Buying Your First Rental Property: The Checks to Run Before You Offer

Most first-time landlords work out whether they can afford the deposit. Far fewer work out whether the property makes money.

Those are different questions, and the second one is answerable in about half an hour before you offer.

The cash you actually need

The deposit is the number people plan for. It is rarely the number required.

On a 180,000 property at 75% loan-to-value:

In the worked example used across this blog we treat purchase costs as 7,500, giving 52,500 of cash invested against a 45,000 deposit. The extra 7,500 is the part beginners forget, and it is the number cash-on-cash return is measured against.

The arithmetic that decides it

Four figures, in this order. If it fails at any step, stop.

1. Gross yield - the screening filter

Annual rent divided by purchase price. Quick, crude, useful only for eliminating obvious non-starters.

2. Net yield - after real costs

Voids, management, maintenance, insurance. On our example the honest figure is 6.8% against a headline 9.3%.

3. Monthly cash flow - after the mortgage

The number that decides whether you can hold the property. Ours produces about 196.58 a month.

4. Break-even rent

The rent below which it costs you money. On our example, about 1,147 against actual rent of 1,400 - roughly 18% of headroom.

Run all four on the free Rental Yield & Cash Flow Calculator before you offer. It takes about thirty seconds once you have the figures.

Stress it before you commit

A deal that only works in perfect conditions is not a deal. Change one variable at a time:

• Interest rate +1.5% - our example's cash flow falls from ~197 to ~71 a month while the yield barely moves
• Two months empty instead of two weeks - see How to Reduce Void Periods
• Rent 10% below your estimate - because your estimate came from asking prices, not achieved ones
• A 3,000 repair in year one - a boiler, a roof, a rewire

If the property survives all four, it is genuinely robust. If it fails two, you are buying a hope.

Checks that reveal a bad deal

Achieved rent, not asking rent

Look at what comparable properties actually let for and how fast. Anything still advertised after six weeks is priced wrong, and using it as your benchmark builds the error into every calculation that follows.

Service charge and ground rent, in writing

On a leasehold flat this can be 1,500-3,000 a year and it comes straight off your yield. Ask for three years of actual statements, not an estimate. Ask specifically whether any major works are planned - a roof or lift replacement can arrive as a five-figure demand.

Lease length

Short leases get expensive to extend and hard to mortgage. Below about 80 years, price the extension in before you offer.

Licensing

Some councils and cities require a licence to let, with a fee and conditions. Check the specific address, not the general area.

What the survey says about heating, roof and damp

The three that produce four-figure bills. A cheap valuation is not a survey.

The finance test, run yourself

Lenders stress your rent at a higher rate and require cover of 125-145%. Run it before you apply - a property can be affordable to you and still unfundable. See How to Finance Your Next Rental Property.

Things that are not investment reasons

• You liked it. You are not living there. The tenant's preferences and the numbers decide
• It was cheap. Cheap and low-yielding is common. Cheap and unlettable is commoner
• Prices always go up. They do not, and capital growth cannot pay a mortgage in the meantime
• The agent said it rents easily. Ask what it achieved and how long it took to let. If the answer is vague, it is not evidence

Before the first tenant

Once the purchase completes, four things should exist before anyone views it:

1. Written screening criteria - decided while nothing is at stake. See How to Screen a Tenant
2. A tenancy agreement that is correct for your jurisdiction
3. A deposit plan - cap, scheme, deadline. See Tenancy Deposits
4. An inventory, photographed and ready to sign at check-in

Landlords who set these up before the first tenancy rarely have a bad first year. Landlords who improvise them during it usually do.

Frequently asked questions

How much deposit do I need for a first buy-to-let?

Typically 20-25% of the purchase price, plus purchase costs on top. Lower-deposit products exist but the rate is usually worse, which hurts the cash flow that decides everything.

Should I buy near where I live?

For a first property, strongly consider it. Self-managing is realistic within about 30 minutes; beyond that you are paying an agent, which changes the arithmetic - see Letting Agent or Self-Manage?

Flat or house?

Houses avoid service charges and ground rent, which are the two costs most likely to erode a yield unexpectedly. Flats are often cheaper to enter and easier to let in city centres. Run both through the calculator rather than deciding in principle.

What return should I expect?

There is no correct number, but be suspicious of any deal whose case rests on capital growth. If the cash flow does not work today, you are relying on something nobody can promise.

Do the arithmetic before the viewing

Free, nothing to download: the Rental Yield & Cash Flow Calculator gives you all four numbers in about thirty seconds.

Once you own it, the Rental Property Tracker keeps rent, expenses and mortgage interest in one place from day one - which is much easier than reconstructing year one in month thirteen. $27 once.

General information for landlords and prospective investors, not financial, tax or legal advice. Purchase taxes, licensing requirements, lending criteria and leasehold rules differ substantially by country and region. Figures are illustrative and based on the worked example used throughout this blog. Speak to a qualified broker, solicitor and accountant before committing to a purchase.