What is deal stacking?

Find out whether deal stacking is the process you need for profitable lets.

Please note, this article does not contain any financial advice. It’s simply meant to inform landlords of the potential options a buy-to-let landlord may have when investing.

What is deal stacking?

Deal stacking in the property market refers to the process of evaluating whether a property you’re interested in buying to let it out is a good financial decision. The process involves calculating the potential returns you could make, with the main focus being on the rental yield.

What is rental yield?

Yield is a calculation that helps determine the profitability of a buy-to-let property.

How do you calculate rental yield?

You can calculate the gross rental yield of any property by dividing the annual rental income by the current property value or the purchase price and multiplying this by 100 to receive the percentage value.

For example, you buy a flat worth £180,000 and rent it out for £900 per calendar month. If you’ve successfully rented out the flat for the full year, your annual rental income is £10,800. Divide this by the property’s value and your gross rental yield (not including any costs) is 6%.

To calculate your net rental yield, you also need to take your annual costs into consideration.

Continuing with the above example, let’s say that your mortgage payments, maintenance, insurance and other fees or taxes come to roughly £3,000 per year. You subtract your costs from your year’s rental income and then recalculate your rental yield using the new result:

What is a good rental yield?

According to Zoopla, the average rental yield in the UK is 5.6%, with Sunderland, Aberdeen and Burnley having top-performing gross rental yields above 8%.* Areas with the lowest rental yield were the South East (5.34%), East of England (5.28%) and London (4.93%).*

Now that we’ve had a look at how to calculate your rental yield, let’s come back to deal stacking and why it could be important for you as a landlord.

Is deal stacking important?

If you’re a landlord in the UK and are thinking about buying another property to let, then deal stacking may be highly relevant to you. Why? Because it helps you make informed decisions about your next buy-to-let and property investments.

Deal stacking can offer you an analysis of any potential expenses, e.g. costs to bring the property up to rental standards, potential void periods or even regular maintenance needs.

How does deal stacking work?

If you’ve invested in multiple buy-to-lets, then chances are that you’ve already followed this process to determine whether a property is worth purchasing and renting out.

Step 1: Yield calculation

The first step is to calculate either your gross or net yield (as shown in the examples above). A higher yield usually indicates a better return on investment.

Pro tip: It’s often a good idea to include any potential costs in your calculations. This will give you a more realistic understanding of how profitable the potential rental can be.

Step 2: Profit and loss analysis

Deal stacking involves creating a profit and loss statement so that you can account for any adjustments that need to be made when factoring in letting agent fees, services charges, insurance costs or mortgage payments.

Step 3: Benchmarking and comparing

To know whether your investment is good, you need to compare your potential property’s yield to that of other property’s in the same area and of a similar size. If you find that your potential rental yield is the same or above your comparisons or benchmarks, you could consider this to be a good investment.

What should I keep in mind when purchasing a buy-to-let?

Here’s a short list of factors you may want to discuss with your letting agent when considering a buy-to-let:

• Types of tenants you want to attract and let to
• Current and local rental demand
• Location and surrounding amenities (is the property close to public transport options, supermarkets, parks, schools, etc.)
• Type of property (furnished/unfurnished)
• Potential refurbishment costs
• Wear and tear

Talk to our local lettings team to find out how much you could earn or for any other general enquiries about your current rental property.