How can a property investor make money from a rental property?
Savvy property investors enjoy rewarding returns through a balance of rental income (cash flow), and value appreciation (equity) in their property. Gone are the days of ‘buying and flipping’ a property to make a quick profit. Instead, property consultants advise to buy and hold a property as a mid-to-long term investment.
This section will explore these returns in more detail to give you an idea of key considerations when estimating your net income.
Rental income is the agreed monthly amount that tenants pay to live in your investment property. Your Net Operating Income (NOI) is the amount you pocket from the rent you collect, after deducting operating expenses such as maintenance fees and mortgage repayments (if you finance your property).
While mortgage payments will be the largest deduction from your cash flow, it’s important to remember that each payment is contributing to the principal amount owed on the property without having to use your own money. The other most common operating expenses are vacant periods, rental property management fees and furnishing costs.
However, it is worth noting that achieved rents are much higher on Build to Rent apartments in prime city centre locations such as Manchester and Birmingham. With these properties, maintenance costs also tend to be significantly lower as they are newer, more durable and built for purpose. Furnishing a property can also reduce vacant periods as they are offer more flexibility and have the ‘show-home effect’, as well as generating up to 20% higher rental yields.
Vacant periods also tend to be far shorter on city centre apartments as they are in higher demand. According to Urbanbubble, vacant Manchester city centre properties spent a record low amount of time on the market in June 2022 – in some cases just hours.
Capital growth refers to the increasing property value over time, through a number of factors including inflation and demand. While rental income gives investors a stream of immediate cash flow, capital growth gives them equity and peace of mind knowing they own a tangible asset that is appreciating in value, and they can sell any time.
The increasing value of the property does also contribute to more cash flow, as the landlord can charge a higher premium for the property based on its value, quality and location.
Unlike more volatile markets such as cryptocurrency and stocks & shares, investors find comfort investing in brick and mortar – a physical asset supported by supply and demand.
Off-plan property is particularly lucrative, as investors can purchase at the lowest possible price point before the value of the property increases significantly over the build period.
For example, our latest Birmingham development Affinity Living Lancaster Wharf completes in Q2 2024. Forecasting 10% growth over the build period and 4% growth every year in line with Birmingham’s growth projections, a property purchased at GBP 229,404 today would be worth GBP 307,061 five years post-completion.
Residential property advice for new investors
1. Find the right location
Location remains the most important factor when it comes to property investment. Put simply, you’re looking for property with the highest achievable rental yield and capital growth potential.
Prime city centre apartments typically generate the strongest yields as they are in high demand among tenants, especially since the post-pandemic urbanisation trend.
When choosing a city, consider the following: house price and rental growth forecasts; supply and demand ratio; and key infrastructure projects taking place. Find out why renters are choosing Birmingham in our blog.
2. Decide on your investment property type
In these prime city centre locations, the most popular (and most profitable) property types are Build to Rent apartments. Because they are purpose-built, these properties directly answer tenant demand for premium amenities, spacious apartments and prime central location.
Apartment sizes in these developments typically range from studios to 3-bedroom apartments. The apartment size you choose largely depends on your budget, preferences, and financial objectives. Speaking with a property consultant will help you establish these goals and expectations. But rest assured, it’s safe to say there is demand for every size in city centres.
3. Decide whether to buy or finance your property
When it comes to buying an off-plan property, most reputable developers will offer a range of payment plans – typically a 20-30% down payment and the balance on completion (usually 2-3 years later). Financing your rental property is entirely dependent on your budget and personal preference.
To find out more about the UK mortgage process and what to expect, listen to our latest podcast on a platform of your choice – Apple Podcasts, Spotify and Google Podcasts.
4. Calculate your operating expenses
As mentioned in the previous section, it’s important to calculate your operating expenses to get an accurate idea of your net income. That way you can set realistic goals and set money aside for expenses such as vacant periods and property management fees. Speak to a property consultant for an accurate idea of these fees.
When it comes to property investment, it’s not a one-size-fits-all approach. Finding the right investment largely depends on your budget, financial goals and property preferences.
Select Property Group are leading UK property developers and investment specialists, helping our global clients achieve their financial goals from our international offices in the UK, Dubai, Hong Kong and Shanghai.
Speak to one of our property consultants today to start the conversation around property investment. Arrange to speak to us by phone, face-to-face, email or WhatsApp.