Why make another online calculator for Buy to Let investments?
The impact of higher interest rates is far worse for buy to let because it must be the only business where interest is not tax deductible (for directly owning landlords). The result is that most buy to let investments with debt are likely to become cash flow negative unless fixed mortgage rates fall well below 5%. Hence it is imperative that landlords understand their buy to let financial position so that they can make rational decisions.
Who is Rent Yield Calculator for?
Anyone that would benefit from learning more about the financial returns available from buy to let. Even seasoned investors are likely to gain insights. I use it as a buy/hold/sell tool. For example, I will have 2 properties that will become loss making in 2024 and 2025 unless mortgage rates fall. As I did not become a landlord to lose money, I will probably sell. I have also used Rent Yield Calculator to calculate accurate offer prices, enabling me to source a below market value property in 2023.
Is this a Below Market Value Property?
A popular property strategy is to buy Below Market Value property (BMV). Through rigorously sticking to benchmark rates for Cap Rate and Net Cash on Cash, Rent Yield Calculator enabled me to source a property around 15% BMV while meeting Cap Rate and Net Cash on Cash benchmarks.
What is the Break Even mortgage rate?
The break even mortgage rate is the rate at which a buy to let is forecast to create zero cashflow.
What are User Benchmarks?
User Benchmarks are the rates for Cap Rate and Net Cash on Cash Return that an investment needs to match.
Correctly setting benchmark rates reduces the chances that you will overpay for a property given the market and personal circustances.
How are User Benchmarks set?
The Cap Rate benchmark is set through researching what equivalent quality properties generate in operating income. If you want to buy below market value, then the Cap Rate achieved should exceed the benchmark.
The Net Cash on Cash benchmark is set based on what you believe that can be achieved from other investments of similar risk all after tax and inflation. For example, if I believed that an ISA investment portfolio will go up with inflation and yield 3% per annum, I would probably say that I wanted around 4% from my buy to let in order to compensate for the effort required and risk. It really depends upon what other investments that an individual might consider and typical returns.
At what % should I set my expenses?
This depends. Very low priced property is likely to have a disproprortionately high % of expenses compared to higher priced properties.
Personally, I tend to allow an amount for what I call reactive maintenance or repairs. I then plan an assumed replacement schedule. For example to keep a property in good condition, I might assume a new kitchen every 20 years, bathroom 25 years, windows 25 years, roof 50 years, boiler 10 years. I then estimate a cost for each item, divide by the number of years and add to maintenance costs. I then have a service charge and 12% goes to my letting agent, insurance and a few other smaller costs.
The assumption is that if my portfolio is to keep up with the market, then its condition must be maintained. This is contrary to those who recommend buying new property as no spend will be required. The reality is once a new property is 20 years old, the buyer is likely to factor in the costs of a new kitchen and bathroom.