joe3k Posted September 27, 2011 Report Share Posted September 27, 2011 Hi Guys. Just found a property in Northern Ireland. It has a purchase price of £55k. Rent should be around £400 per month. 25% deposit required for the mortgage with an interest rate of around 5%. How can I check to ensure this property cash flows and is a good investment? I've also read briefly that cap rates are important to work out, alongside Cash on Cash return and Total ROI. Can anyone assist me to work it out? Thanks Link to comment Share on other sites More sharing options...
Richlist Posted September 27, 2011 Report Share Posted September 27, 2011 £55000 purchase price 25% deposit = £13750 75% mortgage = £41250 @ 5% interest only = £172 pcm Rental income £400 pcm (£4800pa) Gross profit before expenses = £228 pcm Gross Yield = 8.7% Gross return on capital invested = 34.9% Now the bad news....... You need to take into account all of your costs (in addition to your mortgage) including: * Legal costs for buying * Finance costs....mortgage application fees etc * Costs of preparing property to let.....EPC, gas cert, electrical checks etc * Furnishing costs * Repairs & Maintenance * Agents fees * Building, Contents, Rent guarantee insurances * Deposit protection * Inventory costs * VAT on any expenses * Ground rents & service charges * Freeholder permissions * Utility costs during voids * Postage, telephone * Mileage costs * Stationary * Advertising * Capital allowance expenditure * Provision for bad debt * Provision for redecoration/ contents replacements * Loss of income on deposit monies If you employ an agent on full management you might get away with paying 10% Overall you net profit is unlikely to be more than approx £1200. Taxed at 20% this will leave you £960 pa / £80pcm if you are lucky. Thats a net return on capital invested of 6.9% Link to comment Share on other sites More sharing options...
joe3k Posted September 27, 2011 Author Report Share Posted September 27, 2011 Hi Richlist Thank you so much, for such an excellent reply. That is very much appreciated. Worthy of note: I would rather invest with a repayment mortgage rather than an interest only one, even though I know this will cost more each month but at least at the end of the 25/30 years the mortgage will be paid off (assuming that the rent pays the mortgage and other costs etc...).. what are your thoughts on this and would you advise a 25 or 30 year mortgage (or shorter/longer)? A Gross Yield of 8.7% sounds reasonably good for Northern Ireland... do you think it is? I understand how you calculated gross yield (annual rent/property value), however how did you calculate the gross return on capital invested and what is it for? I am assuming it is used as an indicator to how good the investment is, in relation to the amount invested? i.e. investing £55k in a bank account the gross return on capital invested would be approx 2-4% these days - is that about right? I will have to factor in the costs you mentioned and it is excellent to know which costs to consider. I think initially (or at least for my first few rental properties), I will try to manage them myself - should give me a good grounding in what's involved and a broader overview, alongside saving a few quid. Is a net return on capital invested of around 7% decent (would it be this that is the comparison to the current 2-4% of a bank account)? The fact that I can leverage money should really help, even if it is only 7% - sounds quite positive to me and the fact it cash flows at all must surely be good? What is your overall opinion of this potential investment property (barring not actually seeing the condition of it etc...) i.e. on paper, what do you think of it... does it stack up for you? Thanks Link to comment Share on other sites More sharing options...
Richlist Posted September 28, 2011 Report Share Posted September 28, 2011 Worthy of note: I would rather invest with a repayment mortgage rather than an interest only one, even though I know this will cost more each month but at least at the end of the 25/30 years the mortgage will be paid off (assuming that the rent pays the mortgage and other costs etc...).. what are your thoughts on this and would you advise a 25 or 30 year mortgage (or shorter/longer)? I have no opinion on your mortgage selection......there are at least 500 BTL mortgage products to pick from. See an expert = mortgage broker. A Gross Yield of 8.7% sounds reasonably good for Northern Ireland... do you think it is? I have no idea what represents 'reasonably good' or any experience of the N/Ireland market. I understand how you calculated gross yield (annual rent/property value), however how did you calculate the gross return on capital invested and what is it for? Calculation is £4800 rental income as a percentage of your money invested (£13750). Most calculations are completely meaningless. The best one is to add up all of your deposit, buying costs, set up costs, finance costs, mortgage costs ie all the money you spend to buy ad prepare the property up to the point that the tenant moves in. Then calculate what your NET income is relative to that total expenditure. The result is your TRUE net yield. But it requires some effort to crunch the numbers .... I am assuming it is used as an indicator to how good the investment is, in relation to the amount invested? i.e. investing £55k in a bank account the gross return on capital invested would be approx 2-4% these days - is that about right? Yes something like that. I will have to factor in the costs you mentioned and it is excellent to know which costs to consider. I think initially (or at least for my first few rental properties), I will try to manage them myself - should give me a good grounding in what's involved and a broader overview, alongside saving a few quid. Only do it if you know what you are doing. See my check list below. Is a net return on capital invested of around 7% decent (would it be this that is the comparison to the current 2-4% of a bank account)? I have no idea if a 7% net ROI is representitive. Whatever your ROI you have to remember that its not right to compare to bank or building society returns. Rental returns carry lots of downside risks and are NOT guaranteed......bad tenants, bad payers, increased mortgage and other costs, lots of repairs and maintenance, legal fees etc etc. Bank investments are usually guaranteed/ carry NO RISK. The fact that I can leverage money should really help, even if it is only 7% - sounds quite positive to me and the fact it cash flows at all must surely be good? I wouldn't necessarily agree with that. Have property prices fallen in NI ? Are they going to fall further ? Is what you are paying £55K for today likely to be £45K this time next year ? Is this the right time to get into BTL ? etc etc.. What is your overall opinion of this potential investment property (barring not actually seeing the condition of it etc...) i.e. on paper, what do you think of it... does it stack up for you? Impossible to make a valid comment for the reasons you have suggested. The figures look OK but if the property happened to be the wrong type in the wrong location, let to the wrong people etc etc my comments would be worthless. Good luck. 1. Get References.....bank, employer and previous landlord. 2. Take out rent guarantee insurance.....it’s not expensive. 3. Get a home owning guarantor. Carry out reference checks on the guarantor. Give the guarantor a copy of the AST. Make sure the guarantor document is drawn up as a deed. 4. Don't let to people with pets or children......the risk of them giving you problems are big. 5. Don’t let to anyone under 18 (minors). Draw up your own limits….I prefer nobody under 25. 6. Don't let to smokers........you won't get rid of the smell. 7. Don’t do Company lets. 8. Don’t let to anyone on Housing Benefits. 8a. If you do choose to let to applicants on Housing Benefit CHECK that your mortgage & freeholder (if your property is leasehold) allows it. 9. Don't let to anyone who isn't working full time. 10. Inspect properties every 3 months. 11. Only let initially on a 6 month AST.....that way you can both part company after 6 months if you don't get on. 12. Use a reputable Lettings Agent OR one who has been recommended OR do it yourself (only if you know what to do). 13. Meet your tenants personally. Make sure you ask all the right questions and gauge whether they are right for you. 14. Protect the deposit in one of the official schemes. 14a. If you have a dispute with your tenant(s) over deductions from the deposit remember…..you can either go through the DPS adjudication process OR take the tenant to the Small Claims Court for recovery of your losses where you may have a better chance of success. 15. Issue a section 21 notice as soon as the deposit has been protected. 16. Make sure there is a detailed inventory & schedule of condition……signed by both parties. 17. Remember its a business....so avoid emotion & being overly sympathetic to your tenants. 18. Read as much as you can about renting & letting i.e. educate yourself. 19. Don’t let to anyone who doesn’t speak or understand English. 20. Don’t forget that you will need an Energy Performance Certificate (EPC)…….before you market the property. 21. Don’t forget to get an annual Gas Certificate. 22. You are responsible for ensuring anything electrical in the property is safe so consider getting the electrics checked professionally….and any appliances you provide. 23. Try to avoid having your property classified as an HMO……meeting regulations is expensive and time consuming. 24. Make sure all adults living at the property are on the AST & any other documents. 25. Minimize your income tax liability by claiming all the expenses you are entitled to…..most people don’t and therefore pay more tax than they should. 26. If one of the owners is a higher rate tax payer consider splitting the beneficial income other than 50:50 to take advantage of the lower tax payer rate. 27. Keep all capital expenditure receipts/ invoices to minimize CGT liability on disposal. Link to comment Share on other sites More sharing options...
joe3k Posted September 28, 2011 Author Report Share Posted September 28, 2011 Thanks again for another extremely useful and informative answer. It may not be the correct time as house prices have dropped drastically in Northern Ireland and are continuing to fall slightly. Timing where the bottom is would be difficult though and I was thinking if I get in before it fully bottoms out I will have a greater choice and hopefully be able to negotiate the price down to negate the expected slight drop. Timing is everything I guess and unfortunately it appears to be impossible to predict where the bottom will be. I really appreciate you taking the time to have given two such excellent responses and definitely feel more informed now. Thanks Link to comment Share on other sites More sharing options...
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