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How To Make A Profit On Buy To Let

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Here's an example of a recent purchase,

Purchase price £115,000 (Modern 3 bed with gardens and garage in first class (northern) residential area.)

15% Deposit £ 17,250

Mortgage £ 97,750

Purchase costs £ 800 (valuation and conveyancing)

I/Only @ 5% £ 4,887

Annual rent £ 6,600

Gross Surplus £ 1,713

Maintenance £ 350 (including insurance and based on average from actual recent experience)

Net surplus £ 1,363

So thats a return of £1363 per annum from each £18050 (deposit plus purchase costs) invested giving a gross yield of 7.55% per annum.

In my experience it is hard to make the BTL figures stack up and provide a running yield once you pay much more than £120k for your purchase, but up to this level it does still make sense, and you can protect against any chance of a HPC to a degree by paying BMV prices now. Potential for capital growth (probably long term) on top of 7.55% per annum.

Hard to think of an alternative investment providing in excess of 7% gross per annum and with potential for capital growth.

Pick holes in this if you wish.....

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What about voids? What if nobody wants to live in the $hithole? What if the neighbours are crack-whores?

I could go on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on...

But I won't coz that's really irritating innit?

Not irritating, just a little blinkered perhaps.

Voids are so easy to avoid, best place to start is make sure you don't buy a shithole where the neighbours are crack-hores. After that it's simply a case of correct property presentation and rental pricing, charge £50pcm less than comparable properties and you'll never have it empty. Oh, and make sure you've not bought in an area already swamped by BTL's.

Not having a go, just offering info others might enjoy and benefit from.

Now any one got any valid holes to pick?

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If that's your business and it suits you, fine.

I do note no agent's fees, presumably you do all that yourself?

Not something that would entertain me.

IO, sort of like a long lease isn't it?

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What!? For a 115 large? Don't be so soppy...

Not forgetting fees, tenants not paying and running off with all the fixtures and fittings. blah, blah, blah...

If it were so simple, we'd all be doing it, wouldn't we? Or do you think we're just a bunch of $hit for brains, hill billies?

Of course there are risks but they can be kept to a minimum using a bit of common sense. Careful vetting and choice of tenants is probably the most important part of any BTL.

It's easier than you think.... if you have the right mindset to it.

Whoops, you sound a little sore about this, have you had a bad experience?

If that's your business and it suits you, fine.

I do note no agent's fees, presumably you do all that yourself?

Not something that would entertain me.

IO, sort of like a long lease isn't it?

It's not about entertainment, it's investment. Still looking for alternatives.

I/O for tax efficiency.

You could go down the capital and interest route using the surplus if you prefer, giving up the running yield for eventual ownership at the end of the term.

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Here's an example of a recent purchase,

Purchase price £115,000 (Modern 3 bed with gardens and garage in first class (northern) residential area.)

15% Deposit £ 17,250

Mortgage £ 97,750

Purchase costs £ 800 (valuation and conveyancing)

I/Only @ 5% £ 4,887

Annual rent £ 6,600

Gross Surplus £ 1,713

Maintenance £ 350 (including insurance and based on average from actual recent experience)

Net surplus £ 1,363

So thats a return of £1363 per annum from each £18050 (deposit plus purchase costs) invested giving a gross yield of 7.55% per annum.

In my experience it is hard to make the BTL figures stack up and provide a running yield once you pay much more than £120k for your purchase, but up to this level it does still make sense, and you can protect against any chance of a HPC to a degree by paying BMV prices now. Potential for capital growth (probably long term) on top of 7.55% per annum.

Hard to think of an alternative investment providing in excess of 7% gross per annum and with potential for capital growth.

Pick holes in this if you wish.....

:):):)

Not hard really, is it ? Here goes....

1. You have not bought this house, you are merely renting it from the bank with an option to take capital gains and capital losses.

2. You assume further potential for capital growth after ten years of swiftly rising prices. This is most unlikely.

3. You have made no allowance for void periods without a tenant. This is simply unrealistic.

4. You have made no allowance for exit costs at the other end of the investment e.g. agent's fees and conveyancing. If the investment is VERY long-term (>50 years) this might make sense, but you would be dead by then.

5. You have made no allowance for non-payment risks. There are bad tenants out there.

6. Your figure for maintenance is only achievable on a very short term basis - four to five years at most compared with your 25 year mortgage. Eventually you will have to redecorate or re-do a kitchen or a bathroom, or need a major repair. The RICS recommends an allowance of something between 1% and 2% per annum so call this figure £ 1500 and almost all of your supposed gross profit is gone. I am also a bit unsure about your insurance figure but you do not split it out.

7. You have assumed that the mortgage will always stick at 5% interest. In the last 25 years we have had interest rates over 8% for about eight of those years. If you wish to take a long-term risk you must also take a long term and prudent view on interest rates. An average assumption is surely higher than 5%.

8. You have made no allowance for adverse trends in rents. What if rents in your area go down ?

9. When you have voids, you have to calculate not only lost rent, but expenses such as Council Tax, water rates etc.

10. You have made no allowance at all for management and professional fees - presumably you hope to do it all yourself and are not costing your time.

11. You calculate a Return on Equity yield of 7.55%. There are two points about this: (1) Even 7.55% is very unattractive for the level of risks you are taking; and (2) given you are exposed to the capital gains and losses, it would be more sense to look at the Return on Capital Employed yield. This is £1,363 divided by £ 115,000 or 1.19% which is not humungous and indeed almost indistinguishable from holding money in a very poor savings account, except that you are exposed to risks which are many times larger than this return.

All in all I would not take this investment on at any price above £ 55,000 and you would be a fool to do so.

Calculations like this simply expose the fact that for most recent investors and wannabes BTL is simply something they do not understand and cannot accurately assess. As a play on rapid capital appreciation it may work.

That rapid appreciation is over and anyone who invests like this will shortly learn about business the hard way.

Best of luck.

LONDONBUYER

:):):)

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Sounds quite reasonable, if you could make the figures work. However, with 5% return on cash, you are not getting much for your risk. Furthermore, if rates rise/voids lengthen/rents fall, your cashflow would come under pressure. Finally, most people here think that we are due for a fall of such significance, that you will be in neg equity within a year or two. But if you can make the numbers work, not too bad.

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:):):)

Not hard really, is it ? Here goes....

1. You have not bought this house, you are merely renting it from the bank with an option to take capital gains and capital losses.

2. You assume further potential for capital growth after ten years of swiftly rising prices. This is most unlikely.

3. You have made no allowance for void periods without a tenant. This is simply unrealistic.

4. You have made no allowance for exit costs at the other end of the investment e.g. agent's fees and conveyancing. If the investment is VERY long-term (>50 years) this might make sense, but you would be dead by then.

5. You have made no allowance for non-payment risks. There are bad tenants out there.

6. Your figure for maintenance is only achievable on a very short term basis - four to five years at most compared with your 25 year mortgage. Eventually you will have to redecorate or re-do a kitchen or a bathroom, or need a major repair. The RICS recommends an allowance of something between 1% and 2% per annum so call this figure £ 1500 and almost all of your supposed gross profit is gone. I am also a bit unsure about your insurance figure but you do not split it out.

7. You have assumed that the mortgage will always stick at 5% interest. In the last 25 years we have had interest rates over 8% for about eight of those years. If you wish to take a long-term risk you must also take a long term and prudent view on interest rates. An average assumption is surely higher than 5%.

8. You have made no allowance for adverse trends in rents. What if rents in your area go down ?

9. When you have voids, you have to calculate not only lost rent, but expenses such as Council Tax, water rates etc.

10. You have made no allowance at all for management and professional fees - presumably you hope to do it all yourself and are not costing your time.

11. You calculate a Return on Equity yield of 7.55%. There are two points about this: (1) Even 7.55% is very unattractive for the level of risks you are taking; and (2) given you are exposed to the capital gains and losses, it would be more sense to look at the Return on Capital Employed yield. This is £1,363 divided by £ 115,000 or 1.19% which is not humungous and indeed almost indistinguishable from holding money in a very poor savings account, except that you are exposed to risks which are many times larger than this return.

All in all I would not take this investment on at any price above £ 55,000 and you would be a fool to do so.

Calculations like this simply expose the fact that for most recent investors and wannabes BTL is simply something they do not understand and cannot accurately assess. As a play on rapid capital appreciation it may work.

That rapid appreciation is over and anyone who invests like this will shortly learn about business the hard way.

Best of luck.

LONDONBUYER

:):):)

phew! think you just p!ssed on his bonfire

:lol:

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Firstly, with Bmv dealing being the seasoned bulls survival mechanism in a falling market,

novices would be well advised to stay clear of these self-certified bargains.

Secondly, £18050 in the bank earning 4.5% in a bog standard internet account, versus 7.5% btl yield...

So all of the work you have done is worth 3% (£540) for the year. Whereas I have my salary to look forward to, you have £540 to cover voids and haemmoroids, from stressful tenants.

Thirdly, these low end (<120k) properties have a tendency of attracting the less stable members of the species.

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:):):)

Not hard really, is it ? Here goes....

1. You have not bought this house, you are merely renting it from the bank with an option to take capital gains and capital losses.

2. You assume further potential for capital growth after ten years of swiftly rising prices. This is most unlikely.

3. You have made no allowance for void periods without a tenant. This is simply unrealistic.

4. You have made no allowance for exit costs at the other end of the investment e.g. agent's fees and conveyancing. If the investment is VERY long-term (>50 years) this might make sense, but you would be dead by then.

5. You have made no allowance for non-payment risks. There are bad tenants out there.

6. Your figure for maintenance is only achievable on a very short term basis - four to five years at most compared with your 25 year mortgage. Eventually you will have to redecorate or re-do a kitchen or a bathroom, or need a major repair. The RICS recommends an allowance of something between 1% and 2% per annum so call this figure £ 1500 and almost all of your supposed gross profit is gone. I am also a bit unsure about your insurance figure but you do not split it out.

7. You have assumed that the mortgage will always stick at 5% interest. In the last 25 years we have had interest rates over 8% for about eight of those years. If you wish to take a long-term risk you must also take a long term and prudent view on interest rates. An average assumption is surely higher than 5%.

8. You have made no allowance for adverse trends in rents. What if rents in your area go down ?

9. When you have voids, you have to calculate not only lost rent, but expenses such as Council Tax, water rates etc.

10. You have made no allowance at all for management and professional fees - presumably you hope to do it all yourself and are not costing your time.

11. You calculate a Return on Equity yield of 7.55%. There are two points about this: (1) Even 7.55% is very unattractive for the level of risks you are taking; and (2) given you are exposed to the capital gains and losses, it would be more sense to look at the Return on Capital Employed yield. This is £1,363 divided by £ 115,000 or 1.19% which is not humungous and indeed almost indistinguishable from holding money in a very poor savings account, except that you are exposed to risks which are many times larger than this return.

All in all I would not take this investment on at any price above £ 55,000 and you would be a fool to do so.

Calculations like this simply expose the fact that for most recent investors and wannabes BTL is simply something they do not understand and cannot accurately assess. As a play on rapid capital appreciation it may work.

That rapid appreciation is over and anyone who invests like this will shortly learn about business the hard way.

Best of luck.

LONDONBUYER

:):):)

Great post London! You actually seem to know what you are talking about.

JP.

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Not irritating, just a little blinkered perhaps.

Voids are so easy to avoid, best place to start is make sure you don't buy a shithole where the neighbours are crack-hores. After that it's simply a case of correct property presentation and rental pricing, charge £50pcm less than comparable properties and you'll never have it empty. Oh, and make sure you've not bought in an area already swamped by BTL's.

Not having a go, just offering info others might enjoy and benefit from.

Now any one got any valid holes to pick?

For me, your arithmetic seems somewhat redundant when you fail to include capital losses on the property.

You are assuming that the property will at worst 'break even' in value.

But then that opens a separate debate...

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:):):)

Not hard really, is it ? Here goes....

1. You have not bought this house, you are merely renting it from the bank with an option to take capital gains and capital losses.

2. You assume further potential for capital growth after ten years of swiftly rising prices. This is most unlikely.

3. You have made no allowance for void periods without a tenant. This is simply unrealistic.

4. You have made no allowance for exit costs at the other end of the investment e.g. agent's fees and conveyancing. If the investment is VERY long-term (>50 years) this might make sense, but you would be dead by then.

5. You have made no allowance for non-payment risks. There are bad tenants out there.

6. Your figure for maintenance is only achievable on a very short term basis - four to five years at most compared with your 25 year mortgage. Eventually you will have to redecorate or re-do a kitchen or a bathroom, or need a major repair. The RICS recommends an allowance of something between 1% and 2% per annum so call this figure £ 1500 and almost all of your supposed gross profit is gone. I am also a bit unsure about your insurance figure but you do not split it out.

7. You have assumed that the mortgage will always stick at 5% interest. In the last 25 years we have had interest rates over 8% for about eight of those years. If you wish to take a long-term risk you must also take a long term and prudent view on interest rates. An average assumption is surely higher than 5%.

8. You have made no allowance for adverse trends in rents. What if rents in your area go down ?

9. When you have voids, you have to calculate not only lost rent, but expenses such as Council Tax, water rates etc.

10. You have made no allowance at all for management and professional fees - presumably you hope to do it all yourself and are not costing your time.

11. You calculate a Return on Equity yield of 7.55%. There are two points about this: (1) Even 7.55% is very unattractive for the level of risks you are taking; and (2) given you are exposed to the capital gains and losses, it would be more sense to look at the Return on Capital Employed yield. This is £1,363 divided by £ 115,000 or 1.19% which is not humungous and indeed almost indistinguishable from holding money in a very poor savings account, except that you are exposed to risks which are many times larger than this return.

All in all I would not take this investment on at any price above £ 55,000 and you would be a fool to do so.

Calculations like this simply expose the fact that for most recent investors and wannabes BTL is simply something they do not understand and cannot accurately assess. As a play on rapid capital appreciation it may work.

That rapid appreciation is over and anyone who invests like this will shortly learn about business the hard way.

Best of luck.

LONDONBUYER

:):):)

You're far too optomistic!

You do make 'some' well thought out points there although others I do have a different view on. I could counter every argument but if those are your views you'll no doubt counter them back! Had a spare hour last night and was trying to add a bit of balance to this site, I suspect there are some people on here who need that from time to time.

Im afraid I've not got time for this now, bad tenants and maintenance issues to deal with, oh and best go buy choccies for my good tenants so they don't leave and cause me voids!

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You're far too optomistic!

You do make 'some' well thought out points there although others I do have a different view on. I could counter every argument but if those are your views you'll no doubt counter them back! Had a spare hour last night and was trying to add a bit of balance to this site, I suspect there are some people on here who need that from time to time.

Im afraid I've not got time for this now, bad tenants and maintenance issues to deal with, oh and best go buy choccies for my good tenants so they don't leave and cause me voids!

Oh well that's LondonBuyer told - clears that one up nicely. Which of his " well thought out points " do you have a different view on ?

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I/O for tax efficiency.

Isn't it really because the surplus is not large enough to enable the loan to be repaid (yes it is tax efficient to keep the loan but you'd need a surplus of £4,000 a year to be able to repay the loan over 25% years and you are no where near that at the moment.

Also your figures only add up based on current low interest rates. Thats your choice but for me the figures just don't add up.

As for londonbuyer (who also used to do Buy to Let) he makes a large number of points that I can only agree with. i'd love to read what your arguments against them are.

Edited by eek

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So all of the work you have done is worth 3% (£540) for the year.

That be some solid thinking captain. Those maintenance costs are woefully underestimated - I have a single property I let out and despite having bought in 1999 for peanuts, on paper I should be making £1,500 a year. After maintenance, insurance, new furniture, appliances etc I have made exactly nothing on a cash basis over a 5 year period. And that's with no significant voids. All you need is one dodgy season with the boiler (I have suffered this, my landlady has just suffered this on my behalf) and your profit for the next 4/5 years is wiped out.

You might get lucky. But as someone else pointed out, the rate of return relative to the risk is poor. Equities have a better return.

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£6600 on £115,000 = a Gross Return of just under 5.8%. Not worth the risk for potential (illusory) Capital Gains.

Factor in (a) 85% mortgage, (B) voids, © maintenance & insurance (d) bad debts, and the deal does not look very attractive, IMHO.

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Please buy every property you possibly can on this basis. Please get all your friends, mates, relatives, etc involved and get them all to buy a few as well. Then please please buy a few more...

until it all goes horribly pear-shaped and you lose the shirts off your backs, at which point the rest of us will be p*ss*ng ourselves laughing.

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Here's an example of a recent purchase,

Purchase price £115,000 (Modern 3 bed with gardens and garage in first class (northern) residential area.)

15% Deposit £ 17,250

Mortgage £ 97,750

Purchase costs £ 800 (valuation and conveyancing)

I/Only @ 5% £ 4,887

Annual rent £ 6,600

Gross Surplus £ 1,713

Maintenance £ 350 (including insurance and based on average from actual recent experience)

Net surplus £ 1,363

So thats a return of £1363 per annum from each £18050 (deposit plus purchase costs) invested giving a gross yield of 7.55% per annum.

In my experience it is hard to make the BTL figures stack up and provide a running yield once you pay much more than £120k for your purchase, but up to this level it does still make sense, and you can protect against any chance of a HPC to a degree by paying BMV prices now. Potential for capital growth (probably long term) on top of 7.55% per annum.

Hard to think of an alternative investment providing in excess of 7% gross per annum and with potential for capital growth.

Pick holes in this if you wish.....

Pick holes? I thought you were a bear writing a cautionary tale about BTL. Then I realised you were serious!

Sounds too much like hard work to me, with very little return, and I do enough of that already without having to try BTL as a career alternative. Talk about out of the frying pan into the fire.

Your return of £1363 means that you have got to be landlord to, say, 20 or so properties to make it worth your while? Or have I missed something?

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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