There are over a million landlords in the UK, many of whom have made a lot of money out of property, but with ARLA estimating nearly 30% of landlords have only invested in the last 5 years, many are likely to have lost or be losing money.
So what are the useful buy to let calculations you need to make to know if your property investment is delivering?
Well here’s my 3 property portfolio returns checks. I’ll assume (for ease!):-
Check one: What rate is your property value increasing at?
Rule of thumb: ideally any ‘asset’ you invest in needs to at least keep up with inflation, which since 2000
has run at around 3%.
Inflation calculation
If you bought in 2005 for £100,000, it’s now 2013, so eight years later
8 years x 3% inflation = 19.4%
So your property needs to be worth at least £100,000 x 19.4% = £119,400
Watch Kate's video 'Investing pensions in BTL property'
Check two: Is your rental income increasing in line with inflation?
And it’s the same calculation for rents
Rule of thumb: ideally any ‘asset’ you invest in needs to at least keep up with inflation, which since 2000
has run at around 3%.
Inflation calculation
If you rented your property in 2005 for £5,500, it’s now 2013, so eight years later. That’s £458 per month.
8 years x 3% inflation = 19.4%
So your rental income should be producing at least £5,500 x 19.4% = £6,567 or £547.
Check three: What’s your return on your investment?
Rule of thumb, ideally you’d like to see a better return than for other financial investments you make. A pension, on average, should be delivering around 7% per year, so if investing for retirement, you should be achieving similar returns – at least.
Return on your buy to let investment calculation
Take the £30,000 cash I put into the property / this by the current growth in value of the property
Let’s assume the property kept up with inflation, so is now worth £119,400.
The growth in capital value is £119,400 - £100,000 = £19,400
I invested £30,000 and if I sold, I would incur selling costs around 3% = £119,400 x 3% = £3,582.
So if I sold today, I would net £119,400 - £3,582 = £115, 818, so the actual capital increase on the property would be £15,818 after the costs of sale.
The final ‘quick’ calculation is:-
The property grew in value by: £15,818/£30,000 I invested = 53% return
I have invested since 2005, so this growth is over 5 years = 53% / 5 years = 10.5%
BUT remember you won’t pocket all of the £15,818 as you have to pay tax.
So how do you do the tax calculation? Well you go to a property tax expert as tax is bespoke to each individual person – there are no ‘rules of thumb’!
Watch Kate's video 'Investing pensions in BTL property'
Visit our Property Tax checklist and How to Analyse a buy to let property as well as our other buy to let checklists
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