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How to make money from buy-to-let property

2-minute read

How to make money from buy-to-let property
Mollie Millman

Mollie Millman

20 September 2016

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Many landlords may feel that their profits are dwindling fast following the introduction of tax changes and tighter mortgage lending criteria.

It seems that the golden era of investing in property may be over. But despite the changes occurring in the sector, there is still one way to make money.

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What is the one factor that investors need to focus on?

The buy-to-let sector is changing for investors and using tools such as taking out a mortgage and offsetting the monthly loan payments against tax will no longer be as beneficial as they once were.

The Government is reducing the amount of tax relief available and replacing it with a much smaller tax credit - a process being gradually phased in over four years.

It means investors need to look at their figures more closely to make their money work harder and get the profits they deserve.

Calculating your rental yield

The answer for boosting profits is where it always was - in the rental yield. This is one of the best measures of return that you will receive on your investment.

While there are more complex methods of calculating a yield (such as taking into account mortgage costs), in its basic form, all you need is the value of a property and the monthly rent costs.

For example, if a property is worth £300,000 and the monthly rent is £900, then the annual rent is £10,800. To calculate the yield, divide this annual rent by the property value, before multiplying this figure by 100 to turn it into a percentage. In this case, the yield is 3.60 per cent.

This is a relatively low yield and doesn’t leave much room for profit once the new tax changes are taking into account.

Increasing your rental yield

The answer to increasing this yield is to tip the balance of the above equation by reducing the value of the property and increasing the rent achieved.

In other words, investors need to focus on buy-to-let properties that are cheaper but command higher rents.

In the above example, if the property value is lower - say at £200,000 - and the annual rent stays the same, then the yield is pushed up to a far more impressive 5.60 per cent.

Cheaper properties may not always be most attractive as investments - particularly if landlords are more interested in capital growth - but if they come with good rents, then they can provide excellent returns in terms of yield.

Do you think the buy-to-let golden era is coming to a close? Tell us in the comments.

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