Hi guys,
I’ve been lurking on the forums for some time, and making a few posts and thread contributions. The advice from members is really valuable. However I thought it time to introduce myself and give an overview of my proposed plan.
Since the life changing event of the birth of my daughter (now 2 years old) I’ve been doing some long term planning and looking at property as a long term investment for my daughter but also as a source of supplemental income. I’ve also been somewhat inspired by Rob and Rob’s excellent Property Podcast, which I have found a useful source of advice and guidance, and which lead me to PT.
Up until now, I have had a broad portfolio of investments. My current situation is
Pension: £310,000 across 2 pensions (one actively being contributed into)
Share ISA Portfolio: £85,000 with one property fund as constituent
Savings: £60,000 with about £26,000 in a cash ISA
Existing BTL: Flat in London with £190,000 mortgage, bought for £340,000 is 2004 and estimated value of £440,000 (i.e. £250,000 equity).
I plan to continue to build my pension portfolio and aim for a £650,000 pot, and keep growing my Share ISA portfolio as a tax free investment with maximum investment per year, however plan to re-allocate savings into property with 2 objectives:
1) To provide a passive income to supplement current income streams
2) To provide a potential asset base for my daughter for the future (i.e. I'm hoping for capital growth over the next 16 years)
I am looking for what I consider to be low risk strategy, by focused on BTL on houses in my local area, focused on good quality accommodation for professional sharers. The local area does have good transport links and rental demand. I am looking at 2 or 3 bedroom freehold properties, in the region of £130,000-180,000 . I am looking at low maintenance options (e.g. PVC windows) and relatively high EPC ratings. I am confident that the rental demand on the properties I am looking at is high.
I currently have the £60,000 cash put aside for initial investment. In terms of planning and research I have
1. Interviewed 6 letting agents, and selected one who is lettings only who I felt best answered my questions and felt most able to offer advice. The selected agent has a portfolio of properties locally and has offered estate agent independent rental valuation.
2. Engaged a mortgage broker, and validated my ability to obtain a mortgage. I will use the broker to source a mortgage. We are basing our calculations on returns with a 5% mortgage rate. My broker has her own property investments.
3. Got a conveyancer lined up.
4. Have an accountant who is a property investor themselves.
Plan (2 year outlook)
I’m looking to purchase 2 properties, with a view to generating a small income. Ideally I’m looking at a net yield of 5% per property. I am looking primarily at my local area (South Leicestershire) rather than further afield. While I do recognise that greater returns are potentially available further afield, I would prefer to invest locally.
My challenge – Deal Economics
The current challenge I am having is looking to find properties that meet my net yield criteria of 5%. I have 4 estate agents looking to source options, and one has come forward with what they describe as an ‘ideal investment opportunity’.
Having reviewed the figures, this does not look like an ‘ideal investment opportunity to me” and I invite review to see if I have made a mistake on my figures:
House Purchase Price: £180,000 (with deposit of £32,000 and a LTV of 25%)
Monthly Rental (p.c.m.) £695
Yearly Income (gross) £8,340
Gross Yield 4.63%
However, once I have taken into account expected expenses (hopefully being reasonable, and assuming 1 month void/year) the yield drops significantly.
Letting agent deductions/year (8%) £667
Rent not received (in void periods – 1 per year) £695
Buildings Insurance/year £200
Maintenance Expenses/year (5%) £417
Council tax (paid in void period) £83
Mortgage Interest (year) (£504.43 x 12) £6,053
Total Deductions £8,116
Income (net) per year £224
Income (per month) £19
Yield (net) 0.12%
Return on Investment (£32,000/£224) 0.12%
The above is an example of a property which my estate agent describes as an ‘ideal investment opportunity’ however my net yield calculations lead me to indicate it is not. £19/month seems to be not worth the effort.
Even if I assume 0 voids, the net yield is only 0.56% with income of £84/month and the ROI is 3.13%
If I have mis-calculated, or my yield expectation is unrealistic please let me know. If not, I will keep hunting for better investment opportunities.
Advice and comments on my strategy, and the deal my agent has sourced are welcome!
I’m going to run through the figures with my agent on Saturday,
Many thanks,
David Cook