Budget before you buy-to-let

Investment property can yield healthy returns – but investors should budget properly for the ongoing costs of ownership in order to calculate the real returns they can expect.

Berry Everitt, MD of the Chas Everitt International property group, says a common mistake among new investors is to overestimate the profit they will make by only calculating rental streams and neglecting to factor in maintenance costs and other regular payments such as municipal rates and insurance premiums.

“But before you leap to sign an offer to purchase, you must do the sums. A good starting point is to subtract the deposit you can afford from the selling price to determine the size of the bond and thus monthly repayments.

“The next step is to conservatively calculate the monthly rental you could reasonably expect in order to determine whether it would cover the monthly bond repayments and if not, what amount you will have to contribute monthly.

“Then you need to determine whether you can afford to subsidise the bond, and factor in other ongoing costs of ownership. These include fixed costs such as insurance premiums and municipal rates as well as maintenance costs which can vary considerably depending on the state of the property.”

Writing in the Property Signposts newsletter, he says prospective investors should thus carefully inspect the targeted property to determine what might need repairing or replacing in the immediate future and then, even if it is a new property that currently needs no repair work, plan to put aside some funds for unexpected or emergency expenditure.

“Next you should budget for management fees if you are not going to deal with tenants directly and collect the rent yourself, as well as maintenance, staff wages, taxes, legal and bookkeeping costs and advertising costs to attract tenants.

“And only once you have totalled all these expenses and subtracted them from the projected rental income will you arrive at the net operating income of your targeted property.

“After that, you should subtract the monthly bond repayments and any levies to calculate the actual annual return on the deposit you paid to buy the property (your original investment).”

Article by: www.chaseveritt.com