2. Pick a Neighbourhood and Target the Right Tenant
Now that you’ve decided on your city, it’s time to narrow down your search for what neighbourhood you want to invest in.
Research here is vital as you will need to learn more about the top postcodes in the city by working out their investment potential and rental income. You can do so by checking out our property guides listed in our first tip.
You should focus on average rental income to see your return potential, as well as the area’s affordability, population, amenities, schools, and crime rates.
By picking your neighbourhood, it will greatly impact what type of tenant you target and the type of investment property you choose.
If you choose a city centre, which is recommended, you will likely be able to target both young professionals and student tenants, meaning you can buy normal residential property or student accommodation.
For our money, the best property type to choose for beginner investors is city centre off-plan apartments as they are more affordable and prove incredibly popular amongst young professional tenants.
3. Focus on Rental Yield/ Cap Rate
Perhaps the best way of answering “is my rental property a good investment” is by working out the rental yield.
A rental yield is a percentage figure that shows how much return on your investment you will earn through rent every year.
Not only does a rental yield show your rental income, but more importantly, it shows just how good of a return on investment you’ll be getting from rental income.
You can calculate rental yield by dividing the yearly rental income/ annual rental income by the initial investment purchase price and multiplying by 100 to work out the gross rental yield (returns without expenses).
Property Purchase Price: £100,000
Monthly Rental Income: £1000
Calculation: ((£1000 x12)/£100,000) x100 = 12% gross rental yield
To work out the NET rental yield, which is a more accurate figure, you’ll need to know your monthly expenses – something that will be difficult if you don’t already own the property.
Types of expenses that can impact landlord profits are:
- Property taxes and a large tax bill like stamp duty or income tax
- Running costs or maintenance costs on rental properties
- Mortgage interest/mortgage payments (you can learn more in our buy to let mortgage interest guide)
- Property management company expenses for managing investment properties
So, what is a good rate of return on rental property and real estate? Generally, a good rental yield is 5% or above. It’s common to find buy to let properties in places like Liverpool that offer 8% NET rental yields.
By targeting buy to let properties with high rental yields, you can set yourself up for massive investment success.