How to assess a property's rental income
Before you invest in a buy-to-let property, you need to do some calculations to work out what your rental income is going to be.
To do this, you need to know how much rent you can charge and compare this with your expenditure. Your rental income must cover your outgoings and bring in a profit. However, to attract tenants and minimise the risk of void periods, you must set the rent at a fair level.
Your objective should be to maintain a healthy and sustainable cashflow at all times.
How much rent to charge?
How much you can reasonably charge a tenant depends on the demand for rental homes in that area, existing prices and the condition of your property.
You could also scan the property pages of local newspapers and look in the windows and at the websites of letting agents.
Talk to local letting agents
It’s worth tapping into the knowledge of letting agents in your area. You may not end up using their services if you want to manage the property yourself, but most will still be happy to chat with you.
They’ll give you an idea of how much rent you can expect from your property and how much demand there is in that region. This information should give you a feel for the rental climate in your area and what tenants will be prepared to pay in rent for your type of property.
What are you offering?
Before you can correctly judge the potential rental income, you need to be clear about what you’re offering a tenant. You certainly don’t want to undervalue your property.
For a start, will the property be furnished or unfurnished? What white goods will you include? Is the kitchen fitted out with just the basics or does it have a dishwasher, microwave, fridge freezer, etc?
Does the property have a garage, parking spaces or a garden? All of these things can be reflected in the rent.
Calculate income versus expenditure
Once you’ve established how much you can charge in rent, you need to know what other expenses need covering. Are there any permits such as parking permits or service charges for maintaining communal areas that need to be taken into consideration? Will you cover these, or will they be passed on to the tenant?
Now you can add together the rental income from your property or properties and deduct all expenses. You can offset some of your costs by claiming for any expenditure you incur exclusively for your rental property such as maintenance costs, letting agent fees, accountants’ fees, ground rent, and insurance.
Once upon a time, you could also have deducted your mortgage interest, but since the section 24 law was introduced in April 2017, this is only permitted if you purchase the property as a limited company.
Finally, once you’ve calculated your yearly profit, you should take into account the tax that will be payable – after you’ve deducted all allowable expenses.
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