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.
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.
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.
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.
Keep up to date with Simply Business. Subscribe to our monthly newsletter and follow us on social media.Subscribe to our newsletter
99 Gresham Street
29 St Katherine's Street
© Copyright 2019 Simply Business. All Rights Reserved. Simply Business is a trading name of Xbridge Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Registration No: 313348). Xbridge Limited (No: 3967717) has its registered office at 6th Floor, 99 Gresham Street, London, EC2V 7NG.