jsm tax

Buy to let explained

Joshua Tharby explains buy to let property investment and how it can be a great property strategy

What is Buy to Let Property Investment?

Buy to let (B2L or BTL) is a property investment strategy where a property is purchased with the intention of letting it out and receiving rental payments. Some investors also purchase in the hope of future capital growth.

Often a buy to let property is purchased with a mortgage on the property, potentially up to 75% LTV for most landlords. Using a mortgage to leverage the property helps to deliver maximum returns.

Example (without mortgage)

A property is purchased for £150,000 without a mortgage. The property will bring the following monthly income and costs:

Rental income – £775

Mortgage – N/A

Letting agent fees – £75

Maintenance & voids – £75

Other costs – £30

Net monthly profit – £595

This equates to around £7,140 per annum.

The capital employed here (excluding legals and SDLT) is £150,000, as there is a net return of £7,140 per annum, the return on capital employed (ROCE) is just 4.76%.

 

Example (with mortgage)

The same property is purchased for £150,000 with a mortgage. The property will bring the following monthly income and costs:

Rental income – £775

Mortgage – £281

Letting agent fees – £75

Maintenance & voids – £75

Other costs – £30

Net monthly profit – £314

This equates to around £3,768 per annum.

 

The capital employed here (excluding legals and SDLT) is now only £37,500 as the property has a 75% LTV mortgage. Taking the mortgage interest payments into account, there is a now return of £3,768 per annum, the return on capital employed (ROCE) is over double at 10.05%.

 

The result of leveraging the investment has a huge impact on the returns. This is due to mortgage interest rates being lower than the rental yield on the property.

Keeping the numbers simple, as you can now purchase 4 properties instead of one, there is the potential for annual profits of £3,768 x 4, £15,072. Over double an un-leveraged property. Naturally these figures would need adjusting slightly for the additional legal fees and SDLT however the principles remain in point.

 

At JSM Tax we are property specialist accountants and tax advisers, as well as being property investors ourselves. As part of our services we can help you identify underperforming properties and ensure your portfolio is delivering the maximum returns.