Back of the Envelope Calculation of BTL Profitability

So many people seem to have taken the plunge into buy to let property, but is it actually profitable? Here’s my quick back of the envelope calculation.

I bought my 2 bedroom flat in Colchester, Essex in 2006. In hindsight my timing was terrible as I bought pretty much at the height of the previous property boom. If only I'd have bought in 2009!

The problem is that it’s hard to time any market. Plus we’ve not had that many property crashes and even if you had the money, would you want to spend a lot of cash when jobs are hard to come by?

Anyway, on with the calculations. I currently receive £525 a month in rent. The table below shows a typical year’s expenses. I’ve actually been very lucky in that I've had comparatively few void periods. Indeed my current tenants have been in the property for almost three years.

Expense Item Monthly Cost / £
Mortgage Interest 45.00
Service Charge 80.00
Ground Rent 8.00
Letting Agent Fees 68.00
Tenancy Renewal and Rent Guarantee 25.00
Repairs 25.00
Tax on Profit (assuming 20%) 55.00
Total 251.00

So overall I make around £219 a month or £2628 per year from the property after expenses. A yield of around 2.33% on the initial purchase price. That’s hardly earth shattering and I’d probably have made a lot more by investing in the stock market. Someday I’ll do the math to prove it.

Note that I’ve excluded mortgage capital repayments from the above. My mortgage is around 24K now so they’re pretty low.

I guess what I’ve noticed over 10 years is that expenses have soared! Yes I was lucky in that my 5.49% mortgage rate was slashed to just 2.25% due to Bank of England interest rate cuts. But while my rental income has stagnated, my ground rent doubled and the leasehold service charges have gone up around a whopping 40%.

There may be room to cut letting agency fees but given that the government wants to outlaw fees to tenants then there’s unlikely to be much room to manoeuvre here. Of course if you live reasonably close to your property you could use a letting agent as an introduction only service, then manage the tenancy yourself.

One thing is certain – future private sector rental costs are likely to soar, if they haven’t already! I have a feeling that my rental income needs to increase but it’s generally easier to push through big rental increases between tenancies. As it is I am thankful that my tenants have chosen to stay in my property for such a long time.

Capital Growth

Of course it’s good getting rental income from a property, but what about capital growth?

I bought my flat for £113,000 in 2006. In 2017 I believe it’s worth £125,000. So that’s around £1200 of capital appreciation a year. Again, as I bought during the last peak my returns have been rather less than most other property owners.

Taking into account capital growth, I’d guess that makes a return of 3.59% a year. So pretty low and that’s not taking into account the significant upfront costs of buying the property in the first place. I was also lucky in that the people I bought the place from completely renewed the interior and had new windows fitted – if you’re contemplating buying a property that needs renovation then that’s something else to consider. Although I spent little on renovations, I did put white goods in the kitchen.

Low Cost Areas

Area Beds Min Price
CH42 2 £29,950
DL4 2 £29,950
DL17 2 £30,000
L1 1 £35,000
ST4 2 £35,000
DY11 2 £36,000
PR3 2 £38,000
BB9 2 £39,950
G67 2 £39,950
NE63 2 £39,950
WS12 2 £40,000
S4 2 £40,000
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