£900 a month rent sounds pretty good, doesn’t it? You’ve found a property you like, the purchase price looks good and after doing your research you’re confident it should achieve around £900 a month. That’s £10,800 a year in rent. But how much of that £900 are you actually keeping?
This is something I always look at when we’re working through the numbers on a property, because the rent coming in and the money you’re left with at the end of the month are two completely different things.
If you’ve bought using a mortgage, there’s your finance cost for a start. If you’re using a letting agent, there’ll be a management fee. Then you’ve got insurance, general maintenance and repairs to think about and potentially things like service charges depending on the type of property you’ve bought.
I also like to allow for the fact that things won’t always go perfectly.
Your property might be empty for a short period between tenants. A boiler will eventually need fixing. Something will break. That’s just part and parcel of owning property. None of that suddenly makes it a bad investment. It just needs to be included when you’re working out whether the numbers make sense for you.
Let’s stick with our £900 a month example. It’s really easy to see that figure on a rental appraisal and start doing the maths based on £10,800 coming in every year. But that’s your gross rental income, not your profit. What I really want to know is what’s left each month once we’ve accounted for the costs of owning and running that property. That’s the figure that tells us much more about whether the investment is going to do what we need it to do, and everyone’s answer will be slightly different.
Someone buying outright with cash is going to look at completely different numbers to someone buying with a mortgage. One investor might be focused on generating as much monthly income as possible, while another might be happy with a lower monthly return, because they’re thinking about holding the property for the next 20 years.
Neither is right or wrong. It just comes back to knowing what you’re trying to achieve before you buy. So if you’re looking at an investment property yourself, don’t stop at the advertised rent or the headline yield. Get a piece of paper out and work through it.
What’s the realistic rent? What will your finance cost? Will you be using a managing agent? What should you allow for insurance, maintenance and void periods without a tenant? Are there any other ongoing costs attached to that particular property? Then look at what’s left.
This is a really big part of what we do at JH Property Connect. We work with time-poor business owners and investors who have the capital to invest, but don’t necessarily have the time to sit on property portals every evening, speak with agents, attend viewings and then work through the numbers on every property they find. We do all of that for them.
We search, view, negotiate, research the area and rental market and work through the numbers before presenting an opportunity to any of our clients. I never want somebody to look at a property we’ve presented and just see £900 a month rent. I need them to understand what that £900 could actually mean for them. Because ultimately, it’s not just about what’s coming in every month. It’s really about what’s left once everything has gone out.