Money Matters - How to Analyse Buy to Let Deals

By Shelley Mackay

Sep 20

Welcome to Money Matters. Today, I want to show you how to analyse a buy-to-let deal.

I've been on Rightmove this morning, and I've found a house that I'd be quite interested to buy to put a tenant in there. So I'm going to be doing the figures straight with you guys now, to show you what I look for, and what tells me if it's a good investment or not. So the first thing I look at is market value. I'm going to called it MV. So on the listing on Rightmove, it's says it's on for sale for 60,000 pounds. But that might not always be the market value. So what I've done is I've had a little research down the street, and I've worked out that market value for this street for two-bed houses, which this one is, £72,000. So that's the market value. Now, the purchase price for this is this price that's listed on Rightmove, and its £60,000. So already, I know I'm going to get it below market value, but is it enough below market value for me?

So next thing I work is the possible rent that you can achieve each month. So what I do is I go onto Zoopla, I put the postcode in, and I look at what's renting in the area, and what Zoopla suggest to me is good rent, and it's suggested for this area 450 pounds. So for a house you're going to buy for £60,000 and get back £450 a month, that's not too bad, is it, we don't think? So the other I then need to work out is the mortgage. 75% loan-to-value mortgages. Now, I know people can get buy-to-let mortgages that are 80, 85% loan-to-value, but 75% will keep you safe, and you want to do the figures so the figures keep you safe. So on a 75% loan-to-value mortgage, I'll put 75% so we know, you're looking at a mortgage of £45,000 being left on the house. OK. So the next thing we need to look at to work out if it's a good investment, is we need to calculate money in.

The first thing we need to work out is a deposit. So if my mortgage is £45,000 on 75%, the purchase price is £60,000, and know the deposit in there is going to be £15,000. £15,000. Now the next thing you need to work out, because when you buy a house, you've usually got stamp duty and tax to pay, and you've got your legal cost to pay, so I use, because I know this varies across the country and it varies from place to place, but I just use 4% to give me a really good feel for what the legals and tax are going to be. So I've got tax and legals, and I'm using 4% for those. And it's 4% of the purchase price to give me what the general tax and legals are, so in this instance it's going to give me £2,400.

Now the next thing I need to work out is renovation. Do I need to do any refurb to the property? Now, I haven't actually viewed the property yet, because I will go and view it, and once I view, I will redo these figures, so this is just to tell me if I need to view it or not. So refurb. Now, I've had a good look at the pictures on Rightmove. The kitchen looks fine. It looks like it's got a brand-new bathroom. The attic room looks like it's been redone, because it's got fresh carpet in there, and the outside looks fine, so to me it just needs a really good decorate, because it's decorated like my nana would decorate a house. So yeah, I would want to redecorate that to attract some really good tenants in there. So I'm going to say, because it's only a few rooms that need decorating, I'm going to say about £2,000, so I'll put refurb here, and we'll put £2,000 there. Now, that should give us a total money in that we need to purchase this property. So total money in, comes to £19,400, so that's just to purchase the property. We're buying it with a traditional mortgage.

We need to work out monthly expenses. So I put monthly expenses here. So what do we have to pay per month to keep the house? Well, the first thing we have to pay is your mortgage payments. So I'll put mortgage payments there. Now what we do, we work this out by saying, just generally, it's going to be on a 3% interest-only mortgage. Now, you can do capital and repayment, you don't have to do it on 3%, but this is generally what we find from all the properties that we purchased, 3%'s about right, and you can start off on interest only, and we'll be doing another Money Matters about whether you want to do interest, interest to capital payment, but for today's model, we're just going to assume 3%. So for this one, you do 0.03 times by outstanding mortgage, which is £45,000, divided by 12, because you've got 12 months in a year for each mortgage payment, you're looking £112.50 per month to pay for your mortgage. Now, oh that should be down here, sorry. 112.50 to pay for the mortgage. Now, you've then got your management fees. A lot of people debate with me whether to have an letting agent looking after it for you or not. I say as a business owner, I want to be working on my business not in my business, so I feel it's very important that I'm not tied up in the nitty-gritty, doing tenant reference, chasing rent, or you know, when they ring up, you've got a light bulb out. I'm not dealing with that, because my mind needs to be dealing on growing my business, so I always pay management fees, and 10% I don't feel's a lot to pay when that headache's gone, you know it's fully managed, yet you might say this figure doesn't apply, because you're going to manage it, but that's just my view. So management, and management usually, typically 10%, and it's 10% of the rent, so we know we can get £450 rent a month, so my management's going to be £45. Oh, that looks like an 8, but it's a 5. I'm really rubbish at writing on whiteboards. The other thing we need to look at is maintenance and voids. And typically again, per year, these are about 10%, so again, you do 10% of your rent that you're going to save, and that's 45 pounds. So your total monthly expenses comes to 202.50, when we add those up. So now we've got two really important pieces of information. We know the total amount it's going to cost us to buy, and we know how much it's going to cost us to run. So now we work out our return on investment, and this is what every investor uses to work out whether it's a good deal or not.

So ROI, return on our investment. So what we do is, we do monthly cash flow we need to know first off, so we do rent minus expenses. So I'm going to do monthly cash. So our rent is £450 minus our expenses, which is £202.50, gives me £247.50, so that's how much money I'm going to make per month. Now, we need to get annual cash flow, so we need to work out how much it's going to be over the year, so all we do is take £247.50 and times it by 12, and that gives me £2,970 pounds, so near three grand profit a year, once you've taken all them expenses out. Now, to get your ROI calculation, your return on investment, to say is it a good deal or not, you do your annual cash flow, so which is £2,970, you would then divide that by your total money in. Now, your total money in we worked out was £19,400, so £19,400, and then you times that by 100, and that will give us 15%. Now, there is some debate about what's a good return on investment. Some investors are quite happy with that. I like properties that are 20, 25% ROI, so for me, this might not get me jumping' in my car going to view it. What I would do is I would ring the agents, and see whether I could get this price reduced before I went to view, because for it to make my 20% I'm probably need to drop that to about £50,000 to buy. So one of the things I like to do is I also like to work out is this a no money down deal. So no money down deal would where you be, you would buy it cash, and then you would refinance it, and be able to pull your money out after doing some work to the house. So, buy cash, refurb, and then re mortgage, and pull your money out, so we're going to work out whether these figures allow it. Now, what I do is I work what my 75% mortgage would be on my market value. So my 75% mortgage on my market value would be £54,000. That's not even going to give me enough to pay back purchasing the house, so that won't be no money down deal. However, if I manage to get this house for £40,000, so instead of my purchase price being 60, it's £40,000, say, then if after the works I'm going to do to it, it gets valued at £72,000, 54,000 out with a mortgage would allow me to pay back the cash, plus it would give me some extra for refurb, and the taxes, etc., so it could a no money down deal. Now in reality, I don't think the agent's going to drop that to £40,000 for me, but you kind of see my thinking and where I'm going with it. So this is what I like to call a back-of-a-fag-packet analysis. It's before I jump out my chair and go and view something. I like to work out all the figures, and work out is it worth my while going to view, and going to look at it. Is it going to make me enough money back? And again, and like I say, I like it to be over 20, 25% return on investment to make my money back. But some investors would be happy with that, so you need to just understand what you'd be happy with, and what you've got to play with. This wouldn't be a no money down deal, so I would need to have £19,400 to put into it.

And that's how you analyse a buy-to-let deal.

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