Buy-To-Let Net Present Value (NPV)

The single most important method of judging viability is to compare the Net Present Value of net rent income with the investment required.
This is sometimes referred to as the NPV Surplus:

NPV surplus (deficit) = NPV of net rents – investment required

In our example, the NPV of net rents calculated on the cash flows in column 7 using a discount factor of 5% over 30 years is £180,215. The total procurement cost was £259,600.

NPV Surplus = £180,215 – £259,600 = – £79,385

The NPV of net rent shows how much investment a buy-to-let project can repay from rental income over the discount period. In this case it falls £79,385 short.

If we deduct income tax from the net rent, the NPV drops to £168,235 for a basic rate tax payer, or £156,255 for someone paying tax at the higher 40% rate.

There is not much of a market for buying and selling whole portfolios of private rental properties in the UK. Consequently valuers are rarely asked to make an assessment of what it is worth as a going concern. But in the social housing sector council and housing association properties change hands based on what is sometimes referred to as ‘tenanted value’, which is calculated using the NPV in exactly this way.