The Complete Guide to Property Investment: How to survive & thrive in the new world of buy-to-let

by Rob Dix

In general, when someone says “yield” and doesn’t specify which type, they’re talking about gross yield

Gross yield is the annual rental income generated by an asset, divided by the price of acquiring it – so a property that brings in £10,000 per year in rent and cost you £100,000 to buy gives a gross yield of 10%.

(When I calculate gross yield, I like to include any major refurbishment costs in the “price of acquiring” part of the equation.

Net yield is the annual rental profit (rather than income) generated by an asset, divided by the price of acquiring it.

That calculation is Return on investment (ROI) – calculated as the annual rental profit divided by the money you put in.

Aim: Build a healthy income stream over 20 years without working too hard. In a nutshell: Invest enough to buy one high-yielding property every 18 months, then increase the pace as rental income compounds.

By the time we’d bought ten properties, we’d invested £250,000 and generated an income of £22,000 per year. If we’d saved up until we could buy properties in cash instead of using mortgages, we’d have only been able to buy two properties – which would give an income of £10,200.

Also, if property prices go up by 10%, we’ve got ten properties to gain in value (for a total gain of £80,000) instead of two (a total gain of £16,000).

Aim: Build an income stream while limiting the amount of capital you need to invest. In a nutshell: Find properties that need refurbishing, do the work that will increase their value, and refinance so you need less of your own cash to put into the next purchase.

Whereas mortgages are typically for up to 75% of the property’s value, bridging normally goes up no further than 70%. It’s more expensive than a mortgage – the interest rate is usually in the range of 0.75%–1.5% per month, plus fees of around 2% of the total loan amount – but it’s quick and easy to arrange.

Now, with the work done, we want to get off our expensive bridging loan and onto a traditional mortgage product. And importantly, when we do so, we want to borrow 75% of the new value of the property – the £80,000 we believe it’s now worth, rather than the £55,000 we paid for it. Under most circumstances you can’t apply to re-finance until you’ve owned the property for six months (which is why I reckoned for eight months of bridging payments), so we put a tenant in the property while we wait for that day to arrive. When it does, we borrow 75% of £80,000

New borrowing (75% of £80,000 valuation): £60,000 Repay bridging loan: £38,500 Left in the bank: £21,500

We originally invested £33,500 and got £21,500 back after refinancing – meaning that we now have just £12,000 tied up in that property. If we want to move on to another identical purchase, we already have £21,500 in the bank – so we just need to sav...

If the market did take a temporary tumble at the wrong time – or for some other reason it turned out to take longer before you could refinance – you could just wait it out without worrying about your interest rate.

Aim: Invest a lump sum of cash, and turn it into a much larger amount of cash (or a mortgage-free income) in 10–20 years. In a nutshell: Buy properties with an eye on capital growth, then sit back and wait.