Cheap Buy-to-Let Houses: Testing the Cash Flow
January 14, 2023
Cheap buy-to-let houses aren’t automatically good investments. A low purchase price can hide poor demand, expensive repairs or a property that’s difficult to finance. But sometimes a change in rents and borrowing costs makes the numbers on a lower-priced house much more interesting.
That’s what I was seeing when I recorded my January 2023 video about buying cheaper houses. I hadn’t always favoured that part of the market. Rising rents had changed the calculation, while the smaller mortgage meant the interest bill could remain manageable compared with a much more expensive property.
The example in that video was a three-bedroom house advertised at £95,000. I wanted to negotiate closer to £85,000, but I initially ran the figures at the asking price. These are historical deal assumptions, not a current listing or a promise of the rent, mortgage rate or return available today.
You can watch the original cheaper-house investment calculation alongside the explanation below.
Why I had previously been cautious about cheaper houses
One of my concerns was maintenance. People often put a percentage of rent into their spreadsheet and assume that covers the likely repairs and empty periods. That can make a lower-rent property look better than it really is.
In the video, I explained that a house renting for around £700 a month might need more than a £70 monthly allowance. My experience suggested budgeting nearer £100 a month for maintenance and voids in that sort of example.
The underlying point is that property costs don’t all shrink with the rent. A boiler, a damaged floor or a period without a tenant can still be expensive in a cheaper house. You can’t simply assume that everything costs half as much because the purchase price is lower.
That’s why I hadn’t treated cheap houses as an automatic route to strong cash flow. I wanted the actual income and likely expenses to justify the investment, including the less exciting costs that arrive after completion.
What changed in the example I was considering
The rent was the main change. I described similar properties that had previously let for around £695 a month, while the available comparables I was examining were advertised around £850–£875.
I also looked at recent local lettings, where the rent varied with condition. For the calculation, I used £850 rather than the higher asking figure. That was my working assumption based on the research discussed in the video; it wasn’t a guarantee that the house would achieve that rent.
A rent increase matters because some of the costs are relatively fixed. If a sensible maintenance allowance stays at £100 while rent rises, more of the additional income can potentially reach the landlord. However, management charges linked to rent also rise, and other costs can increase over time.
The lesson isn’t to copy the old rent. It’s to revisit a market when the relationship between price, rent and costs changes, rather than sticking permanently to a view formed several years earlier.
The £95,000 purchase calculation
At a £95,000 purchase price and 75% borrowing, the mortgage would be £71,250 and the deposit £23,750. That’s the first important split: the price of the property isn’t the amount of cash you need, but the deposit isn’t the whole cash requirement either.
In the video, I allowed roughly £1,500 for legal costs and £1,500 for mortgage-related fees, with a rounded £3,000 allowance for stamp duty. Together, those assumptions put the initial cash requirement at about £29,750, which I described as around £30,000.
The tax allowance belonged to the rules and circumstances of that historical example. It shouldn’t be copied into a new purchase. Stamp duty, the additional-property surcharge and any non-resident surcharge depend on the transaction and the rules in force.
For a purchase now, check the government’s residential Stamp Duty Land Tax guidance if the property is in England or Northern Ireland. Scotland and Wales use different property transaction taxes. I would also add a separate cash reserve rather than assuming the acquisition budget is all I’ll need.
What the monthly cash flow actually showed
Using the video’s illustrative 5% interest-only rate, interest on £71,250 comes to £3,562.50 a year, or £296.88 a month after rounding. That calculation assumes interest only; it doesn’t include paying down the mortgage balance.
The other monthly allowances were £20 for insurance, £100 for maintenance and voids, and £85 for management. The management allowance represented 10% of the assumed £850 rent.
Subtracting those amounts from £850 leaves approximately £348.13 a month, or £4,177.50 a year before tax and any costs not included in the model. The video rounded this to roughly £350 a month. The precise result depends on using consistent figures throughout the calculation.
I’d also check whether the management quote includes VAT, and whether there are separate tenant-finding, renewal or other charges. If an additional cost wasn’t in the model, it must come out of that surplus. My guide to letting-agent fees explains why a headline percentage doesn’t always tell the whole story.
A headline return needs a clearly defined denominator
The video described a return of around 14%. Using the consistent figures above, £4,177.50 divided by £29,750 is approximately 14.0%. That’s a projected annual pre-tax cash return on the assumed initial cash outlay.
It isn’t a guaranteed return, a total investment return or a prediction of capital growth. It also changes if the buying costs, reserve, rent or operating expenses change. Add more cash to the project and the percentage falls unless income increases too.
I find this distinction useful because a percentage can look very precise while resting on estimates. The decimal places shouldn’t distract you from asking how reliable the underlying numbers are.
A good deal assessment shows both the pounds and the percentage. I’d want to know how much money is left each month and how much cash I have committed, before deciding whether the return compensates me for the work and risk.
Why a smaller mortgage can help when rates rise
The comparison I made was with more expensive southern property. In the video, I discussed three-bedroom houses around Didcot costing roughly £350,000–£400,000, while the rent was around £1,400 a month.
Those were historical local figures. The point was the relationship: the purchase price and mortgage could be several times larger, without the rent increasing in the same proportion. When interest rates rose, that difference became much more important to cash flow.
A one-percentage-point increase on a £71,250 mortgage adds £712.50 a year in interest, or £59.38 a month. On a £300,000 mortgage, the same change adds £3,000 a year, or £250 a month. Those are simple interest-only illustrations, excluding fees.
That doesn’t make every cheap house safer. It explains why the amount borrowed matters alongside the interest rate, and why I was willing to reconsider properties I had previously passed over.
The asking price wasn’t my target purchase price
Although I used £95,000 to show the calculation, I said I wanted to buy at about £85,000. I was interested in creating some protection through the purchase price rather than relying entirely on future growth.
A lower price can reduce the required deposit and borrowing, but only if the property is worth buying in the first place. I’d want comparable evidence for the value and a clear view of condition. A ten-thousand-pound reduction isn’t useful if an overlooked problem costs substantially more to fix.
The original video described a property I intended to view and potentially offer on. It didn’t establish that this particular purchase completed at £85,000. I wouldn’t turn an intended negotiation into an invented result.
The process is what matters: do the numbers at the asking price, establish the price you actually need, then assess whether the seller will agree. If they won’t, keep looking rather than forcing the model to justify the deal.
Stress-test the surplus before spending it
The projected £348 monthly surplus gives us a starting point for testing the deal. If the interest rate were 7% rather than 5%, the annual interest would be £4,987.50, or £415.63 a month. Keeping the other assumptions unchanged leaves about £229.38 a month before tax.
That is still positive in this simplified illustration, but the room for additional costs is smaller. A major repair or a prolonged vacancy could absorb months of projected income. The £100 allowance is a budgeting assumption, not an insurance policy against every problem.
I’d test the rent too. If the property only achieved £800, or required work before letting, the attractive initial calculation would need revisiting. Include the cost of holding it while no rent is coming in.
For a broader explanation of that process, see my article on the profit left from £1,000 rent. The habit is the same at any price: work from the income down, then ask what you’ve missed.
I can test those assumptions in our buy-to-let deal calculator. It separates the cash required from rental cash flow and lets me allow for maintenance, empty periods and higher interest costs. The results are illustrations before tax, not promises of what a property will earn.
Buy the numbers and the property together
What interested me wasn’t simply a house below £100,000. It was a particular combination of price, rental evidence, manageable borrowing and the possibility of negotiating a better entry price.
I’d still need to inspect the property, understand the local tenant market, check the legal position and confirm that suitable finance was available. A spreadsheet can’t tell me whether an apparent bargain has a problem hidden behind the headline figures.
My view changed because the circumstances changed. That’s a useful habit for any investor: keep your principles, but be prepared to reconsider which properties meet them.
If you’d like help assessing your own purchase budget and cash-flow assumptions, book a free 30-minute call. You can also explore the Starter Club or learn about Done For You.