If you are considering the prospect of renting out some property, and looking for ways to make money through this venture, you need to understand that landlords earn through two basic means – rental yield and capital growth. Understanding these two concepts is key if you are looking to profit from your property.

Rental income refers to the rent the tenant pays you, but don’t expect to be gaining any significant benefit from this at the very start. To begin with, you will need to take the mortgage costs into account, which are likely to take a good chunk out of your income. At most, a lender will only provide you with 80% of the value of the property, which means you need to cover the remaining 20% yourself.

In addition to mortgage, there are many other costs you need to budget for. Insurance premiums are a major cost, and while they vary according to the property’s size and type, you should be prepared to set aside around 2 to 3% of the rent you receive for this (if the property is furnished, you will need to set aside an additional  1 to 4% of the rent you receive). In addition, if you hired the services of a letting agency, you will also need to pay their fees – while many opt to look for a tenant privately, an agency can help you get a much higher rent, so the extra cost is worth it. If the property you purchased is leasehold, you will also need to pay ground rent and service charges.

In addition to these costs, some portions of the rental income also need to be set aside for the maintenance of the property (e.g. when things break down and need to be repaired), and the replacement of furnishing, fittings, and fixtures (it is advisable to re-decorate after every two years or so). You will also need to anticipate empty periods during each year (or ‘void periods’, as landlords like to call them), when you find yourself in between tenants.

In order to get a rough idea about your net expected rental income, you will need to subtract all these costs from the rent that you and your tenant have agreed on. Then, in order to calculate your net rental yield, you can divide this figure into your property’s value (and all the costs that went into its purchase).

The final figure you end up with is likely to be less than your mortgage’s cost. While this will leave you with a shortfall in the initial years, and might make earning by renting out property seem difficult, it can all be managed via proper planning and careful management. Besides, if you bought wisely, the rental income is likely to increase with the passage of time.

Capital growth, or capital appreciation, is another way for landlords to earn. Capital growth refers to the way in which a property’s value increases with the passage of time, and the best way to maximize this is to ensure that you buy well to begin with.  Make sure you purchase property in an area that is already desirable, or one which has plenty of potential and is likely to grow into a popular location in the future. Keep in mind that the value of a property can decrease overtime too, so it is vital to purchase wisely in order to avoid this.

All in all, earning by renting out your property is not the way to make quick money – rather it is more of a long-term plan for profit. However, if you are careful, calculating, and gradually work towards building it all up, you can find yourself reaping the rewards in the future.

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