Do you know how much money you could make from a buy-to-let property?
Our free buy-to-let returns calculator helps you estimate the potential income, cash flow and overall return from a UK rental property.
Enter the property price, deposit, mortgage rate and expected rent, along with your estimated costs, tax rate and investment period. The calculator then estimates your rental yield, annual cash flow and potential return, including the effect of mortgage costs and property growth.
This can help you answer an important question: could this buy-to-let property provide the return I need for the money I am investing?
The result is an illustration rather than a guarantee. Rental income, property values, mortgage rates, tax, void periods and costs can all change over time.
How are buy-to-let returns measured?
There are several ways to measure the potential return from a buy-to-let property.
Gross yield compares the annual rent with the property’s purchase price. It is a useful starting point, but it does not take account of the costs of owning and letting the property.
Net yield takes more of these costs into account, such as letting agent fees, maintenance, insurance and periods when the property is empty.
Cash-on-cash return looks at the cash you have invested and compares it with the cash flow generated by the property.
You can also look at the potential total return, which can include rental income and any increase in the property’s value over time.
Looking at more than one measure can give you a better picture of how a property could perform.
What costs should I include when calculating buy-to-let returns?
The rent you receive is not the same as the profit you make. Depending on the property and how it is managed, your costs could include:
- mortgage interest or repayments
- letting and property management fees
- periods when the property is empty
- repairs and maintenance
- landlord insurance
- service charges and ground rent
- accountancy and other professional fees
- tax
- the costs of buying and eventually selling the property
Some costs may be deductible when calculating your taxable rental profit, while others are treated differently for tax purposes. HMRC’s rules distinguish between allowable revenue expenses and capital costs such as improvements.
This is why a property with a high headline rental yield may not necessarily produce a high return after all of its costs.
What is a good buy-to-let yield?
There is no single rental yield that makes a buy-to-let investment worthwhile. A higher gross yield can mean more rental income relative to the property’s purchase price, but it does not tell you how much money you will actually keep.
Two properties with the same gross yield could produce very different returns if one has higher mortgage costs, management fees, maintenance costs or periods without a tenant.
Your objectives also matter. You may be looking for regular rental income, long-term capital growth, or a combination of the two.
It can therefore be more useful to compare the expected income and costs of a property rather than relying on a particular yield as a target.
How does the mortgage affect my buy-to-let return?
If you use a mortgage to buy a rental property, the interest and other borrowing costs can have a significant effect on your cash flow. A higher mortgage rate increases your monthly costs and can reduce the amount of rental income left after expenses.
The type of mortgage also matters. With an interest-only mortgage, your monthly payments generally cover the interest rather than paying down the capital. With a repayment mortgage, part of each payment goes towards reducing the amount you owe.
A repayment mortgage can therefore build equity in the property over time, but it will usually require higher monthly payments than an equivalent interest-only mortgage.
The calculator allows you to model both types so you can see how the financing structure affects the potential return.
How does tax affect buy-to-let returns?
Tax can make a significant difference to the amount of rental income you keep.
For individual landlords, mortgage interest on residential property is not deducted from rental income when calculating taxable profit. Instead, eligible finance costs generally qualify for a basic-rate tax reduction. This can have a larger impact on landlords who pay Income Tax at higher rates.
Other allowable expenses, such as certain maintenance, insurance and letting agent costs, can generally be taken into account when calculating rental profit, provided they meet HMRC’s rules.
Your tax position can also depend on how the property is owned and your wider income.
The calculator provides an estimate based on the tax rate you enter, but it is not a substitute for calculating your actual tax liability.
What about house price growth?
Rental income is only one potential source of return from a buy-to-let property. If the property increases in value, you could also benefit from capital growth when you eventually sell it. However, property prices can fall as well as rise, and there is no guarantee that a property will increase in value over your investment period.
The calculator allows you to enter an assumed annual property growth rate so you can see how different assumptions affect the potential value of the property and overall return.
The calculation does not predict future property prices, and actual returns could be very different from the illustration.
How much money do I need to invest in a buy-to-let?
Your initial investment is more than just the deposit. You may also need to pay Stamp Duty Land Tax (SDLT), mortgage fees, legal costs, valuation fees and other costs associated with buying the property.
The additional property rates of SDLT can also apply when buying a buy-to-let or another additional residential property in England and Northern Ireland. The rates and rules differ across the UK.
A larger deposit means you need to borrow less, which can reduce your mortgage costs. However, it also means putting more of your own money into the property.
The calculator includes the deposit and SDLT when estimating the cash invested, helping you compare the potential return with the amount of capital you have put into the investment.
Should I speak to a financial adviser about buy-to-let?
A buy-to-let returns calculator can help you understand the potential numbers behind an investment, but it cannot account for every aspect of your circumstances.
A regulated financial adviser can help you consider how a buy-to-let property fits alongside your other investments, income and financial plans. A mortgage adviser and tax adviser may also be able to help with the financing and tax implications of the investment. Before buying a property, it can be useful to consider not just the potential return, but also the risks, costs, amount of capital you are committing and how you would cope if rental income or property values were lower than expected.
If you would like help assessing your options, you can use the Trusted Advisor adviser matching service to find a regulated financial adviser suited to your needs. Alternatively, email our team at hello@trusted-advisor.co.uk and we can help you understand the next steps.