The Numbers Page

First decide whether you want to focus on rental income or capital appreciation.

It is of course possible to get both but concentrating on one prevents you from falling between two stools.

Residential property provides you with two streams of income, monthly rent and capital appreciation.

The amount of rent that you get per annum when compared to the purchase price is referred to as rental yield and is calculated using the following equation.

Nett rental income divided by purchase price = yield when expressed as a percentage

e.g You pay £80,000 for a house that gets £450 per month and you do not use a managing agent.

£450 x 12 = 5,400 divided by 80,000 = 6.75%.

So your rental yield is 6.75% a relatively simple calculation. We like simple.

Capital appreciation is the life changing element of residential property investment given enough time although it does depend on your plan. Rental “profit” looks good on paper but there are always voids and repairs and renewals which need to be taken into account and they are unpredictable.

So now you decide which you want to focus on. If its capital appreciation you get yourself a mortgage and if its income you probably pay cash.

Either way you will want the same kind of properties in the same kind of places, places where people want to live.

Example 1

I want to acquire £1million worth of property so I can become a full time ski instructor in 10 years.

I have £160,000 at my disposal plus some more from income.

So first of all how do we acquire £1million worth of property ?

Simple, you buy ten houses worth £100,000.

But lets start with one as an example.

Let me show you how.

Capital appreciation could be regarded as guaranteed given the laws of supply and demand, the only thing we’re not sure of is the timescale.

However, historical data shows us that generally speaking over any given 10-15 year period house prices rise above the level of inflation, although rarely in a straight line

So let’s look at what that does to a typical buy to let house. As mentioned before the best buy to let houses tend to be first time buyer houses in areas that people want to live. This means they are generally in the range of £80-125,000 for a new build and somewhat less for “previously loved” properties.

Lets take a house worth £100,000 as an example as that makes the arithmetic more straightforward.

We would normally expect to negotiate a discount on a new build house of 15-25% so we’ll assume 20%.

So value £100,000, discount £20,000, purchase price £80,000.

However, its important to remember the property increases by a factor of its value not its purchase price

You may be surprised to discover that in ten years time assuming the current rate of inflation (we’ve assumed 4%) that your property would come to be worth £148,024.

Value £100,000, purchase price £80,000, mortgage (80%ltv) £64,000, deposit £16,000.

Mortgage repayment of around £266 per month and a rental income of £450 per month will provide you with a monthly surplus which should be sufficient to cover all eventualities (on a new house anyway)

Capital appreciation would still be £68,024 in ten years but that represents a return on cash invested of 426%.

 If you have £160,000 available plus some extra from income to pay purchase costs then you can acquire ten houses worth £1million which have cost you just £800,000 and in ten years could be worth £1,480,240!!!!

With ten mortgages with outstanding balances of £640,000 thats an equity of £840,240!!!

Plus you will have been receiving a monthly surplus of around £1900 (increasing annually) to cover all your costs and have some leftover.

 

Example 2

I have £250,000 of savings/winnings/inheritance which I would like to put in a hands off safe haven to provide me with some income in my retirement and then pass on to my children in due time.

Banks will only provide a paltry return and are not guaranteed safe beyond £85,000 per institution.

Looking at the same property, value £100,000, purchase price £80,000 rental £450 per month, we could easily acquire three of those, covering costs and get £1350 per month gross rental income and in ten years that portfolio would be worth £444,072.

Enough for the children?

So the question is where can you find properties such as these?

Well I have some good news for you

Delicious recent opportunities

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