Identify your costs

Although the overwhelming body of opinion in the private letting sector suggests the opportunities for those thinking about entering the market have never been better, those who have been persuaded to dangle their feet in the choppy waters of the landlord business would be well advised to think about exactly what they aim to get out of the business before they even arrange business property insurance.

Opportunity knocks

It may seem straightforward at the moment. Young couples looking to buy a home of their own can’t afford a mortgage, homeowners looking to sell their property are having to bring their prices down because of the paucity of prospective buyers out there and tenants looking for a decent place to live are saturating the market. It would seem that all one needs is a hefty deposit, although even that requirement is dropping slightly on buy to let loans, and a clear idea of what you want to achieve.

Rental yield not easy to understand

There are plenty of places where you can get advice and good financial advice is paramount. Any financial advisor will tell a landlord new to the business to work out his rental yield before he buys a property, but that is somewhat easier said than done and is a calculation that is susceptible to dramatic change. It is basically the amount of money you make from your property divided by the cost/value of the property.

It is the value of a property that often makes the rental yield figures susceptible to change. A property bought for £100,000 in today’s stagnant market will probably shift very little over the next 12 months however, in a volatile market the value can change quickly and dramatically. Landlords who bought property at the turn of the century were looking at vastly changed yields when their properties doubled in value by 2007.

Factor in costs

The other side of the equation is easier to understand, easier to manage but absolutely imperative to get right. You must take into account any costs you are likely to incur and offset them against the amount of rent you expect to achieve. Taking costs as a percentage of the rental income you expect to bring in, then first and foremost comes your mortgage and that may well be anything upwards of 70%. No landlord should be without residential property insurance which usually costs around 3% of the rental value. Take out 10% for the upkeep of the flat i.e. replacing damaged fixtures and fittings and factor in 8% for the void periods that no landlord wants but must allow for.

Forewarned is forearmed

Once you start adding these things up it soon becomes apparent the importance of keeping your finger on the pulse of your business and how susceptible it is to fluctuations in the housing market that you have little power over. Starting off with this knowledge though will help any prospective landlord understand the subtleties of the business and not to expect easy pickings without putting in the hard work.