What’s your buy-to-let worth?

14 September 2023 4685 Views

As the ‘big buy-to-let’ sell off gathers momentum, we take a look ways you can guestimate the value of your rental property or portfolio and the additional market challenges that you also have to consider.

How to value your buy-to-let

At the end of the day, a property is only worth what someone is willing to pay for it, and in this market, the demand may well be dwindling – from both owner occupiers and investors.

To give yourself an idea – and I say idea because all information gathered should be taken with a pinch of salt – you should start with a simple bricks and mortar desktop valuation.

This is not dissimilar to how you would value any type of residential property and involves comparing sold prices of similar properties in terms of type (i.e. detached house, flat), number of bedrooms and location.

Using tools like RightMove and Zoopla, Google Street View and Local Authority websites is extremely useful.

Make sure you:

• Look at the sold prices of at least three comparable properties

• Try and ensure these are within the same road or post code

• Disregard sales over 6 months old

• Take into account the condition of those properties compared to yours with a plus/minus calculation

• Look at properties for sale with newest to oldest which helps track market movements in the current market

One of the biggest mistakes that landlord vendors make during this process, however, is assuming that there are ready and willing buyers. Right now, there are less buyers generally, not to mention fewer landlords or would-be landlords looking to invest in more properties. The demand at the time of the valuation could be significantly different to as little as a month ago.

Owner-occupiers would also take a less encouraging view of a property that has been rented out, with an increased chance of it being finished to a high standard or well-maintained.

That then leaves potential investors, who will be more interested in the income potential, and take a more commercial view.

Commercial valuation

Although lenders won’t usually value the commerciality of a single-tenancy buy-to-let for mortgage/remortgage purposes, a landlord buyer will be interested in the property’s performance as a rental.

A loose formula is the gross rent minus reasonable operating costs, multiplied by 12 and divided by the yield then multiplied by 100.

Here is a basic example of a property based on the current average monthly rent (Goodlord August 2023), assumed operating costs of 20% and the current average yield of 4.76%:

(£1,347 - £270) x 12 / 4.76% (x100) = £271,344

This does not, however, take into account any mortgage costs, nor location, and as a result, the bricks and mortar value could actually be significantly higher, or lower.

When a landlord takes a commercial view, they will also consider whether the property is compliant, properly licensed if applicable, and what work would need to be done such as EPC improvements.  

This is the most likely valuation an investor will want to know about if you are a portfolio landlord selling multiple buy-to-let properties. The valuation methods and formulae above all stand, but you could do further analysis and provide averages, plus discount on the total value of the portfolio to remove any additional hassle, delays and aggravation of selling properties individually.

Additional problems with selling a buy-to-let in today’s market

The main issue with selling a buy-to-let is tenure. A vacant property will be easier to sell and appeal to a wider range of buyers, but a property sitting empty for over 200 days will be costing the owner money.  Selling with tenant in situ, though, dramatically reduces the buyer pool to investors.

Current market conditions make it a less than favourable market for landlords to sell also:

• Annual buy-to-let profits are down £4,000 a year on average (June 2023 compared to June 2022) according to finder.com. This is a 59% difference based on mortgage rates a year apart.

• Buy-to-let lending has dropped 40%, as has the value of loans, suggesting the big sell off has already started and as a result, the market is more saturated with rental properties for sale.

• Rental properties sold in 2023 made £10,500 less compared to those sold in 2022 according to Savills.

• Zoopla reports that buy-to-let properties are typically priced 25% lower than the wider housing market.

• Properties are taking longer to sell, with the average completion time standing at 220 days, and it taking twice as long just to find a buyer (Hamptons) compared to last year.

Of course, the only real way to know how much your buy-to-let property is worth on the open market is to put it up for sale. Priced correctly, and it might sell quickly, but then you’ll be wondering if you could have made more. Overpriced and it will struggle to garner interest and you’ll potentially have an empty property generating zero income and a mortgage that still needs paying.

If you have a portfolio, then times that hassle by the number of properties.

An alternative is to sell to a professional cash buyer. Open Property Group will buy any rental property in any condition, regardless of location, lease length or tenure.