How to analyse a property deal step by step

The property: setting the scene

For this worked example, we are looking at a 3-bedroom mid-terrace in Sheffield S6, listed at auction by McHugh & Co with a guide price of £145,000. The property was last sold in 2017 for £98,000. It appears to need cosmetic work - new carpets, decoration, and potentially a new kitchen - but no structural issues are visible in the listing photos.

Step 1: Is the guide price in the right ballpark?

The guide price at auction is not a valuation. Sellers set guide prices to generate interest. We need to know what similar properties actually sell for.

Using Land Registry data for S6 in the last 12 months: 3-bedroom terraces have sold in the range of £130,000-£165,000, with a median around £148,000. The guide price of £145,000 is within normal range. There is no obvious bargain here, but there is no premium either. We would expect the actual auction price to land somewhere between £140,000 and £158,000 depending on competition.

Our target purchase price: £142,000 (just below the median). This is the number we will use to run the deal analysis.

Step 2: Estimate the rent

Never use the vendor's or agent's rent estimate without checking it yourself. Agents have an incentive to make the deal look attractive.

Search Rightmove and Zoopla for 3-bedroom terraces currently available to rent in S6 and immediately adjacent postcodes. As of this analysis, active listings in S6 are asking £725-£850/month for 3-bed terraces. Larger or recently refurbished properties are at the top of the range.

Given this property needs work and will not be prime condition, a realistic achievable rent on completion of basic cosmetics is £725/month. We will use £700/month in our analysis as a conservative figure to give ourselves margin.

Annual rental income: £700 x 12 = £8,400

Also check PropertyData or a local letting agent to confirm rental demand. A low-demand area with falling asking rents changes the picture significantly. In S6, the 12-month rental trend from PropertyData shows rents up approximately 4% year-on-year. Demand is reasonable.

Step 3: Calculate gross yield

Using our target purchase price of £142,000 and annual rent of £8,400:

Gross yield = (£8,400 / £142,000) x 100 = 5.9%

This is below the 7% threshold we would want to see ideally. At 5.9%, there is not a lot of margin. But let us continue the analysis to see what the net cashflow actually looks like, because gross yield is not the decision metric.

If the property can be purchased at £135,000 (a realistic outcome if competition is limited), the yield improves to 6.2%. Still below 7%, but better.

If we assume the refurb adds value and supports higher rent of £725/month: - Gross yield at £142,000: (£8,700 / £142,000) x 100 = 6.1%

The yield is marginal. This tells us the deal needs to be bought well to work.

Step 4: Full cashflow analysis

Assuming purchase at £142,000 with a 25% deposit (£35,500) and a 5.2% interest-only BTL mortgage on £106,500:

Monthly income - Rent: £700

Monthly costs - Mortgage interest (5.2% on £106,500 / 12): £461 - Letting agent at 10%: £70 - Landlord insurance: £30 (£360/year) - Maintenance reserve at 10%: £70 - Void allowance (4 weeks / 12 months): £54

Total monthly costs: £685 Monthly cashflow: £700 - £685 = £15

This is barely positive. £15/month does not make this a compelling deal. You are essentially providing a property management service for free.

The numbers would improve at a lower purchase price. At £130,000 (25% deposit = £32,500, mortgage £97,500): - Mortgage interest: £422/month - Total costs: £646/month - Monthly cashflow: £700 - £646 = £54 - Annual cashflow: £648 - Cash-on-cash return: £648 / (£32,500 deposit + £6,500 SDLT + £3,000 costs) = 1.5%

Still modest, but at least meaningfully positive.

Step 5: The go/no-go decision

The numbers on this Sheffield terrace at £142,000 are marginal. Monthly cashflow of £15 provides almost no buffer for unexpected costs. A single boiler replacement wipes out 5 years of cashflow.

The deal could be improved if: 1. It can be purchased at or below £130,000 2. Post-refurb rent is confirmed at £725/month+ 3. You self-manage (removing the 10% agent fee, saving £70/month = £840/year)

At £130,000 purchase price and £725/month rent with self-management: - Monthly cashflow: £725 - (£422 mortgage + £30 insurance + £73 maintenance + £56 void) = £144/month - Annual cashflow: £1,728 - Cash-on-cash return on £42,000 total cash: 4.1%

This is a genuinely acceptable deal. Not exceptional, but cashflow-positive with a reasonable return.

The verdict: Only pursue this property if you can secure it under £130,000. Set a hard maximum bid at that level at auction and walk away if it goes higher. Discipline at the point of purchase determines whether a deal works.

The checklist approach

For every property you consider, work through this checklist before spending any money:

1. What do comparable properties actually sell for? (Land Registry, not the vendor) 2. What is a realistic conservative rent? (Three active listings, not the agent's estimate) 3. What is the gross yield at my target purchase price? 4. What is the monthly cashflow after ALL costs including voids and maintenance? 5. What is the cash-on-cash return on total cash deployed? 6. What is my maximum bid/offer and what happens to the cashflow if I pay 10% more? 7. Is there a clear exit strategy (hold for income, sell in 5 years, refinance)?

If any question produces a number you are uncomfortable with, step back. The best deals are the ones where the numbers look good even when you are pessimistic about rent and generous about costs.

Related guides