So, to make sure I'm not being overly optimistic just because I want to feel like I can achieve the BTL plan earlier I've been running 3 sets of numbers recently.
1. How much does it cost to buy a BTL property. I'm pretty happy with the figures behind this as we've bought 3 (as main residences which we've then sold) in the past and have experience. The only big variable here is the cost of the actual property and therefore the deposit needed to save up. I'm basing my sums on a purchase price of £125k a 75% LTV and therfore a deposit needed of £32k.
2. How quickly can we expect to save this up.
and 3. How would the costs of BTL vs the income stack up for me.
So regarding no.3.
From scouring the internet and my own experience of owning a house here's the calculations I've been working off...
- Purchase price of £125k.
- Mortgage of £93k @ 3.6% for 25 years.
- Monthly rent of £650.
Before costs are taken into account it's a yield (monthly rent*12 / purchase price) = 6.24%
It'll be interesting to see once I start talking to more people what additional costs should be added in here or whether the costs are too high / low.
From what I know are present though I think this is probably about right. I could easily see a scenario where the repairs, refurb and service costs were significantly lower. You'd also like to hope that I wouldn't be paying the Letting Agent finders fee and marketing fee every year - given that the average UK tenancy is about 2 years now.
I'll also have to give alot of thought to the letting Agency management fee also. It's a very sizable amount - which the removal of would almost double the annual expected. However, especially with this going to be my first time it'll probably be pretty valuable to have them on board helping me through the process. One to consider going forward.
All that being said it seems pretty decent to me. Just over £1k in expected profit on the rental.
So I've continued to run a few more scenarios and see how they affect the annual return.
- Increase vacancy from 1 month to 2.
- Annual profit drops to £568
- Reduce rent by 10%
- Annual profit drops to £515
- Increase mortgage rate from 3.6% to 4%
- Annual profit drop to £793
- Increase mortgage rate from 3.6% to 5%
- Annual profit drops to £45
- Increase mortgage rate from 3.6% to 6%
- Annual profit becomes a loss of -£712
And to dispel all the negativity
- assume zero vacancy. Zero costs for repairs, refurb, Agency finding fee, Agency marketing fees.
- Annual profit increases to £2,500
So, I think I'm getting a better handle on the costs, from trawling online and hope to have captured most - though obviously there are two major risks which a fund would need to be set-up to cater in the event off... not finding a tenant and something going seriously wrong with the property.
Conclusion is that there is nothing I've found here to stop me wanting to push towards this as my no.1 goal.
Next things to look at are... how long will it take us to save up enough and also interestingly if it's going to take a couple of years (it is almost certainly) then what do I do with the money in the meantime - given I'm expecting to require the money in the next couple of years it would seem too short a period for the stock market which is typically aimed at a longer planning financial horizon.
Hi Brian
ReplyDeleteLooks like you've really thought this through - net yield might be a little skinny if there are unexpected expenses/interest rate increases, but if you have a fund to cater for such unexpected costs, then probably not a huge issue.
You're right, too short a period to stash the cash on the stock market - needs to be in safe cash accounts, preferably ones paying interest. Or premium bonds (that's where some of mine was sitting in for a while!).
If there's zero vacancy, there will still be council tax to pay, plus the standing charges for the utilities as it won't be cost effective to have them switched off/on.
Do your 'repairs' include boiler cover?
If you're interested, at a later date, I'll see if I can dig out the 'interview questions' I had for the various letting agencies I checked out - I asked them all the same questions so I could do a proper comparison of their answers - a couple were a bit daunted by my spreadsheet haha!