How To Buy To Let Property On A Realistic Budget: Costings, Cash flow, ROI and Cash Margin

14 Aug

Property investment is a capital hungry business – the purchase of a property is just the beginning of a long line of costs.

You need more than you think.  (Rule: 52)

Estate agents, glossy brochures and TV programmes deal in the “headlines” of buy to let; the sort of sums which make you think property is a short-cut to becoming an over-night millionaire.

Property can make you money – but it’s also going to cost you money.  And there’s a lot of hidden expenses involved.  These are the boring details that many don’t like to deal with – talking about solicitors fees and stamp duty takes some of the sexy sheen away from which kitchen worktop to opt for.

But the devil is in the detail.

If you want to get real about buy to let, you need to factor all these costs in to your budget – because as you will see with my “easy” buy to let property experiment – the “untalked about” costs are pretty high.  If you need a point of comparison, check out the numbers from the Stevenage property project.

The “easy” buy to let property experiment case study: The Property

This three bedroom, mid-terraced Victorian property with attic conversion is located in Waltham Cross, approx. 15 miles from Central London.  It is a spacious property offering 129 sqm (1388 sqft) of internal accommodation with a small rear garden.  It is 3 minutes walk from the train station which gets you into London in 20 minutes.  The M25 and A10 are within 5 minutes drive.  The town centre is a 5 minute walk and good schools are located close by.  The area is a likely candidate for Cross Rail in the future.

The “easy” buy to let property experiment case study: The Numbers

The property was purchased before auction for £250k.

Here is the breakdown of all administrative expenses (including VAT):

Mortgage broker admin fee  £        199.00
Mortgage admin fee  £    1,999.00
Mortgage completion fee  £          35.00
Mortgage surveyor fee  £        355.00
Search fee check (flood check)  £          42.00
Auction house fee  £        540.00
Solicitor purchase fee  £        660.00
SDLT form  £         60.00
Bank transfer fee  £          42.00
Chancel indemnity fee  £          15.30
Stamp duty  £    2,500.00
Land registry fees  £        270.00
Land registry search fee  £            3.00
Bankruptcy search fee  £            2.00
Contribution to sellers legal costs  £    1,872.14



Mortgage & Equity: 

A buy to let mortgage of £172,465 was arranged to finance this property.  The product was a 5 year fix at 4.49%.

The equity to complete the property purchase was:  £77,535

Renovation costs: 

The before and after photos of the property renovation are here.

The breakdown of all costs including labour and materials:

Kitchen (inc upgraded worktop; hob, oven and fan; sink & tap, handles)  £    1,237.12
Kitchen fitting  £        350.00
Flooring  £    1,300.00
Plumbing (inc. new boiler with 7 year guarantee, pipework etc)  £    2,135.00
Double glazing (windows & doors)  £    3,244.00
Bathroom suite (bought new off eBay)  £        120.00
Bathroom shower & taps (new off eBay)  £          55.00
Partial rewire (inc new board with RCD, sockets, lights, periodic test cert)  £        975.00
Labour (plastering, tiling, carpentry etc)  £    1,560.00
Labour (removal kitchen, bathroom, tiles etc)  £        450.00
Materials (paint, tiles, etc)  £        660.51
Gas & Elec meter usage  £          30.00

The totals:

Administrative and renovation costs totalled:  £20,711.07 in addition to the £250,000 purchase price of the property.

A mortgage was raised to finance the purchase of the property.

Equity of £77,535 was required to purchase the property plus renovation and admin costs means the total cash invested in the property is:  £98,246.07

Cash flow, ROI and Cash Margin

Most people in the property industry quote gross rental yields to illustrate performance.  However, because I look to take a “wage” from my property investments then I calculate property performance according to different indices.  Unlike many others, I also include the monthly running costs to calculate how much money will be made every month.

You will note, none of the figures below allow for capital appreciation.  If you want more information on how to run the numbers and make calculations check out The Rules.

The total cash invested in this property is: £98,246.07

The property is rented (single family let) at £1450 pcm: £17,400 per annum

The monthly mortgage payments (on 5 year fix) are: £652 pcm:  £7824 per annum

At first glance these numbers look great: a potential profit of £9576 per year (£798 per month).  However, you need to factor in expenses and voids throughout the year.  While this property is newly renovated and in a high demand area, it is best to always prepare for a worst case scenario.  I use an easy rule of thumb; I allow 10% of the annual rent to cover maintenance costs (inc. insurance, CP12 etc)  and I allow for one month void per year.  I self-manage this property.

This means from the monthly “profit” I need to allow for the following expenses:

Void allowance: £120.83 per month (One month void per year, calculated as £1450/12)

Maintenance allowance: £145 per month (Calculated at 10% of annual rent)

To calculate the realistic Monthly Cash Flow, you do the following:

Monthly Income (MI) – Monthly Expenses (ME)

The Monthly Cash Flow (MCF) figures for this property are:

  • Rental income: £1450 per month
  • Minus:
  • Mortgage interest: £652 per month
  • Void allowance: £120.83 per month
  • Maintenance allowance: £145 per month

This means the realistic Monthly Cashflow of this property is:

£1450 (MI) – £917.83 (ME) = £532.17 (MCF)

£532.17 is the surplus cash the property will make every month after taking into account the estimated expenses.


To calculate the Return on Investment (ROI) you do the following:

ROI = Monthly Cash Flow x 12 Months/ Total Cash Invested

(£532.17 x 12/ £98,246.07) x 100 = 6.5%

The ROI shows the annual return is 6.5% on the cash invested in the property, after estimated expenses.


To calculate the Cash Margin you do the following:

Cash Margin = Monthly Cash Flow/ Monthly Income

(£532.17/£1450) x 100 = 36.7%

A Cash Margin of 36.7% means I get to keep, on average, over one-third of the rent I collect after costs.  The higher the margin means the more money there is to be made and, the better buffer you have if rents fall or costs increase.

Was the project worth it?

This property has been bought as a long-term investment.  I am happy with the results achieved and believe this property performs well as both a day-to-day rental income producer and *takes her crystal ball* should perform well in the future with regards capital appreciation.

Only time will tell if this turns out to be an “easy” buy to let – but for now, signs are promising.

If you missed the property renovation videos, or just fancied a binge-fest on the buy to let renovation- you can find them all here:

Property Renovation Kick Off

Week 1

Week 2

Week 3

Week 4

Week 5: It’s a wrap!

Be Sociable, Share!