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Buy to let - the basic sums!

Buy-to-let  property investment has been very attractive to property investors but you must make the right calculations before embarking on a buy to let project or you may find you're down on your investment and would have been better leaving the money in the bank.

New build is usually the safest bet, or a professional refurb but it's dangerous to believe what the developers tell you - they inevitably predict unrealistic rents, and ignore the costs and the empty periods between lettings (voids).

Remember you are looking for a good annual return and capital growth so take a look at up and coming areas, regeneration zones etc, where you can still buy at a sensible price but with real opportunity for capital gains.

Once you've identified your target area and found a possible property, the only way to make sure an investment will work is to do the sums yourself. It is not difficult and it could make the difference between a great investment and a costly misjudgement.

The first calculation is return, the percentage you make on the money you invest (what the experts call 'yield')

To find the yield just divide the annual net income by property value, then multiply by 100.

To establish the income, you take the rent and subtract all the costs, including the mortgage interest, voids, letting agent's fees, ground rent and service charge (for leasehold flats), insurance, replacement fixtures and fittings and maintenance. Also include an estimate of your own time and travel expenses – you are running a business proposition here.

So if your net income is £8750 pa and your property is worth £150000, your yield is (8750/150000) x 100 = 5.83%

The beauty of establishing  the yield is that it shows you if the investment in property will earn you more than leaving  the money in a deposit account

The next step is to calculate how much money you will need, and how much of this should be borrowed.

Total investment = cost of property + stamp duty land tax + survey + mortgage arrangement fee + legal costs + refurbishment + new furnishings.

So now you know how much money you need -  which type of loan will be best?

Your biggest cost will be mortgage repayments, so even small changes in interest rates can make a big difference to returns. It's crucial to make sure the figures genuinely stack up before committing, and yields are very reliant on the type of mortgage you choose.

In essence the choice is between repayment and interest-only mortgages, where the sum borrowed is repaid at the end of the term.

Many experienced landlords will take out interest only mortgages and not repayment mortgages. If you ask a landlord why, the most frequent reply is 'why should I repay the money? – I make money by borrowing money'. So, borrowing £200,000 to invest in property, which gives an annual return of 10 per cent, if the mortgage interest is only 6 per cent, makes good business sense.

Getting the best deal is a matter of trawling through the rival offerings from the buy-to-let mortgage lenders. There is a handy online mortgage calculator at www.buytoletmortgages.co.uk, which makes comparisons easy – just enter the figures and it shows instantly what deals are available.

Investors need to regularly check things are going to plan once the investment has been made and the property bought . At this point, you will want to check the capital growth. Remember, capital growth = selling price – legal fees – selling costs – taxes – buying cost.

Remember you must include taxes, including capital gains tax, which may reduce net capital recipts by as much as 40 per cent.

So buy all means go for buy to let - but do choose the right location, the right property and do your sums!