When you discuss your personal or corporate investment in property or stocks, you consider that the money which you have invested, plus the dividends and interest earned during a given period, less the costs of investing and the taxes to be paid on your earnings, collectively represent your total investment picture.
You also determine that the Return on Investment (ROI) is the earned portion less the costs. Return on Investment would therefore be described as a ratio of the amount invested divided into the earned amount less the costs. But do not be fooled by the simple equations, ratios or get led astray by focusing solely on the capital returns. There are many pitfalls waiting for the un-weary investor. Getting it right does not happen without planning, market analysis and geo political awareness. Investing in buy to let property is not an instant road to riches scheme.
An investment in knowledge always pays the best interest. There is simply no substitute for expert advice; H&G are available to help you make the right choices in 2014 and beyond.
Our short guide covers your potential risks and rewards and where you can go to learn more.
Before you dive in be prepared to…
- Have a deposit on the property tied up for an indefinite period. This is usually about 15-20% of the property value.
- Get the place up to a very high standard so that you can be confident it will attract paying tenants.
- Pay for maintenance work to be done.
- Weather any fluctuations in the market.
Tips for Success:
Firstly do your homework, or employ H & G to do it for you. Due diligence is quite simply the most important part of your purchase.
Once the due diligence is done:
Location, location, location; this has always been one of the most important factors when buying investment property; a good location will help you create a steady yield and thus, a healthy return on your investment (ROI).
The most desirable properties are conveniently located for public transport, local amenities, restaurants, bars and have parking facilities nearby.
Potential clients should use our expertise to find out which areas and what kinds of property are in demand. We will be able to advise you about local rental incomes and potential ROI.
Charging too high a rent will put off prospective tenants – H & G could help you research the market conditions thoroughly. Remember that in some cases the rent may not always cover the mortgage if you have one, and if the lettings market is sluggish, you may not succeed is covering your entire monthly mortgage amount.
A well maintained and attractive property will be much more in demand than a rundown property. H & G can organize all aspects of property maintenance on your behalf.
If you decide to let the property furnished, it is worthwhile taking some time to find out what features make a property desirable to tenants. Again, H & G will be able to advise you on this, we could also introduce you to several trusted Interior Designers, it is especially important in Spain and her associated Islands, where demand for quality properties is very high.
If you have the money, time and inclination, you may consider investing in a property that needs some work. You’ll be able to customize it to the needs of your tenants. H & G could introduce you to; reliable builders who will help you renovate your property and get it up to the standard desired by high net-worth tenants.
If you do not have the time or inclination to buy a property that needs a lot of work, then a fully built property may be more suitable. However, it is worth remembering that even new properties will need maintenance and the maintenance requirements will increase as the property ages.
When you are investing in the property market, try to remember that it is not you, who is going to be living in it. Look at it with an objective eye, think like an investor and do not get emotionally attached to your investment.
There will come a time when the market either returns to its normal level, following a slump in prices, (hopefully you were in at the bottom) or there may be a spike in an upwards direction, due to cost push inflation of some other factor.
At this point, you should sell, in order to return the maximum profit from your investment.
Far too many investors enter the property market like sheep, simply following the socioeconomic trends. They enter at the top of the market and exit at the bottom; this is complete nonsense and financial suicide.
Once again, do not become emotionally attached to the property and look to maximize your ROI wherever and whenever you can.
Buy To Let Mortgages:
H & G have a number of lenders who have loans and mortgages tailored specifically for the buy to let market. These mortgage lenders (also referred to as Residential Investment Loans) will lend between 15-115% of the purchase price of the property if you are a resident in the EC.
The majority of these mortgages are usually about 0.5 % higher than a normal, standard variable rate mortgage. They are available in Long, Short, Fixed and Capped options.
Before committing to an investment loan of this kind, H & G will help to review your current and long-term situation and make sure that you know exactly what you are getting yourself into. We can help and advise you with the following:
- Your ability to cover the mortgage repayments and insure the property if I have no money coming in from rent. And advise how to manage your portfolio.
- Advise you on how to exit the market with profit, if the housing market appears to be slumping.
- We can advise you on how to take out a mortgage on the property, and how this affects your investments.
Below are some hints and tips which can help you understand the buying process a little better.
How Much Can You Afford?
Traditionally the purchase price of your property is just the beginning of the costs issue. If you take out a traditional mortgage, then you must add interest into the equation, which may be a significant sum. On top of that, you have the following fees which need to be paid. (If you are buying Bank repossessions, in some instances the Banks will pay the costs for you)
|*Costs||Approximate costs for £100,000 property.|
|Lending source’s solicitor’s fees||£300|
|Mortgage Indemnity Guarantee||£1,400|
Traditionally mortgages come in all shapes and sizes. And lenders are giving birth to new types every year. Generally, mortgage lenders will lend you about three times your annual gross salary. If you are buying with a partner, then they may lend you an extra amount equivalent to one times his or her annual gross salary. Harriet and George could organize a 100% mortgage with our colleagues at the Bank if this is suited to your financial situation. You may in some instances be asked to pay the taxes in advance.
Repayment vs. Interest Only:
You have two choices in how you repay your capital – you can either pay it back a little at a time (repayment mortgage), or pay it all back at the end of the contract term (Endowment, ISA, and pension mortgages).
- Repayment mortgage – each month, you pay off part of the capital as well as part of the interest due on the loan. At the end of the term, the mortgage is clear. This is the least risky type of loan.
- Interest only – you make monthly payments to pay off the interest on the loan; at the same time you make payments into an investment fund that will pay off the capital cost of the loan at the end of the loan’s term. So, you don’t pay off the capital during the term of the mortgage.
Calculating Your Rental Return;
When buying rental property it is important to know how to calculate the returns your investment will make. Below we will discuss and demonstrate some of the most common calculations and figures you’ll need to know. You should always do a quick appraisal of any investment before you go ahead to make sure it’s worth your while.
When calculating rental yield values you should also examine the effect that borrowing has on your potential returns. Harriet & George can help you distinguish between buying a property for cash and using a buy to let mortgage to fund the purchase.
How much you decide to borrow also depends on your attitude towards risk as we all know that interest rates can go up as well as down. It’s really a matter of personal preference and how you see the local economy and cost of borrowing for the future that should influence your investment decisions.
Using H & G is a great way of entering the rental market. There are a number of benefits to using us:
H & G could manage your property on your behalf, or we could put you in touch with an internationally renowned Holiday Rental Company, who will actively market your property for you. In some cases, we could guarantee a rental return for you as part of your purchase.
This will help you reduce your administrative burden. We could organize vetting tenants (checking references) / inventory, drawing up handling tenancy agreements and handling the financial transactions such as deposits / bond money and collecting rent.
Agents usually charge between 15-20% of the rental income as their fee. We charge substantially less than estate / letting agents!
In Search of the Holy Grail:
“Return on Investment (ROI) should be your ultimate goal”.
A simple rental yield calculation:
Let’s say that you purchase a property for £100,000 and you receive rental income of £500 per month from your tenant.
The yield calculation would be as follows:
£500 x 12 = £6000 per annum rental income.
(6,000 ÷ 100,000) x 100 = 6% Yield
So simply put, Yield is the return on your investment expressed as a percentage of what you put in! (I.e. if you invest £100,000 and you receive £6000 in profit/income per year, so £6000 is 6% of £100,000.)
The above example has been put very simply without factoring in any property maintenance costs/insurance and doesn’t include any mortgage payments.
Let’s look at calculating, yield with a mortgage & associated costs;
Let’s say you purchase a property for £100,000 but this time you use a buy-to-let mortgage and have to pay for the property insurance and some maintenance costs.
The following are the figures we use to calculate the yield value;
Purchase costs: £1000 (including solicitors fees and insurances etc…)
Deposit at 15%: £15000
Mortgage costs are calculated as follows:
A £100,000 property (purchase price) with an 85% LTV (loan to value) interest only mortgage at an interest rate of 5.5%.
£100,000 – £15,000 = £85,000 mortgage
Monthly repayments are: £85,000 x 5.5% = £4,675 per annum. £4,675/12 = £389 per month.
The gross profit would be;
£500 rent – £389 Mortgage = £111 gross profit per month
£111 x 12 = £1332 per annum.
Now we have these figures we can now calculate the yield value as follows;
Amount invested so far is: £16,000 (deposit + costs)
Annual gross profit is: £1332
(£1,332 ÷ £16,000) x 100 = 8.3% Yield Value on cash amount invested
Looking at the figures above, you could have bought 6 properties secured on a buy to let mortgages with a £100,000 investment and receive £7,992 in gross rental profits compared to £6000 using the cash to purchase one rental property.
Because you can now buy 6 properties you will own a larger amount of assets (£600,000) so you will also get greater capital gains if the house price was to rise in the future.
H&G are uniquely positioned to help you locate the best property investments available. Locating the Holy Grail of property investments has been H&Gs collective goal for many a year now.
Our formula for success defines who we are, we specialise in property, and we are not a Jack of all trades. Judge us on our results, we are trusted by our clients and institutions alike.
Tip for 2015-2020/1:
You don’t need to look too far away for a potential bull market. If we are correct in our analysis, the Holy Grail for 2015-2020/1, is Spain and her associated islands.
She is coming out of the downturn and will shortly enter the up wave like a ‘Bull’ in a china shop. Pun intended.
Spanish Bonds are doing very well as Greece commits financial suicide.
Property in certain areas of Gran Canaria and especially Marbella on the Costa del Sol are 12% up from previous years.
You still need to be sensible mind, don’t go losing your heads! Please do not hand over your hard earned cash to any Tom, Dick or Harry. Do the due diligence and be risk averse. If you’re struggling to make sense of the noise, pick up the phone and give H&G a call. We are here to help and assist you.
Please do not hesitate to contact us or pop into the Manor and have lunch with us, if it’s all getting a little too much for you.
We will happily help you find your next lucrative property investment.