What yield will a BTL apartment in Marble Arch deliver? And will taking out a BTL mortgage increase the yield on a rental home in central London?
The low supply of good quality rental homes in and around Marble Arch means landlords in this vibrant part of central London can generate healthy returns.
This is despite the government introducing a 3% stamp duty surcharge on second homes, which pushes the tax payable on a £450,000 modern studio apartment in Marble Arch from £12,500 to £26,000.
To work out the level of return an investment property will deliver, landlords with property in Marble Arch or other parts of central London need to calculate the rental yield – the rental return as a percentage figure of the property purchase price.
LendInvest reports that rental yields between 2010 and 2016 in the whole of the W postcode was 4.5%, although this calculation assumes landlords receive £20,280 in rent payments each year. www.lendinvest.com/buy-to-let-index/rental-yield
To calculate your buy-to-let investment’s rental yield, take the total rent received over a year. Assuming the studio apartment in Forset Court, which has a 24 hour concierge and is walking distance from Marble Arch tube station, Oxford Street and the open spaces of Hyde Park, has a rental value of £1500 per calendar month, that would work out to be an annual rental income of £18,000.
Next, take the purchase price of the property (£450,000) and add that figure to its buying costs (£26,000 stamp duty plus £2000 professional services fees). That gives you a total of £478,000.
Now perform the following calculation: 18000 ÷ 478000 x 100 = 3.76%.
However, the above calculation assumes the investment property was purchased without the need for a mortgage.
To work out your annual return or yield taking the property loan into account, the annual mortgage costs must be subtracted from the £18,000 received in rent. Let’s assume the investor takes out an interest-only buy-to-let mortgage for 80% of the purchase cost (£360,000) at a rate of 3%. That would result in monthly payments of £900 or £10,800 per year.
Subtracting that figure from the annual rent receipts of £18,000 leaves a pre-tax profit of £7200 per year.
To calculate the yield, take the deposit put down (£90,000) and add that figure to the buying costs (£28,000). This gives a total of £108,000.
Now perform the following calculation: 7200 ÷ 108000 x 100 = 6.66%
A quick glance at the best savings rates available on easy access accounts, reveals no more than 1.3% is currently available. Not only that, the value of property in Marble Arch and other parts of central London is likely to appreciate in value if the investment is held for 10 years or more.
It is wise to bear in mind, however, that a landlord’s true income from a buy-to-let investment is the amount of rent left over after all the other expenses associated with the property have been met. These can include variables such as void periods, maintenance, insurance and the fees charged by letting agents. But even subtracting 25% from the £7200 annual pre-tax profit gives a yield of 5% on top of any appreciation of the property’s value.
Every buy-to-let investment can deliver a different yield depending on the cost of the property and the rent charged. For this reason, the figures quoted above are for illustration only.
Plaza Estates has a database of buy-to-let investors who have expressed an interest in a wide range of property in central London. If you want to maximise the sale value of your property, contact us today and learn what it could be worth.
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