Buying A Property At Auction To Rent Out
Purchasing a Buy to Let property at auction can be a great investment. When you can buy the property below the market price you can earn a better rental yield and more long-term capital gain. But buying a property at auction to rent out is a business, and every aspect of the business must be run efficiently.
You must organize the work, collect and file information, keep accounts, and employ professionals. Always remember that you are not buying a home for yourself, you are running a rental business.
Use our FREE! and easy to use Property Auction Calculator to determine whether any property you’re interested in can show a profit, and if so, how much. Simply enter the figures and the free Property Auction Calculator will calculate the maximum bid you can make for the property and still earn the profit you want. We’ve done the hard work so you don’t have to second-guess anything.
There are many costs people don’t take into consideration that can have a dramatic affect on how much you can pay for a property at auction and still make a profit. Here are some of those costs you’ll need to budget for:
- Financing costs
- Auctioneers fees
- Furniture costs
- Renovation and refurbishment costs
- Repairs and maintenance
- Buying costs (Solicitors)
- Running costs
- Insurances and cover
- Service tests and cover
- Up front costs
- Contingency fund
Financing costs (Bridging Finance, Business Loans and Mortgages)
Spending a little time planning can save you thousands of pounds, because you’ll know all the costs financing companies can charge. You’ll then have complete control over your financing arrangements and be able to get the best deal. See our Property Auction Financing Tips section for the best financing products available for buying investment property at auction.
Considering a bridging or business loan, or a conventional mortgage? Our FREE! and easy to use Property Auction Calculator can compare companies and save you thousands in interest and charges as you decide which lender is best for you.
There’s no need to put your investment at risk by second-guessing any of these costs. When you know all the different costs that lenders charge in the form of exit fees and completion fees, you’ll know exactly how much to bid at auction.
Our free and easy to use calculator includes all costs and calculations for both bridging finance and business loans OR using mortgages to finance your property auction purchase. (You can also use the calculator for a combination of the two i.e. using bridging finance initially then using a mortgage.)
Examples of the finance costs and calculations included in the free calculator
- Broker Fees
- Mortgage interest rates
- Length of financing
- Financing cost per month
- Total amount of capital required
- Mortgage payment per month
- Repayment Mortgage Calculation (Daily and Yearly Interest)
- Interest only mortgages
- Total Finance cost for the Year
- Exit Fees
Our easy to use free calculator can keep financing surprises like arrangement fees and exit fees from harming the return on your investment property.
Property Auction Bridging Loans and Mortgages
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Auctioneers fees
Did you know that when the hammer falls on your successful bid, you’re liable for immediate payment of a buying fee that can range from £150 to £300?
Our easy to use free calculator keeps you aware of all auctioneer’s fees, including buyer’s fees.
Furniture costs
The decision to let furnished or unfurnished can become a decision of tax consequences. The Inland Revenue allows the landlord a choice of a simple 10% flat rate wear and tear allowance, or the actual full cost of renewing damaged or worn out individual items such as beds and carpets. Note that the original outlay for these items is not allowable. Only the subsequent replacement costs are allowable when the expenditure occurs.
Whichever method you choose you must use it consistently. You will not be permitted to change your basis from year to year.
Our FREE! and easy to use Property Auction Calculator considers all the different furniture costs including initial furnishings.
Renovation and refurbishment costs
Properties that need renovation or refurbishment can frequently be purchased at auction well below the price of neighbouring properties. If you can find a property with potential value well above the sum of its selling price and all refurbishment costs, you’ll be able to gain a higher rental profit and show a greater profit on your investment.
Start by building a clear picture of the types of renters looking for flats, and the features they might require. For instance a young couple working in the city will consider good transport links, power shower, a good kitchen, and a neutral colour scheme. Maybe the property you’re considering could suit a couple of different types of renters. Try to anticipate what they’ll be looking for and budget all of those costs.
Remember, it’s not just about location, it’s owning the right property in the right location at the right price.
And you must consider the overall balance of your renovation costs. It wouldn’t do to refurbish just one room, or to fix up the bathroom and leave the kitchen.
Some ways you can add value to any property include:
- Make the property clean looking, crisp, fresh, and warm. Paint in a neutral colour scheme. Add or replace carpets. Consider remodelling the kitchen and bathroom.
- Add functionality with an extra bedroom or extension.
- Repair any obvious problems such as a leaky roof or flaky plaster.
- Make it a home with eating and relaxing areas, and places that provide privacy.
Our FREE! and easy to use Property Auction Calculator helps you to factor in all the different renovation and refurbishment costs, including cleaning and decorating costs.
Repairs and maintenance
Be careful with your repairs. All repairs and maintenance costs are tax deductible. However, when the property has been altered so extensively that it can be considered to be reconstructed, it will be classified as "modified" rather than repaired, and then no amount of the expense is allowed to be deducted.
Tax-deductible repairs and maintenance expenditures include painting and decoration, treatment to remove dampness, roof repairs, and repairs to goods in the property such as washing machines.
Unless you have the skills, property management company professionals should perform most external maintenance of leasehold flats on your behalf. You’ll be charged pro-rata for these services, and be expected to pay the service charge quarterly, bi-annually, or yearly. On occasion, emergency maintenance work such as a structural or roofing problem that’s not covered by the building insurance may be an additional charge, but these sums will normally be communicated up front. This will give you time to challenge the cost before the works go ahead.
A £150,000 flat in South East England, for example, could see service charges in the range of £500 to £1,500 per year. You should allow for a one-off bill of say £500 to £2,500 for emergency repair work.
Interior maintenance will not be included in these service charges. You’ll do well to budget another £500 to £1,500 for redecoration, cleaning or replacing carpets, unblocking pipes, replacing locks, mending showers, or replacing boilers.
Our free calculator includes all the different costs to consider when preparing the repairs and maintenance budget.
Rental calculations
Get your costs and your choice of property right and you’ll be well on the way to becoming a successful landlord. You need to cover the costs of running a property for the life of the mortgage to end up with a healthy property that you own free and clear. Increases in property values over the last few years have made lots of landlords huge beneficiaries of rising prices. Some investment properties have even doubled in value.
A rental void is a period of time when you have received no rent on the property i.e. between tenants. Allow for rental voids: you cannot rely on your property being permanently occupied - on average UK investors experience three weeks per year without a tenant.
Letting agent's fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
When choosing a property to let it is wise to take advice from local letting agents to determine; what type of properties are in need, and in which parts of the town is best or most wanted.
The Association of Residential Letting Agents (ARLA) state that a property needs to be in the right area, close to transport and other facilities, and in good condition.
When choosing a letting agent to act on your behalf it is very sensible to choose one that is a member of the ARLA. The reason being, all members of the ARLA must join in a bonding scheme to protect rent and tenant's deposits. The bond provides total compensation of up to £2 million a year.
There are a number of tax issues that need to be looked at in order to maximize your tax position, such as being able to offset your maintenance costs, letting agent fees etc as well as any interest paid on a buy to let mortgage against your tax.
Also when you know all the important Rental Costs you’ll know exactly how much to bid at auction.
Our FREE! and easy to use Property Auction Calculator also includes all the different costs such as advertising, letting agency fees and a tenant reference check that you must consider when budgeting for rental costs.
Buying costs (Solicitors)
When you buy property at auction you’ll be required to pay costs such as solicitors (legal) fees, stamp duty and land registry searches.
There are also other possible costs that you could incur; such as having to pay money owed the local authority or possibly having to pay the sellers legal fees.
There are also a number of other possible costs if the property you have purchased is leasehold such as a notice of transfer.
Certain auctioneers and vendors additional costs have begun to become more common. Many auction houses have not only passed these costs on to the purchaser, but have made them payable when contracts are exchanged at the fall of the hammer.
All of these possibilities are included in our free calculator so that you’ll be made aware of these amounts that the purchaser is expected to pay.
Our free calculator includes all the costs to consider when budgeting for buying. It also includes costs such as Stamp Duty and Land Registry for you.
Top-level calculations
Knowing your net yield is essential. You can only get an accurate net yield by knowing all the possible costs.
Start with the gross yield, which represents the year’s rental income on your property, expressed as a percentage of its purchase price . Calculated as (Annual rental income × 100), divided by the purchase price. If you were to buy a house for £100,000, for instance, and manage to rent it out for £800 per month, you would receive £9,600 (assuming no void periods). This equates to a gross yield of 9.6%.
The net yield is calculated using the amount left after all costs for the purchase and for the year have been taken into account.
Gross rental yield can vary from as little as 4% to as much as 15% or even 20% of the property value. Net yields will usually be substantially lower than gross yields. Be sure that you’re comfortable with both types of calculations.
As a rule of thumb, your target for gross rental return should be around the average of 10%. Unless your main investment objective is capital appreciation, and you have the ability to make up for any rental shortfalls, anything less is not usually going to be worth the risk.
Some agents will quote projected net yields at around 75% of gross yields, but be advised this is vary optimistic. It’s more likely that your net yield will be closer to half of your gross yield. (That’s why 10% gross yield should be your minimum target – it will usually equate to only 4% or 5% net).
In most years 4% may be enough. It will not be enough if you suffer a year of long void periods, or substantial damage, or excess repair, maintenance or refurbishment costs.
There are nine top-level sums that you must consider when you decide if the investment is for you. Our free and easy to use calculator automatically determines all nine. They are:
- Your bid price limit, which is the maximum price you will bid up to. Our calculator allows you to adjust your limit to see how your potential profit margins and yields are affected.
- The total costs without a contingency, other than the purchase price of the property
- The contingency (Safety net on all costs).
- The total costs with a contingency, other than the purchase price of the property.
- The total cost of the transaction (including the purchase price and all costs including the contingency).
- The gross yield (no void periods).
- The net yield (no void periods).
- The gross yield (with void).
- The net yield (with void).
Our FREE! and easy to use Property Auction Calculator includes all nine of the top-level calculations investors need.
Running costs
Ground rent and council tax are only two of the possible running costs you need to know that are included in our free calculator.
Insurances and cover
An insurance policy for an owner-occupied property may not cover the property or its contents when the property is let. An existing, standard, buildings, or contents insurance policy may restrict the cover or increase the premium.
Insurance premiums are also fully tax-deductible.. You’re well advised to use an insurer who specializes in this type of property insurance.
Our free calculator includes all the different types of insurance that you need to consider when insuring your property.
Initial costs
At the exchange of contracts (when the hammer falls) you’re immediately responsible for the property. Making sure that it is secure i.e. checking the locks is an example of one of the initial costs.
Our free calculator includes the different initial costs that you’ll need to prepare for.
Service tests and cover
By law landlords must ensure that their property is safe for letting. For example, the landlord must ensure all gas appliances and all pipes are checked for safety every twelve months by a CORGI registered engineer. If any appliance or pipe becomes defective or dangerous it must be repaired or replaced immediately.
Formal records of these inspections and tests need to be kept on the premises of the let property, and should be supplied to the tenant renting the property.
Safety legislation is regularly updated. A letting agent should be able to provide full details of the latest relevant regulations, and help you determine any action that you need to take to keep your property safe for tenants.
Our FREE! and easy to use Property Auction Calculator includes all the costs that you must consider when budgeting for testing services and the cover and certificates for them.
Upfront costs
It’s very useful to know what costs you have to pay upfront and how much they are. This is especially true when you have to pay them regardless of whether you are the successful bidder at the actual auction.
Our free calculator has all the different upfront costs, such as property survey costs, and calculates the total of all of them.
Contingency fund
Wise investors allow for a contingency fund as a safety net to guard against anything costing more than they’ve budgeted.
Ten percent is a common and prudent amount.
Our free calculator allows you to enter a contingency percentage which is calculated against all costs.
Other costs
There are a number of costs such as accountant fees that don’t fall into neat categories.. Our free calculator anticipates these costs as well.
Don't pay too much for a piece of property at auction. Get a complete checklist of all the costs involved and how to calculate them with our FREE and easy to use Property Auction Calculator. We've done all the work for you. You'll know exactly what price you can bid up to at the property auction.
Have more questions about property auctions? Find answers now:
- Interested in FEE FREE Property Auction Bridging Loans and Mortgages?
- Property auctions beginners guide
- Property auction bidding tips
- Property auction financing tips
- Selecting the right property at a property auction
- Buying a property at auction to rent out
- Buying a property at auction to fix up and sell
