Stacking up your buy to let investments

It’s only by understanding what risks and potential returns property investors are taking that they can work out whether the deal works for them financially.

If the deal does not work, the property investor must walk away.

While it’s not always easy to look behind the figures, professional buy-to-let investors essentially have four ways of viewing a potential deal before they sign on the dotted line.

Revealing rent cover costs

This is essentially a way for the mortgage provider to calculate the property’s affordability and whether they will make a maximum loan-to-value loan subject to the rent cover supporting the loan itself.

In a nutshell, a requirement of ‘rent cover 125%’ on a buy-to-let mortgage deal this means that the gross income from the monthly rent should be 25% more than the monthly interest only mortgage repayment.

However, most lenders work to figures of around 5% of an interest only mortgage rate.

This means that on a mortgage of £396,000 with 85% rent cover means that you will need to generate £19,800 a year in rent – which is £1,650 a month.

Using rent to calculate the mortgage borrowing

The formula for calculating a buy to let mortgage on the rental income is straight-forward.

If the property is worth £528,000 and the rent income is £1,450, you simply multiply the rental income by 12 which is £17,400. That figure will now make up 5% of the mortgage – so divide £17,500 by 5 and then multiply by 100 to find the maximum allowed mortgage (considering a 125% rent cover) is £348,000.

What is rental yield?

The rental yield is calculated by taking the annual rent income and deducting any business expenses over the year to show what the property’s business net profit is.

When you have that figure, take the capital investment, which includes the deposit paid and annual business expenses, divide that by the net profit (or loss) and multiply that figure by 100 to give the yield.

For instance, if the property cost £528,000 with a deposit of £132,000 and the rent is £19,800 a year with business expenses of £8,500 a year it would leave a net profit of £11,300.

The capital investment is calculated by taking the deposit value (£132,000) plus the business expenses of £8,500 to result in a figure of £140,000.

The yield is then worked out by dividing net profit by the capital investment – in this illustration it would be £11,300/£140,500 which is 0.0804. This figure is then multiplied by 100 to give the net yield figure of 8.04%.

The gross yield is the same calculation as used in the illustration but without the annual business expenses.

How to work out the HMO yield

Working out whether investing in an HMO (house of multiple occupation) is straightforward.

Using the same figures as above, with a rental income of £19,800 and the net yield of 8.04%, you simply multiply the two together to come up with the figure of £159,192.

This amount is what the property is worth – if the figure being asked lower then consider it a bargain but if it’s more than you need to reconsider the investment.

3/5 - (1 vote)

Leave a Reply

Your email address will not be published. Required fields are marked *