WHAT TYPE OF PROPERTIES SHOULD YOU BUY FOR A BUY TO LET INVESTMENT?
WHAT TYPE OF PROPERTIES SHOULD YOU BUY FOR A BUY TO LET INVESTMENT?
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Are you currently in the initial research stages of buying a property as an investment? One of the things that you might start looking into is exactly what types of property will present the best and most profitable returns.
In this article, we’ll explore how to work out what potential investment opportunity will give you the best returns, what type of property you should choose, what value property you should go for and what the critical aspects of the investment are in order for you to maximise your profits.
Keep reading to find out more!
Rental yield is the return you can expect to achieve through rent as a percentage of the overall property value. You calculate rental yield by taking the yearly rental income of your property divided by the total amount you have invested, the higher the percentage the better the investment.
This is arguable the most important for investors, although it’s not the only one you should consider, it’s the main aspect that investor look at when they are trying to determine if they should buy a property.
Before we dig into what types of properties you might want to look at for rental returns is knowing how to actually identify a good opportunity. As discussed previously, for most investors this revolves around there rental yield, but there are two aspects in which you can turn a profit as a Buy To Let investor.
As we’ve touched on, the factor that most people look at is the monthly income returns, minus what you are paying for the property, of course. It’s the main reason people get into investing in property, to have consistent returns, much like a job!
It’s an often-overlooked factor of investment, a large amount of the profit and huge benefit of investing in property, if you hold it a long time, is usually that it increases in value. For example, say you bought a property in March 2010, the average house price in the UK was £167,878, and if you had sold that in March 2020 the average price was £233,609 which represents a significant 39.15% gain!
As you’re now hopefully aware there are two aspects that you should look at for each type of property, capital gains and monthly returns, so we’ll take a look at each different type of property and try to give you an idea of which might be the best overall investment.
In order to find these statistics, we will be using the UK House Price Index from the land registry for the overall house prices.
| Property Type | House Price (March 2010) | House Price (March 2020) | Percentage Change |
|---|---|---|---|
| Terrace | £136,425 | £186,145 | +38.46% |
| Semi-Detached | £159,678 | £221,618 | +38.79% |
| Detached | £258,191 | £354,353 | +37.24% |
| Flats & Maisonettes | £144,189 | £204,264 | +41.66% |
As you can see, Flats & Maisonettes has had the best capital gains over the past 10 years.
It’s unfortunately not as straight forward when it comes to yields as there isn’t the breakdown of data by each individual property type.
In truth, it depends on what you’re looking for. Accumulated several low-cost properties as long as you do it right will often result in higher overall yields, but with that, it becomes far more time consuming and the cost of repairs can increase.
On more expensive properties your monthly returns are probably lower in terms of a yield percentage, but there’s a lot less management involved. You are also likely to have larger capital gains.
To have a profitable investment, no matter what type of property you choose, the most important thing is getting off on the right foot. There are a few critical aspects that are vitally important to maximising your returns, which include:
This is obviously critical, if you can get a great below market value deal it means you’re on to a winner from the get-go. The lower amount you pay for the property the higher your rental yield and capital gains are ultimately going to be.
Can you do anything to the property in order to improve its rental returns? Perhaps give it a bit of an update, make it look much more fresh and appealing. Renting your house out is the same as selling it, and the more appealing it is to a tenant, the more you’re likely to achieve on a monthly basis.
The most costly part of being a landlord is the time in between tenants, with the property vacant. During these vacant times, you’ll have to cover the fees which can eat into your profits. There are several things you can do to try and minimise this time, such as keeping a regular line of communication with the tenant, being a good landlord, charging realistic rents and advertising the property for rental as soon as you find out they intend to move.
This only applies if you need a mortgage, but getting the best Buy To Let (BTL) mortgage rates is crucial. Make sure you shop around and don’t always necessarily settle for the company you have or had a mortgage with in the past, as they might not offer the best rates for landlords. The lower the rate, the less you’ll pay on a monthly basis.
If you’re getting into the world of Buy To Let investments there are a few other considerations that you need to know that impact your overall earnings. Here are the three main things that will impact your overall profits:
Capital gains tax
Capital gains tax is a tax that you pay on the profits of an asset that has increased in value, your property. If for example you buy the property for £100k and 10 years later you come to sell it for £140k, meaning you’ve profited £40k on the asset, currently the government allows a CGT tax allowance of £12,300 – so using this example you’ll have to pay your personal tax rate on £28,700.
Income tax
The first £1,000 of income from your property is tax-free, but the remaining amount your property generates you will have to pay income tax on. The rate is 20% for a basic rate taxpayer and 40% for a higher rate one.
Freehold & leasehold
Another often forgotten expense when people are looking at renting their property out is if the property is leasehold. As a landlord, you can ask the tenant to pay for the ground rent, but you need to ensure that you have a long lease and cover any required lease extensions.
Ellie Dalglish-Hawkins
March 9th, 2021
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Start your property portfolio today!
Are you currently in the initial research stages of buying a property as an investment? One of the things that you might start looking into is exactly what types of property will present the best and most profitable returns.
In this article, we’ll explore how to work out what potential investment opportunity will give you the best returns, what type of property you should choose, what value property you should go for and what the critical aspects of the investment are in order for you to maximise your profits.
Keep reading to find out more!
Rental yield is the return you can expect to achieve through rent as a percentage of the overall property value. You calculate rental yield by taking the yearly rental income of your property divided by the total amount you have invested, the higher the percentage the better the investment.
This is arguable the most important for investors, although it’s not the only one you should consider, it’s the main aspect that investor look at when they are trying to determine if they should buy a property.
Before we dig into what types of properties you might want to look at for rental returns is knowing how to actually identify a good opportunity. As discussed previously, for most investors this revolves around there rental yield, but there are two aspects in which you can turn a profit as a Buy To Let investor.
As we’ve touched on, the factor that most people look at is the monthly income returns, minus what you are paying for the property, of course. It’s the main reason people get into investing in property, to have consistent returns, much like a job!
It’s an often-overlooked factor of investment, a large amount of the profit and huge benefit of investing in property, if you hold it a long time, is usually that it increases in value. For example, say you bought a property in March 2010, the average house price in the UK was £167,878, and if you had sold that in March 2020 the average price was £233,609 which represents a significant 39.15% gain!
As you’re now hopefully aware there are two aspects that you should look at for each type of property, capital gains and monthly returns, so we’ll take a look at each different type of property and try to give you an idea of which might be the best overall investment.
In order to find these statistics, we will be using the UK House Price Index from the land registry for the overall house prices.
| Property Type | House Price (March 2010) | House Price (March 2020) | Percentage Change |
|---|---|---|---|
| Terrace | £136,425 | £186,145 | +38.46% |
| Semi-Detached | £159,678 | £221,618 | +38.79% |
| Detached | £258,191 | £354,353 | +37.24% |
| Flats & Maisonettes | £144,189 | £204,264 | +41.66% |
As you can see, Flats & Maisonettes has had the best capital gains over the past 10 years.
It’s unfortunately not as straight forward when it comes to yields as there isn’t the breakdown of data by each individual property type.
In truth, it depends on what you’re looking for. Accumulated several low-cost properties as long as you do it right will often result in higher overall yields, but with that, it becomes far more time consuming and the cost of repairs can increase.
On more expensive properties your monthly returns are probably lower in terms of a yield percentage, but there’s a lot less management involved. You are also likely to have larger capital gains.
To have a profitable investment, no matter what type of property you choose, the most important thing is getting off on the right foot. There are a few critical aspects that are vitally important to maximising your returns, which include:
This is obviously critical, if you can get a great below market value deal it means you’re on to a winner from the get-go. The lower amount you pay for the property the higher your rental yield and capital gains are ultimately going to be.
Can you do anything to the property in order to improve its rental returns? Perhaps give it a bit of an update, make it look much more fresh and appealing. Renting your house out is the same as selling it, and the more appealing it is to a tenant, the more you’re likely to achieve on a monthly basis.
The most costly part of being a landlord is the time in between tenants, with the property vacant. During these vacant times, you’ll have to cover the fees which can eat into your profits. There are several things you can do to try and minimise this time, such as keeping a regular line of communication with the tenant, being a good landlord, charging realistic rents and advertising the property for rental as soon as you find out they intend to move.
This only applies if you need a mortgage, but getting the best Buy To Let (BTL) mortgage rates is crucial. Make sure you shop around and don’t always necessarily settle for the company you have or had a mortgage with in the past, as they might not offer the best rates for landlords. The lower the rate, the less you’ll pay on a monthly basis.
If you’re getting into the world of Buy To Let investments there are a few other considerations that you need to know that impact your overall earnings. Here are the three main things that will impact your overall profits:
Capital gains tax
Capital gains tax is a tax that you pay on the profits of an asset that has increased in value, your property. If for example you buy the property for £100k and 10 years later you come to sell it for £140k, meaning you’ve profited £40k on the asset, currently the government allows a CGT tax allowance of £12,300 – so using this example you’ll have to pay your personal tax rate on £28,700.
Income tax
The first £1,000 of income from your property is tax-free, but the remaining amount your property generates you will have to pay income tax on. The rate is 20% for a basic rate taxpayer and 40% for a higher rate one.
Freehold & leasehold
Another often forgotten expense when people are looking at renting their property out is if the property is leasehold. As a landlord, you can ask the tenant to pay for the ground rent, but you need to ensure that you have a long lease and cover any required lease extensions.
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