This article contains the calculations needed when looking at property to invest.
For all the example below we will be looking at purchasing a property for £100,000.00 and renting it for £600 PCM
Mortgage Cost and LTV
If we purchase the property for £100,000.00 and get an interest only mortgage on it we will need to calculate what that mortgage could cost us.
If we go for an interest only mortgage the calculation is simple
Take the purchase price and multiple it by 0.75, this will give you the amount the mortgage lender will provide. E.g.
£100,000.00 x 0.75 = 75,000.00
Then we use this value to work out the monthly cost of that borrowing
£75,000.00 x mortgage rate (In this case we will use the average BTL mortgage rate at the moment which is around 5.8%). This will gie us the yearly interest which we will need to divide by 12 to get the monthly value.
(£75,000.00 x 0.058) / 12 = £362.50
CF - Cash Flow (Monthly profit)
It is always important to work out how much money you will be making per month after all your expenses. To do this simply subtract your outgoings from your rental value.
Rent £600 - Mortgage £362.50 - Insurance £35 - Management £60
CF = Rent - all outgoings.
CF = 600 - 362.50 - 35 - 60 = £142.50 pcm
ROCI - Return on Cash Invested
This calculation is used to determine what % of return you will receive from the money you invest. For example:
You buy a property for £100,000.00 and get a mortgage on it for 75%. This means you only have £25,000.00 of your own money in the deal.
To that end the return on the cash you invested (£25,000.00) is calculated through the following
ROCI = ((CASH FLOW X 12) / MONEY YOU HAVE IN THE DEAL (£25,000.00)) X 100
OR
((142.50 X 12) / 25000) X 100 = 6.84%
Return Per Thousand
This calculation is used to compare different properties - it is often a challenge to work out the difference in returns based on the property prices and how much they earn. This calculation simplifies that for you.
This calculation takes the Cash Flow of a property for a whole year and divides it by the number of £1,000.00s in the purchase price of a property. So in this case 100.
((Cash Flow x 12) / Purchase price) x 100.
((£142.50 x 12) / 100) = £17.10
So for every £1,000.00 in the purchase price of this property this property makes 17.10 profit per year.
Yield
Yield is a common calculation in property however does not hold as much value when buying with a mortgage because the ROCI can be very different depending on the mortgage value.
Nonetheless, you must be aware of how it is calculated, PSB.
Annual rental income/property value x 100.
((600 x 12) / £100,000.00) x 100 = 7.2%
Conclusion
There are many calculations needed when getting started but these are the main ones in my eyes. Each calculation can be used to assess deals and establish if they are worth proceeding on, numbers never lie.
It is worth noting that property can be a very emotional business, often you can find yourself getting overly attached to investment properties the same way we would our residential homes. This is a mistake, when viewing focus on the number, not the architecture, colours or overall feel of the property. It's a business transaction nothing more nothing less, sometimes following your heart can lead you up a costly road, following the number is a far safer option.
Please feel free to reach out if you wish to discuss anymore about getting started in property.
My door is always open.
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