Question of the Day: How Much Profit Should you Make on a Rental Property?
Video Transcript
Hello and welcome to today’s video, which is where we are going to be looking at, how much profit should you make on a rental property?
Now, rental income is very important, certainly, it is most of the reason, why people look to invest in buy-to-let, in the UK.
But there are things to consider and there are guidelines, that you can use that will give you some context around what other investors are targeting. But there are outlier-scenarios, and there are many influences that will dictate what sorts of income a rental property will bring in.
We are going to try and touch on all of those in this video, today.
So, first of all, context is everything; the type of property, the tenanting strategy and the location that you are considering. All of this will impact the rental income that you will generate from your property.
If you’re looking at a two-bedroom terrace in London, for example, the figures that you might look at will be wildly different from a two-bedroom terrace in Liverpool or in Brighton or in Birmingham.
In terms of context, so you can compare one property to another, there are two areas that people typically look at.
The first is called a rental yield. And that might be a gross rental yield, as a percentage of what they invest, in that property and what return they get back, from that property, on a yearly basis.
And the second might be monthly income; the profit are they likely to make, on that property, on a monthly basis.
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To touch on the first of those – the rental yield – we usually see investors looking at around 6% gross rental yield for their UK buy-to-let properties. And certainly, we see some investors sacrifice some of that percentage to go to a higher value area, or to a specific property that might cover, for them, as an investor, elements that are higher up their list of priorities or needs.
It could be a property that’s right on their doorstep or it could be a property that is larger in size or that costs more to acquire. Maybe it’s because of the condition, maybe it’s because of the location. There are a whole host of things that can impact the income that a property might generate or impact the amount It might cost to buy it. It’s not a level playing field.
You might pay more for a property but your income doesn’t necessarily go up by a radically different amount.
We do see some investors focus on properties that for them, fundamentally, are great and sound options, that may only achieve around 4 or 4.5% (maybe 5%) gross rental yield but for the majority, we see them targeting 6%+.
When it comes to the physical cash-amount profit per month, we usually see investors targeting around £150 upwards, for their investment properties.
And again, context is everything.
If you’re looking at a London property, you may be acquiring a property that gives you much more income than £150 per month. If you are looking at a two-bedroom terrace in Newcastle or a two-bedroom terrace in Liverpool or in Blackpool or in Birmingham, your rental income might be different.
£150 gives you a good target to aim for and that’s net profit; the net income, after all your costs have been taken into account. So, if you have a mortgage on the property or financing costs, it’s important to consider that. A maintenance budget – because it is going cost you to maintain the property over the long term. Insurance. Also things like management; even if you’re not managing the property with a letting agent and you’re self-managing, it’s important to have a budget identified for that.
And If you change your mind, about anything, at any point in the future, you want to make sure that the property can cover those costs and that you are not faced with the situation where the property becomes net negative; that it will give you what it is going to cost you, every month, to run that property, even when it’s tenanted.
So, £150, per month, is a good guideline to aim for.
Hopefully, that helps. Hopefully, that gives you a starting point, as to what sort of rental income and what sort of rental profit, you can aim for, on your next property purchase.
I look forward to catching up with you, on the next video.
All the best.
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