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Work out what your money makes when you invest in property UK

Before you invest in UK property, there’s a lot of property investment research to do. You’ll want to make certain that you’re buying in the best places to invest in property UK. When you do your due diligence, you’ll also want to make sure that your numbers stack up.

Now, we’ve previously discussed why many people invest in buy-to-let property for positive cash flow and not capital gain. I’ve also examined the five simple steps to perfect positive cash flow.

One objection I hear from beginner investors is that the net yield isn’t ‘exciting enough’. When they compare the gross yield of, say, 7% to the average stock dividend yield of 3.6%, it looks juicy. But when the beginner runs through the numbers and discovers that their costs and expenses take a chunk away, the disappointment is clear to see.

The thing is, to make a proper comparison you need to go one step further and calculate your real yield. In this article, we’ll show you how to do this.

Cash flow calculation rules

When you invest in UK property, you must calculate the anticipated cash flow on the property investment. Here are what I consider to be the golden rules:

  • Always be conservative

Overestimate your costs and underestimate your income.

·         Always do your research and find out the likely rental income

I will phone a few agents in the local area, once as a possible landlord, and once as a possible tenant. You’ll find that you’re given two figures from each agent:

  • The higher figure is given when you call as a landlord – they want your business, so will tempt you to sign with a higher rental value.
  • The lower figure is given when you call as a tenant – they want you to sign with them and so will tempt you with lower rental numbers.

Amalgamate all these results, and the real rental per month is somewhere in the middle. Then use a rent amount of £30 or £40 less per month. Just to be on the safe side.

·         Always allow for an increase in interest rates

By considering that interest rates may rise, you will be building a buffer into your cash flow forecast. You’ll be prepared before it happens.

·         Always allow for maintenance costs of 10% or your rent

The likelihood is that your maintenance costs will be lower than this, especially if you have invested in off-plan property (low maintenance costs is one of the reasons new build property is not expensive).

·         Always allow for six weeks of void period

Average lengths of tenancies are rising, and the average length of void periods are falling. In fact, you’re more likely now to have a multi-year tenancy than ever, and when your property is vacated the average void period is now just two weeks. Even so, erring on the side of caution is the best policy.

Making the cash flow calculation

Let’s say that you’ve found a great location in which to invest. Among the property investment opportunities that you’ve identified is a two-bedroom apartment on a new development only a few minutes’ walk from the railway station.

The cost is £200,000. You have £70,000 to put down as a deposit. The £130,000 mortgage is payable at an interest rate of 4.2%.

  • On checking with local agents, you discover that the probable rent is £1,200 per month. You decide to calculate the cash flow using a rental figure of £1,150 per month.
  • Mortgage interest is calculated at 5.2% (1% above the actual mortgage rate), so you allow £560 per month.
  • Include maintenance costs of £115 per month and investment property management fees of about £120 per month.
  • Allowing for a six-week void period, you’ll need to discount annual rent by £1,592 – or £132 per month.

Your cash flow works out to be:

£1,150 – £560 – £115 – £120 – £132 = £223

Now, £223 per month works out to be £2,676 per year. That’s a net yield on the £200,000 property value of only 1.3%. That doesn’t sound too exciting. But it’s not your real yield.

Working out your real yield

You’re making £2,767 per year on invested capital of just £70,000. You’ve borrowed the rest. So, your real yield is:

(£2,676/£70,000) % = 3.8%

That’s way above the 1% you could earn in a cash account and more than the average stock dividend.

But, remember, too, that your cash flow projections are conservative.

What if you had no void periods, and received £1,200 per month in rent? Your cash flow and real yield would now be:

Rental income £1,200
Mortgage interest £455
Maintenance £120
Property management £120
Void period £0
Cash flow £505


Real yield = ((£505 x 12)/£70,000) % = (£6060/£70,000) % = 8.7%

Now it starts looking exciting. But it could be even better. What if you fixed the interest rate on your mortgage at, say, 2.78% for five years (the current offer from Post Office Money)? Now you’ll have cash flow and real yield as follows:

Rental income £1,200
Mortgage interest £301
Maintenance £120
Property management £120
Void period £0
Cash flow £659


And a real yield of 11.3%!

In other words, the real yield on your investment in this property will be between 3.8% and 11.3% per year. Try getting that level of income elsewhere.

Contact one of our team today on +44 207 923 6100, and we’ll help you discover the best property investment opportunities for market-beating real yields on your investment. Unless, of course, you’re happy to leave your money earning 1% in the bank (if you’re lucky).

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
April 6, 2017

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