BTL - how does it make money?

[Consigliere]

So, trying to understand how this BTL makes money, i can't see it unless im not calculating it correctly. Not setup in a LTD co. Just a single person claiming as rental income.

Receipts £5,500 pa
Expenses £1,600 pa
Mortgage Interest £544 pa

Profit = Receipts - Expenses - (Mortgage Interest x 20%)

Profit = 5500 - 1600 - (544 x 20%)

Profit = 5500 - 1600 - (109)

Profit = £3,791

Tax @ 40% on 3791 = £1,516

Thus money remaining 3791 - 1516 = £2,275.

However, monthly BTL mortgage payments are around £235 pm, so £2,820 pa, thus making a loss of £545 (2275 - 2820).

How do BTLs provide income if they are actually loss making?

[Consigliere]

98elise said:

LooneyTunes said:

Consigliere said:

However, monthly BTL mortgage payments are around £235 pm, so £2,820 pa, thus making a loss of £545 (2275 - 2820).

How do BTLs provide income if they are actually loss making?

The mortgage repayments aren’t a loss! They are paying back the principal of the loan. Yes there is negative cash flow, but that’s not the same as there being a loss.

Think of it as the owner making £2,820 of repayments for just £545

Then add in the price appreciation to complete the picture.

This.

That money is profit regardless of what you do with it. Paying down the mortgage is just reinvesting it.

I take the profit as income. I don't pay any of my BTL's mortgages off unless I have spare cash for a lump sum payment.

Edited by 98elise on Wednesday 2nd February 10:21

Ah ok, im with you. I guess one slight difference is that it is a repayment mortgage, where as other landlords are interest only and taking that cash as income rather than paying down the mortgage.

[Consigliere]

Abdul Abulbul Amir said:

I may be wrong but I think your calcs are wrong.

You calculate the 40% tax on £3,900 and then add back the 20% tax relief on interest. I think that gets you to £2,449 not £2,275.

Thanks im no tax expert so you may be well correct. Good news as its a slightly better position for me!

[Consigliere]

My situation is slightly different, bought a flat to live in in 2006, yup right before the big crash. Not a problem as i needed somewhere to live but it was in a poverty stricken area hence it was something i could afford at the time. Several years later, job opportunity meant i moved to another city - too far to commute so went to sell up, valuations came in which would have left me in serious negative equity, so instead i rented it out.

One thing i didn't realise was when i bought it was there was less than 80 years remaining on the lease - i did realise but didnt know what this meant when selling in the future. Thus as the lease shortens the value of the property hasnt grown as a freehold property or a long lease property would.

The area hasnt improved over the years and at a guess i would be lucky to get 20% increase in what i paid in 2006 - and a lot less potential buyers due to cash only (would be very hard to get a mortgage based on the remaining lease).

With inflation going up, utilities, new NI increase, ive decided to take a look at my finances again and see where i can tighten the belt so to speak.

I am an accidental landlord, it wasnt a strategy just limited options at any given time

Edited by Consigliere on Wednesday 2nd February 11:28