Fully understand your figures

MORTGAGE CALCULATOR

My background with the figures

In my 1st 16 years as a Landlord, I didn’t do any property calculations. The truth is, I didn’t know any property calculations.

You could say I was like the proverbial rabbit caught in headlights, that you sometimes see on dragon’s den. That person who has a really good idea but doesn’t understand the figures. They get asked about profit margins and they are clueless. That was me.

If you are interested in getting into property investing, read a couple of property books. I will recommend a couple at the end of this week’s blog post. You will learn basic calculations like Gross yield, net yield and return on investment:

Gross yield is the annual rental income generated by an asset, divided by the price of acquiring it. Using a recent purchase (rental No.5) as an example: £6600 / £80000 = 8.3%

Net yield is the annual rental profit (rather than income) generated by an asset, divided by the price of acquiring it. Using my recent purchase (rental No.5) as an example: £2400 / £80000 = 3.0%

Return on investment (ROI) is calculated as the annual rental profit divided by the money you put in: £2880 / £24500) x 100 = 11.76%

For more information on how I got these ROI figures, refer to https://duffmoney.com/2020/11/20/rental-no-5-and-legal-compliance/

Finally understanding the figures

The other day, I was asked how much the mortgage would be on a house purchased for £80,000.

About £150 on an interest only mortgage. This is based on an interest of 3%. Currently you can get a product for about 1.5%: https://www.comparethemarket.com/mortgages/buy-to-let/

The reason I told my friend (Ian) the figure based on 3%, is because I have started buying through a limited company and the rate is higher. Look at the £150 broken down:

  • LTV (Loan to value) of 75% so mortgage of £60,000
  • 1% of £60,000 = £600
  • 3% = £600 x 3 = £1800 pa
  • £1800 /12 = £150 pcm

If you are buying rental property personally, you will benefit from the 1.5% rate:

  • LTV (Loan to value) of 75% so mortgage of £60,000
  • 1% of £60,000 = £600
  • 0.5% of £60,000 = £300
  • 1.5% of £60,000 = £900
  • £900 /12 = £75 pcm

Cashflow

From my experience, £500-550 is normal for BTL properties. This is in the North East where properties are cheap, and rents are cheap. This is compared to other parts of the country.

When my friend Ian gets his next rental property, he will probably get £550 pcm in rent. He is going to buy it personally, so from the figures above, that is £75 pcm (mortgage).

I am basing this on a 2 bed property purchased at £80,000. It is in a decent area and should get £550 in rent.

Ian want’s to know what his cashflow will be per month:

  • Mortgage on interest only = £75 pcm
  • House insurance = £30 pcm
  • Maintenance = £55 pcm (10% of rent)
  • Management = £55 pcm (10% of rent)

If we ignore tax (just to simplify things), the costs add up to £215. That is cashflow of £335. Not bad at all.

Ian is a good saver and has some decent savings. He is planning on buying 5 properties like this over the next few months. That is a total of £1675 pcm. This sort of cashflow means he is quickly headed for FI (financial independence).

Working out your figures is important. It enables you to buy property based on your cashflow expectations. Ian wants cashflow of at least £1500 and this is his short term goal. Now Ian is aware of the calcs, he knows what to bid for houses he is currently looking at.

Property books to help with the calcs:

Essential property investment calculations by Robert Heaton.

The complete guide to property investment by Rob Dix.

Picture:

https://www.moneysupermarket.com/mortgages/mortgage-calculator/

 

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