07/10/2021
18.5% annual return on money invested
Firstly I’m not trying to sell a course and the below cannot be constituted as advice it is for information purposes only
I’ve been in property investment for over 25 years and a mortgage advisor for over 13 years and today I wanted to share some of the numbers on a current deal I’m purchasing to show how good money can be made just on simple BTL deals that are easy to find on Rightmove/ Zoopla etc.
So my current purchase is a one bedroom town centre flat. Newly decorated kitchen and bathroom within the last 3 years. Also all the old storage heaters have been replaced ( so minimal maintenance I foresee for next few years if any)
Agreed purchase price of £133,000 and as one of the vendors was an electrician I also negotiated a new EICR Certificate ( Electrical testing certificate that you have to have renewed every 5 years to rent a property for those that don’t know)
So property is ready to rent day 1 at an expected rent of £700 per month circa £8,400 per annum
118 year lease at £150 per annum ground rent
Service charge which will include buildings insurance etc £800 per annum
I usually use an agent on a find only basis and if there is a renewal part of the contract ( ie they want to get paid every year tenant is still there) I have that scrapped if they want my business
Generally pay 7%+VAT for this service = 7% 0f £8,400 = £588+VAT = £705.60
I find the marketing, viewings and most importantly the legal process of issuing documentation is worth this fee. Ongoing management to tell me that something isn’t working and that I need an electrician for example to me isn’t worth the figure in year 2. Happy to pay it again in year 2 for finding a new tenant but generally my tenants stay on average I’d say 3 years plus
I find if you use an agent for vetting purposes they will usually use a company who ll offer landlord rent guarantee and legal fees assistance for around £200. I always take this out for year 1 and then take a view after relationship has developed. I always take cash deposit which I handle and put in DPS scheme. Tenant deposit insurance is not for me
As a cash deal my rental yield based on real costs would be:-
£8,400 - £150 ground rent - £800 service charge - £705.60 estate agent - £200 landlord insurance =
£6,544.40 / £133k X 100 = 4.92% which is pretty good for the South of England. Usually I see about 4.2% before costs
So where do I get to 18.5% ?
Well the power of leverage
I typically mortgage all properties on an interest only basis for cashflow purposes with a 25% deposit on a 5 year fixed basis. As a 5 year fixed deal generally lenders lend more money based on their rental affordability calculator. This property is going in my wife’s name for income tax purposes as she is a basic rate tax payer
So putting down £133,000 x 0.25% = £33,250 deposit
As an additional property it attracts additional stamp duty charge which is £4,150
My legals are £1200 inc VAT
I have also paid the valuation fee on this mortgage lenders product of £300. There are no application fees with the product I have chosen
So total REAL money into deal is £33,250 ( deposit) + £4,150 ( Stamp Duty) + £1,200 ( Legals) + £300 ( Valuation) = £38,900 (important number as this is how I calculate the return on money invested)
The lender I am using I have selected a 5 year fixed product at 1.98% interest per annum which on the remaining:-
£133,000 purchase price - £33,250 deposit = £99,750 X 0.0198 = £1,975.05 interest only mortgage payment per annum
As I have a mortgage payment my net profit is:-
£6,544.40 - £1,975.05 = £4,569.35 per annum from rental element ( this my be less in future years for maintenance but equally I may have a reduced letting agent bill if tenant stays longer than 12 months
In my calculations I also allow ( as South of England ) 2% property price inflation
So on £133,000 @ 2% I calculate a capital growth of £2,660
I base my property growth expectations on CPI inflation. The reason being I believe that’s a sustainable figure long term. If goods go up 2% then wages will follow suit and therefore borrowing affordability will go up 2% and ultimately that will make property prices increase by 2%
CPIH ANNUAL RATE 00: ALL ITEMS 2015=100 - Office for National Statistics (ons.gov.uk)
Now historically it’s been more than this ( slightly out of date but shows further back historic data)
UK House Price Index - Office for National Statistics (ons.gov.uk)
But I think 2 % is a fair long term number
Final Return on money invested per annum calculation
( £4,569.35 ( rent) + £2,660 ( capital growth prediction ) = £7,319.35 ) divided by £38,900 X 100 = 18.8%
Even if I remove the capital growth figure £4,569.35 / £38,900 X 100 = 11.7% and this the kind of number I’m always looking for double digit return on investment to allow for extras like any maintenance etc long term
That’s great I hear you say, for you, but I don’t have nearly £40k to invest
Well you may have in equity in your current property and this isn’t for everyone to leverage their main residence to purchase a investment property it depends upon your attitude to risk which only you can decide and I cannot advise on
I will give you food for thought though currently as of October 2021 there are residential remortgage rates up to 75% LTV from as low as 1.4% with no fees ( makes this easier to give an example with no fees as then everyone’s equal)
If you have enough equity to borrow up to 75% taking into account your current mortgage and the additional £40k for example required and subject to valuation, affordability, credit status, early repayment charges and understanding that your home may be at risk if you cannot keep up the repayments on your mortgage. You could potentially borrow the additional £40k at a cost of £560 per annum £40,000 X 1.4% = £560 ( when your fixed rate ends is when I would suggest looking at this as I don’t advise paying Early Repayment Charges if it can be avoided)
£7,319.35 - £560 = £6,759.35 per annum potential profit from remortgaging and investing in property
I reiterate the above is for information purposes only and I’m not advising you do the above. Property prices could go down as well. Interest rates could also go up in the future so I’d recommend doing more research to make sure you are happy with this kind of investment ( I have horror stories as well of a cannabis farm in one of my properties so its not all roses)
However as a mortgage advisor if you would like to discuss with me on FEE FREE basis your own circumstance’s I’ll happily help take a look at your numbers for you
I hope this helps some of you thinking about property investing as to what’s possible without major works and happy to answer any questions
