The standard investment recommendation for any young couple is to buy their own home. I respect the reasons, and I understand the comfort factor, but I don’t think financial intelligence will ever allow me to own my own home.
I thought I’d make this more of a “practical” blog post on property investment and hope to show a different view on home ownership, so lets jump into some numbers.
The kind of home I would want to live in would cost me about £350k minimum, call me a snob, I wouldn’t want to live in anything cheaper. Mostly this is because I want to live in the country, in a nice area, with land for the horses and close to a “nicer” city. We’ve had a look at a few properties around the £650k mark – nice barn conversions with a few acres – one of these would be ideal.
To rent either of the above kinds of properties would cost anywhere from £900/month, to about £1,500/month. Likewise, if I were to own those properties and rent them out, I’d have a rental return of between 2.8% and 3.1%
Lets just say for a minute I had two options on the table, one was the £650k property above, and the other was to rent that property for £1500/month, and instead buy £650k worth of investment properties.
The UK being what it is, there are plenty of properties on the market for less than £80k which have a rental potential of around £500-£550pcm. You have to look carefully, but they are out there. These are houses I would never want to live in, but buy to lets are not “homes”. The rental return on these dives is hovering at about 7%-8%.
Spending £640k on BTL properties would leave me with 8 such properties, with a combined rental potential of £4,000/month. So to draw a direct comparison, that’s £1,500 as opposed to £4,000.
The numbers above assume you are buying these properties outright, which doesn’t make sense when I get a higher ROI sticking those amounts in a cash account, than on the capital appreciation of a property.
The real excitement comes when you look at your lump of money, get a bunch of self funding BTL mortgages, and your tenants pay off your mortgage for you.
The minimum deposit on a BTL property is currently 25% (just a few years ago you could get 110% mortgages, those were the days!). So with those numbers in mind, taking into account increases in rental potential (3%/year) and house prices (3%/year conservatively on average) you ROI figures are as follows:
Year 1: 5.05%
Year 2: 22.73%
Year 3: 41.41%
Year 4: 61.13%
Year 5: 81.93%
Year 6: 103.83%
This compares with a compound interest rate of 13% – which is a pretty nice interest rate to aspire to.
Choosing the investment properties option I’ll only spend about £830/month to rent the £650k property (because the BTL’s are earning money from day 1) instead of paying £2,740/month in mortgage repayments, making me £1,910 better off every month, or £690,000 better off over 30 years. (wow!)
This is the plan anyway… In the meantime I invest in other things while I wait out “the system” (UK Residency, UK Credit History, 3 Years Company Accounts, etc etc etc) – Being a non EEU foreigner can be a massive PITA.
I’ve dumped the full spreadsheets below for an investment property worth £80,000 with a rental potential of £500/month (7.5% rental return) over a 30 year period. It calculates costs including tax on income, lettings agents fees, landlords insurance, etc. It doesn’t calculate time left empty, which is about 6% on average in the UK.
|Property Details||Value||Rent||Agents Fees||Monthly Principle||Monthly Repayments|
|Landlord Insurance||Monthly Cash Net||Years Cash Return||Years Value Increase||Years Total Return|
|Total Cash Net||Value Increase||Total Return||Total %ROI|
If that makes any sense whatsoever, I’m extremely pleased to have been able to communicate a complex strategy. If not… well… story of my life I guess