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Going for Income Going for income could be converting your existing portfolio of properties or some of them from growth to income, and we have explained that at the end of the article on going for growth. However it might be that your initial plan is to go for income either initially or after a short growth spurt. This might for example be a case where someone is retiring fairly shortly or where they see the need for income to cover a group of daughters, with not only weddings, but university education and hoping to give them each a home. In most cases it is a mixture of growth and income that is needed and it would be difficult to get all income and no growth, however you do need some growth if you are to keep the income up to the same standard in real cash terms. Going for income as a priority at an early stage can involve looking for rental properties that are cheaper and have a larger rent in proportion to cost. For example within the last year a flat sold for £3,000 that was rented at £1,500 a year, so producing a rent of 50% of its value without gearing. There may be a large number of reasons why a property will be cheap compared with its rental income including;
Some of these you will see also give growth and some do not. Some may also give high income potential now but this might not be sustained if a lot more people buy rental property in the area, or company lets unused by a large company moving into the area to house initial key people until they have their own premises. You can improve the income by gearing, but at a lower rate than when going for growth. In each property or group of properties it is necessary to calculate the rental income at no gearing compared with the income from a larger number of properties using gearing but using the same capital. If you gear too highly you use all or most of the income to pay the mortgage and costs, but at a lower rate you have a residual sum remaining. You also need to look at the difference between an interest only mortgage leaving more surplus now and a repayment mortgage that costs a little more now, but down line will mean that there is no mortgage at all to pay. Low start mortgages where interest is low in the first years may also be worth adding to your model, with these you pay less to start, and the cost increases, but if property and rent has also, this means these increased costs are covered, but of course also gives you income from early on. These are best where you are not so excited about higher gearing later. Poorer properties will often not appreciate as fast, and may require a lot more expense over time to keep them up to standard where they get the most rent available, or in some areas be let at all. You may also be able to improve income if you work with other landlords, not so much to create a minimum rent but to make them aware that with more letting agents being set up, some letting agents will need to get rentals at any price in order to pay their bills and that letting agents can make a profit at rental levels where the landlord is making a loss. As a group of landlords you should therefore be looking at which agent gets you the best rates, rather than which can find a tenant the fastest. You also need to educate new landlords who are new to 'buy to let' to look at income as well as growth and that the two are linked, in that if income becomes too low then property will not appreciate and growth is stopped. All rents should be reviewed annually, and while some landlords fear doing this as tenants may be inclined to move, doing it regularly means that it goes up in smaller steps. Tenants are more likely to move because they get a poor service, something is not being repaired or the agents are a pain, than due to the rent. With smaller premises the price increase is not that great, and with larger premises tenants are aware of the disruption and removal costs associated with moving. Some tenants will move, and some of these may be because the rent is kept economic, where they hear of other less skilled landlords charging the same rent as 5 years ago. Don't subsidize tenants, or help out those in difficulty, that is what housing benefit is for. Those concentrating on growth should remember that eventually the income aspect will become important to them, and income now can greatly increase the amount of cash flow available and allow more improvements to be made which will improve growth as well. In most cases it is a balance, growth first and then income or income but an element of growth. Selecting the right properties in the right areas and understanding the market will allow you to not only start with the ideal mix, but also to be able to react to changes and change the mix as you go forward.
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