Buy to Let ROI Calculation

geeovana

15 months ago me and my girlfriend bought our first house together. We are currently thinking of moving and want to work out if it’s viable to rent this house out.

We bought the house for £137,500 however its current market value is around £160,000. I estimate we have around £50,000 equity in the house including the deposit we put down. The mortgage is currently £400. I estimate we could rent the house out for £700+. How would I calculate the current and on-going ROI over say the next 15 years as we pay the mortgage off?

Appreciate any assistance.

Cakeguts

geeovana wrote: »

15 months ago me and my girlfriend bought our first house together. We are currently thinking of moving and want to work out if it’s viable to rent this house out.

We bought the house for £137,500 however its current market value is around £160,000. I estimate we have around £50,000 equity in the house including the deposit we put down. The mortgage is currently £400. I estimate we could rent the house out for £700+. How would I calculate the current and on-going ROI over say the next 15 years as we pay the mortgage off?

Appreciate any assistance.

£700 plus is what you get if you don't mind tenants staying for 6 months and then moving on. If you want good tenants who stay there for a few years you will be looking at around £600 to £650. You have to pay income tax on the rent. You also have to budget for repairs and tenants who don't pay rent.

Could you afford to let this house if you were not getting any rent?

Thrugelmir

geeovana wrote: »

as we pay the mortgage off?

Is letting the property going to generate a sufficient after tax return (ie. cash) to meet the mortgage repayments. I'd be less concerned with the ROI and more with the hard facts. Subject to various scenarios. Crunching numbers is the key.

00ec25

the simplest ROI is the annual gross yield

(700x12) / 160000 = 5.25%.
The gross yield indicates if the investment is worth bothering with to start with before any costs are taken into consideration. Sub 6% is the territory of amateur landlords or professionals who know exactly what they are doing in terms of cost control and fully understand local market conditions in terms of capital growth

since you ask for an ROI you must know something about them, what did you think or want?

obviously there are many other more sophisticated measures you can ruminate upon and navel gaze over, but at the end of the day they do not predict reality...

there are many websites that will explain the mechanics of their methods, do you know how to use google?
try this for starters:
http://lmgtfy.com/?q=return+on+investment+rental+property+formula

geeovana

Cakeguts wrote: »

£700 plus is what you get if you don't mind tenants staying for 6 months and then moving on. If you want good tenants who stay there for a few years you will be looking at around £600 to £650. You have to pay income tax on the rent. You also have to budget for repairs and tenants who don't pay rent.

Could you afford to let this house if you were not getting any rent?

Yes, paying the mortgage wouldn't be an issue.

Thrugelmir wrote: »

Is letting the property going to generate a sufficient after tax return (ie. cash) to meet the mortgage repayments. I'd be less concerned with the ROI and more with the hard facts. Subject to various scenarios. Crunching numbers is the key.

00ec25 wrote: »

the simplest ROI is the annual gross yield

(700x12) / 160000 = 5.25%.
The gross yield indicates if the investment is worth bothering with to start with before any costs are taken into consideration. Sub 6% is the territory of amateur landlords or professionals who know exactly what they are doing in terms of cost control and fully understand local market conditions in terms of capital growth

since you ask for an ROI you must know something about them, what did you think or want?

obviously there are many other more sophisticated measures you can ruminate upon and navel gaze over, but at the end of the day they do not predict reality...

there are many websites that will explain the mechanics of their methods, do you know how to use google?
try this for starters:
http://lmgtfy.com/?q=return+on+investment+rental+property+formula

So, dividing by the full current house price is correct? this is where I am getting confused. Right now I only have around £50,000 in the house so why wouldn't my ROI be divided by the equity in the house? Wouldn't this replicate a true ROI? The ROI would then obviously reduce as more money is put into the house until the mortgage is paid off and it would then be a case off dividing annual rental yield by the market value of the house minus any further costs to calculate a final ROI.

AdrianC

geeovana wrote: »

Right now I only have around £50,000 in the house so why wouldn't my ROI be divided by the equity in the house?

Your "RoI" is a nebulous, irrelevant figure. The correct way to calculate a remotely relevant net figure is to look at the entire financial picture, taking into account all expenditure.

Basic facts:

You own a £160k asset.
It is leveraged against £110k of debt.

But that's only the beginning of it.

Wouldn't this replicate a true ROI?

No, it would be an artificial figure, because you are ignoring that massive debt burden which you need to service. The only figure that will generate is a pub-brag-willy-wave "Considerably Richer Than YOW!" one.

How much of that £400/mo mortgage payment is interest, and how much is repayment?
Are you a higher or standard rate taxpayer?
Will you be managing the property yourself?
What allowance are you making for voids, maintenance, damages, bad debts?

Are you even being realistic in suggesting a £160k value, since you paid £137,500 just over a year ago?
Do you have consent to let from your lender?
£110k debt against £137,500 value would be roughly half the level of equity you suggest - and an 80% LtV, which would suggest that if CtL is not forthcoming you cannot refinance to BtL.