The term ‘net rental’ should mean the rental income after all costs have been deducted. Unfortunately, many developers and agents have a very loose interpretation of the word. In order to make the income look attractive, they do not include various costs or are vague as to how it has been calculated.
The absence of these costs makes a great headline rate and makes it easier to sell the property, but the reality is that the property will inevitably not perform in line with expectations.
Common items that often are not included are void periods and even letting and management fees. Agents will often say that such fees are left out because a UK buyer might want to let and manage it without using an agent. That is true, but the reality is being presented to an overseas buyer who may not be aware of the costs that should be included.
Depending on the property, the following costs should be allowed for:
- Letting fees
- Management fees
- Void periods (two weeks per year to allow for tenants departing, etc.)
- Ground rent
- Service charge
- Building insurance
- Communal costs such as cleaning and Wi-Fi
- Council tax
Of course, it can be argued that ‘caveat emptor’ should apply – it is every buyer’s responsibility to adequately vet the investment opportunity and not rely on what sales agents tell them.
Whilst this may be true, headline rates based on cost omissions are misleading, to say the least, and do nothing to establish long-term trust between the buyer and the developer/agent.
If you are buying a property, make sure you do your income calculations based on all the costs associated with the ongoing ownership of the property.