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How much are landlords really making from buy-to-let? – Brian Hall

by: Brian Hall
  • 17/06/2014
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How much are landlords really making from buy-to-let? – Brian Hall
Having recently read about research commissioned by BM Solutions, I undertook my own analysis, using the data it provided, and I came to a very different conclusion.

It really concerns me that the content from this article has now appeared in industry, investment and consumer publications as well as blogs, forums and Twitter.

BM Solutions’ key points were:
• The average landlord could expect yearly income of almost £60,000 from rent payments, more than twice the average pay of £27,174.
• The average landlord has a portfolio of eight or nine properties with a total value of £1.2m
• In the past three months the average yield grew to 6.2% across the UK.

As ‘income’ is being compared with ‘pay’, I concluded, as I am sure most will, that BM Solutions are talking about net income (less operating costs) not gross income.

Potentially, there is an enormous difference in these two figures as we will see.

A 6.2% yield on a £1.2m portfolio will generate £74,400 in gross income.

Deducting the £60,000 in ‘pay’ BM Solutions say an average landlord can earn from £74,400, leaves £14,400 to acquire and manage a £1.2m portfolio.

This seems optimistic, so I ran my own acquisition cost calculations:

• Geared investor – geared at say 60%, using BM Solutions 3.04% tracked/fixed, the annual mortgage repayments would be circa £41,100 per annum, plus circa £7,800 in costs – a total annual cost of £49,000.

• Cash buyer with no mortgages, the costs (of not putting the £1.2m on deposit) would amount to circa £19,500 per annum.

BM Solutions say two-thirds of landlords have mortgages. Applying this ratio to these figures, to get a ballpark figure to advance the discussion, the average annual acquisition cost would be circa £39,400. It is certainly a substantial amount.

Clearly the average landlord will be unable to ‘pay’ themselves £60,000, from a gross income of £74,400, once acquisition costs of £39,400 have been deducted.

£74,400 less £39,400 leaves £35,000 for lender fees, legal costs, stamp duty, repairs, maintenance, insurance, agency costs and provisions for arrears and voids.

As £35,000 represents only 3% of an average £1.2m portfolio, much of it will be expended on managing the eight or nine properties that makes this up.

It follows that BM Solutions’ average landlord may be making a profit, but they won’t be paying themselves £60,000 per annum from their net rental income.

Of course landlords are making huge returns, right now, as property prices soar.

The Nationwide says that property prices are increasing at 11.1% per annum. This means that the £1.2m portfolio will have inflated by around £120,000 over the past 12 months. This represents a 25% return for a 60% geared investor.

However, BM Solutions were discussing rental income, not capital gains. An article on future property prices would be an altogether different discussion.

BM Solutions closed with “For those people considering the opportunities that this market presents it is however important to understand the financial and legal commitments being a landlord brings and to ensure that you undertake the right level of research and due diligence to increase your chances of success.”

I agree with this final guidance, but I don’t think it lets BM Solutions off the hook.

NB: In my analysis I selected a purchase (not an interest-only) mortgage, so the property would be wholly owned in 25 years and net incomes could rise. However, BM Solutions says elsewhere that most landlords opt for interest-only mortgages.

The pros and cons of this questionable strategy belong in yet another discussion.

Brian Hall is founder of The Model Works

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