross rental yield is a rough calculation to compare one property to another. This is calculated by working out the annual rent (e.g. £900 per month x 12 months) divided by the cost of the property (e.g. £180,000) multiple by 100 equals the gross rental yield (in this case 6%). The gross yield is a rough calculation. The actual return you will receive would be very different, so you should still carry out a full profit and loss for each property.
Rents over time will increase, the amount you pay stays the same, so over time the gross yield should increase.
Capital growth is the increase in the properties value over time and in what makes property investment so attractive.
So far this year 2006, from January to August, property prices have increased by 9%, so if you bought a property for £200,000 in January, eight months later the property should have increased by £18,000.
Another reason property investment is so attractive is being able to use other peoples money (gearing), mainly buy to let mortgages.
An initial deposit this year in January, say 15% or in the above example £30,000, would produce a return on your investment of 60%. Far better than any bank.
Over the years, when the property market falls, rental demand increases and in turn rental yields increase. Long term, the population is increasing, wages will increase therefore rents will increase.
Property investment is for the long term and will go down as well as up. For the property investor there is advantages in both markets.
Posted: 14th September 2006