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Microsoft Cloud Authors: Pat Romanski, Andreas Grabner, Nick Basinger, Kevin Benedict, Liz McMillan

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Calculating the profit of a buy to let portfolio

I rather enjoy maths. Whilst that might make me a bit of a social anomaly to some, it’s pretty handy if you’re running a property business.

To measure how successful your business is it’s important to be able to calculate the return on your investment. You should be able to look at a buy to let portfolio and figure out where you’re turning a profit, where you’re breaking even, and where you’re making a loss.

Calculating gross yield

A simple calculation you can use to compare different aspects of a property portfolio is to divide the annual rent by the cost of the home.

Let’s take the average monthly rent according to HomeLet’s rental index for January, which is £777. Multiply this by twelve to get the annual rent (£9,324).

A different source, the Land Registry’s house price index, gives us the average cost of a house in the UK, which in January was £162,441.

9,324 over 162,441, expressed as a percentage, is 5.74% – and there you have your gross yield.

Calculating net yield

Gross yields are good for calculating the sort of return you might get on a new purchase, but don’t take running costs or other on-going expenses into account.

‘Net yield’ is these figures less running costs. Let's take the above 'average' property and apply some typical costs:

  • Repairs (about 10%, or £932.4)
  • Agency fees (about 12%, taking VAT into account, or £1,118.88)
  • Voids (again, about 10%)
  • Tax (let’s assume 20%)

After these costs, the annual rental return becomes £4,475.52, and the yield becomes 2.76%.

Here you have a truer indication of exactly how much your property's making you. You'll need to keep a detailed account of every single running cost for each of your properties – a breakdown of the sort of costs you can expect to pay can be found in our article, buy to let running costs.

Accounting for capital growth

The change in value of your property should be taken into account when determining the true return on your investment.

Keeping the trusty 'average house' above as our go-to example, let's say you bought it ten years ago in March 2003. According to the Land Registry, you would have paid £124,213, meaning that it would have gained £38,228 in value (£3,823 per year).

As a percentage of the original value, that's 3.10% per year. Added to your net yield, the true annual return is 5.86%.

If you bought the house five years ago in March 2008, however, the house will have fallen in value by £17,418, which is £3,483.60 per year. Divide this negative figure by the original purchase price of £179,859, and you'll get minus 1.94%. This taken into account, your true return becomes 0.82%.

With changes in value taken into account, some properties are actually losing money – recent reports indicate that the worst ‘real yields’ in the UK are as low as minus 10%.

Your own portfolio

Growth will be more important than income to some investors, and vice versa. Some investors will be prepared to overlook a loss in capital if the short-term returns are good, whilst others won’t want to hold on to a property that's losing value.

Only with a broad approach and an idea of different types of return can you truly see how your portfolio is performing. If you haven't already, I recommend grabbing a calculator, running over some numbers, and seeing which of your properties are really working for you.

Read the original blog entry...

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Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.

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