Buy to let investors often miscalculate their total returns

Posted On Monday, 17 February 2014 14:18 Published by
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Many investors in buy to let properties often miscalculate what their returns would be by omitting some of the expenses they incur in running property that is rented out, says Michael Bauer, managing director of IHPC.

Michael Bauer

The obvious is to compare income versus capital, but one has to count up what it actually costs to run the property and what the risks are, said Bauer.

"Many people don't total up what their running expenses are in acquiring and keeping a property. Buy to let property investment is also not easy to exit, as opposed to shares where if you have a bad run, you can cut your losses and sell the shares. If you have a bad tenant who refuses to pay rent, it could take months before you get the eviction order passed," he said.

The criteria of buy to let mortgages also have to be taken into account, which currently are around 85% loan to value, he said. The banks are requiring property investors to put in more equity than they did in the past.

"It is interesting to see, however, that although the investor market has dropped off in the more conservative economic climate," he said, "these investors still amount to ±10% of the overall property market."

All investors should check their income versus the expenses and what the capital returns and risks are before they buy a unit, he said.

More research needs to be done on the rent achievable, as there are often costs which have either been unanticipated or have been carried by the landlord when they should be charged to the tenant by factoring these into the rent charged for the unit.

Some of the main costs that the landlord will have to factor in are:

  •  bond repayments;
  •  rates and taxes;
  •  levies (if in a sectional title or HOA scheme);
  •  building insurance;
  •  maintenance and upkeep of the property (including fair wear and tear);
  •  a managing agent's fee;
  •  an amount set aside in the event of vacancy of the unit;
  •  an amount to cover rental loss and legal fees; and
  •  a provision for tax (income tax) on profits from rental activities.

The risk is lower if the investor buys a property with cash and does not have to pay a bond each month – even though he will have to cover the other operating expenses if the unit stands empty for a month or two while trying to find another tenant, it is not as financially devastating as having to pay a bond amount as well as expenses, said Bauer.

"The advice I give to all investors is that they must remember to run this as a business. You would not just start a business without doing some market research and checking all the financial options before entering into it. The benefits are there but it needs to be managed properly," he said.

"If investing in property, you would also generally, as in investing in shares, not only invest in one development or area. You would split your investments between a few areas and developments and diversify," said Bauer.

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