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  • Property Yields

    Calculation to stack deals

    Hi Guys

    I have saw a calculation provided by Vanessa as a guideline to work out how to stack your deals.

    In the guide this is what Vanessa says

    It is imperative that your deal stacks i.e. that you have positive net cash flow at the end of each month. If you don’t, it’s not an asset, it’s a liability and none of us can afford or sustain those types of properties.

    A simple calculation I use to stack my deals is this:

    Monthly rent x 12 divided by ( mortgage product interest rate) divided by (product rental stress – usually 125%)

    Could somebody explain this the calculation to me? I do not understand what "product interest rates mean? Is that simply the interest rate on the mortgage? also rental stress, could somebody break this down for me?

    Thank you
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    Interest rate = product interest rate.

    Rental stress = amount the rent has to cover the mortgage by to meet the lender's criteria. It is typically 125% so I suggest you use that for your calculations or ask the mortgage broker for the rental stress of an individual product you are thinking of using.

    This is a "back of a fag packet" calculation to make sure that your deal stacks based on what you are paying for the property compared to the rent you will receive. It will also give you an indication if the deal stacks with a 25% deposit or if you will have to put in a bigger deposit.

    The key thing to understand is that the rental income determines how much money the lender will lend based on up to a max. of 85% LTV.

    Hope that is a bit clearer for you?
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    Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **5 reasons to get your FREE portfolio review NOW**
    It does make more sense thank you.

    So in theory then, if the rent is £650 a month which is £7800 per annum, i divide that by the interest rate (interest only mortgage) which is for example 2 percent and divide that by 125% which comes out with a figure (on google) as 312000.

    so what does that number 312000 represent?

    I feel like I am being really stupid here so I am sorry if I am I just really want to understand this properly.

    Thank you
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    The amount represents the borrowing the rent will support i.e £312,000.

    So at 2% interest, a rent of £650 pcm will support a property purchase of approx £420K. (adding on a 25% deposit).

    However 2% is an exceptionally low rate and I would not advise stacking deals on such a low rate.

    It would result in a mortgage payment of £520.00 per month, so only £130 gross cash flow per month. After voids and expenses that would probably result in a negative net cash flow.

    If the interest rate rose to 5%, it would result in a mortgage payment of £1300.00.

    Therefore, this is telling me that this deal does not stack up as the rent is too low compared to the value of the property.

    Stack your deals at 5% to stress test them and this is also more representative of the long term fixed rates currently available.

    A reputable mortgage broker will help you stack your deals properly and advise the numbers to input.

    I just use this calculation to get a feel for if a property is worth viewing. If the numbers don't stack up, I would not bother wasting time to view it.

    Let's use a real life scenario.

    Property purchase price is £230K.

    Monthly rent is £1225.

    This rent will support a borrowing of £235,000 at 5%.

    Therefore, we can immediately see that this deal stacks as you will also be putting in a 25% deposit.

    Deposit = £57,500

    Total borrowing is therefore £172,500.

    Monthly mortgage payment of £718.00 at 5%.

    This deal therefore stacks with £507 gross cash flow per month.

    Even if the rent covers the total purchase price of the property, you will always have to put in your 25% deposit as lenders want to see a financial commitment from the landlord.
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    Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **5 reasons to get your FREE portfolio review NOW**
    Fantastic so that is making a lot of sense to me.

    So in essence then lets say property purchase price is 150,000 , monthly rent of 800 pcm

    25% deposit which is 37500

    borrowing therefore is 112500

    on 5% interest that is around about 480 per month which means that there is £320 gross cash flow per month. is that right?

    I really appreciate the advice.
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    (21-08-2015 09:25 PM)Alphainvestment44 Wrote:  Fantastic so that is making a lot of sense to me.

    So in essence then lets say property purchase price is 150,000 , monthly rent of 800 pcm

    25% deposit which is 37500

    borrowing therefore is 112500

    on 5% interest that is around about 480 per month which means that there is £320 gross cash flow per month. is that right?

    I really appreciate the advice.

    Bear in mind that your example mentions a crucial word in your stacking up outcome: GROSS
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    Full time Landlord in WestYorkshire, mentor and property education to new and inexperienced PRS investors. 25+ years of working knowledge. Accredited NLA member & RLA member http://www.landlordgeoff.co.uk [color=#800080]

    Hi Geoff

    Thank you for your reply.

    When you say the key word being GROSS, what do you mean?

    As far as I'm told gross profit is your bottom line profit after expenses etc?

    I look forward to your reply
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    Gross in this context would be gross rent ie simply your annual rent.

    Net rent or net profit is after costs.

    Your mortgage capacity will be calculated upon a 'nominal' rate set by the lender.

    This is very rarely the pay rate of the product.

    Lenders typically set this between 5 and 6% presently though since the budget a number have increased it and I expect this will continue.

    Lenders will want rental coverage (stack) at the nominal rate or the pay rate WHICHEVER IS THE HIGHER.

    So if you get a 3.19% fix with BM then they will calculate your maximum mortgage based on a rate of 5% with 125% cover.

    If however your mortgage was 5.49% fixed they would use 125% at 5.49%.

    There are a couple of lenders/products that work on pay rate which can help with low yielding properties in the South but the fees are often high.

    Commercial lenders use much higher calculations and 150-190% cover on a repayment basis for rates in the 7-8's is not unusual.
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    Lisa

    All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client.

    www.keys-mortgages.com
    Very helpful addition. Thanks Lisa. Smile
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    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director (aka Colonel Nicaffi) - propertytribes.com

    Hi Lisa

    Thank you for your help.

    What would you say a comfortable figure I should take out of my gross per month for expenses?

    So if my gross is 320 a month what should I deduct from that to give me my net/bottom line?

    Thank you
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    Ask 100 investors and you'll get 100 different answers! There was quite a debate on here and Facebook ages ago about it.

    I can tell you after 15 years of investing and a large portfolio of very mixed properties that my averages are £150 a month for a freehold and £250 a month for leasehold.

    I have properties that cost £50 a year and others that cost significantly more! Those are averages over a long period and a lot of properties.

    That doesn't include voids or mortgage costs.
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    Lisa

    All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client.

    www.keys-mortgages.com