BTL - profit margins?

FloppyDisk

I wondered if any one could provide a bit of experience on how much one could expect to return from a BTL these days. I've been playing around with the figures that I might achieve if I were to rent out my flat, which I may do in a few years time.

For a mortgage of £150k (value 200k), 5% interest only repayment would be £625. I could probably achieve £950 pcm rent.
Assuming a 10% fee from an agent, £40 a month for the service charge, £85 for the sinking fund, £10 landlord insurance...

Without even accounting for voids or redecoration I would be lucky to get £100 pre tax profit, which seems rather low for all the potential hassle. I appreciate that perhaps the days of the BTL boom are over, were huge house price rises the real driving factor behind BTLs?

Am I expecting too much?

Thanks, Floppy

anselld

950 pcm on a 200k property is not a particularly good gross yield (5.7%) Profitable BTL will be generally higher than this. Are you sure you have not over valued the property or undervalued the potential rent?

Also 5% on 75% of the value is a high mortgage which would put a big dent in most people's BTL profitability.

00ec25

you can present the numbers any way you want to support any argument

the singular factor however is what is your business objective?
eg:
the simple view is you have 5.7% gross yield (950x12/200k). This is the basic test that many (including mortgage lenders use). That is a tad low as people still expect 6% gross as an absolute minimum

or you look at the opportunity cost, you are leaving 50K in equity and that returns £100 pre tax ie 2.4%. You would earn more selling up and putting that 50k in a savings account

so returning to the key question, consider 3 options:

1) do you need income NOW : if yes your plan is bad value

2) do you not need income now but will need to release a lump sum "in the future" (pay for your wedding? pay for the kids at uni?) - you should not be looking interest only as you want to be able to sell up and release equity which has accrued because your tenant has paid off your mortgage (and yes the days of relying on capital growth on interest only are probably gone)

3) do you not need income now and do not want a lump sum in the future but would need a regular income after you retire - repayment mortgage timed to pay off when you retire and can then take the rent as pure income

tim123456789

Nope, I think that you've got it about right

I can't understand why all the numpties are still jumping into BTL

tim

tim123456789

anselld wrote: »

950 pcm on a 200k property is not a particularly good gross yield (5.7%) .

But it is the normal for such properties.


To better this you either have to go into HMOs or rent bottom of the barrel properties

tim

FloppyDisk

Thanks for the feedback, unforunately I think my valuations are about right and the management costs are as I'm experiencing them now!

anselld

tim123456789 wrote: »

But it is the normal for such properties.


To better this you either have to go into HMOs or rent bottom of the barrel properties

tim

Depends what part of the Country it is.

Thrugelmir

Starting point needs to be around an 8 to 10% yield.

Any less and the margins aren't worth the risk. Particularly if you are carrying a high level of mortgage debt.

phill99

But people are obsessed with rental returns.

The real return is capital appreciation over the long term. That's where you make money.

ch3101

I'm in the middle of a buying a 1bed flat for 36000.

Mortgage is 170, rent will be 350ish.

Our total investment will be 10k to do the following :
Deposit n mortgage
Register as landlords
Pay all legal fees
Pay bank fees
Get the flat safety certified for gas and electricity etc
Pay a finding fee to get an agency's help finding a tenant initially
Fresh lick of paint
Any other costs in starting
Keep ~1000-1500 in the account the rent goes into and mortgage is taken from just for peace of mind and in case we need to do any repairs or maintenance etc.

So going on a profit of ~150 a month - 1500 a year (assuming 2 months empty a year) it's 15% yield on the investment.

The mortgage would be 120 a month interest only so we will be building equity at >50 a month as well so say another 600 in the first year, 21% yield assuming everything goes as planned.

Not bad at all eh?

You just have to find the right market and right price point for the area you are buying in.

ch3101

And to put it into perspective, the deposit money was in a savings account and an Isa on 2.85 and 2.3% respectively.