Strategy for first-time property investors
Drawing from our experience, we would like to offer you a strategy for investing in property that is both rewarding and straightforward to grasp in the UK.
To Start off
When beginning investors contemplate buying-to-let mortgages, they understand that a 25% deposit will be necessary. As they account for the costs associated with purchasing their first property, we consider the strategy that will best benefit them, especially if they plan to build a property portfolio.
Return on Investment (ROI) is essential in this plan. Suppose, for example, you acquire a £100,000 apartment that yields £10,000 in annual rental income. You would work out what percentage of return this is, compared to the money you've invested. This implies that based on the £25,000 you put down (25%), you'd earn a 40% gross ROI every year based on your deposit. Though it appears attractive, there are numerous expenses to take into account such as purchasing legal fees, stamp duty, and furniture packs if necessary. These expenses would probably bring the total investment amount to around £30,000, rather than £25,000.
Once you own the property, we must consider other expenses, such as management fees and maintenance costs such as service charges and ground rents if owning an apartment. To re-evaluate the ROI, based on our experiences, it looks like this: £30,000 to purchase, regular expenses at 10% of the gross management fee (£1,000 per year) and £1,200 in maintenance costs. If you have taken out insurance as well, the NET rental return will be around £7,000 after deducting £3,000 in yearly costs. This implies that, considering the original purchasing costs, you will have an ROI of approximately 23% each year without factoring in your mortgage interest rate which would be another cost to calculate, when calculating mortgages please remember to only factor in your interest rate and not the capital repayment. It's essential to remember that this is a general rule of thumb and that there may be other running costs associated with buying or running the property.
Although a 23% ROI is still an appealing investment across the UK, it is even more attractive in the northern parts of the country, where property prices are generally cheaper than those in the south which will increase your ROI. Additionally, we must keep in mind that when computing ROI, we are not accounting for the price growth in this example.
The Strategy
The perfect scenario, aiming for a property investment with a high ROI between 45% to 50% purely from rental profits. The property is also within high populations and regeneration zones, if you are from the UK a quick example would be when the BBC relocated its main HQ offices from London to Salford all those years ago. following this regeneration prices grew significantly and still are to this day.
Now that we have covered the ROI element which is a big factor in this strategy.
First-time investors are looking to aim for properties that are generating anything between 45% - 50% Net ROI, this would mean of course the money invested into these types of properties using finance offers a full 100% return on cash invested within 2 years of ownership. you can start to gather where this strategy is heading.
Within the first 3 years of ownership, you should have received the full initial investment returned and then along with the price growth and mortgage repayments paid through this period
The majority of buy-to-let mortgages will offer a fixed rate and period, for example, 3 years fixed mortgage at a 3.5% interest rate. we do not factor in mortgage payments when we are calculating ROI due to the fact it’s repaying your borrowed capital as opposed to being a cost, if you want to factor in the 3.5% interest rate that is, of course, your choice.
investors then look to re-finance, retaining ownership since the property would’ve gained equity and move the capital onto the next investment.
Overview
Target properties that generate 9% Net rental returns per year or higher on the full property price paid for this strategy to work. For example, based on a £100,000 property you should be profiting £9,000+ a year after all costs. target areas that are up and coming like regeneration areas. If the property is not in a regeneration zone then you should look at high-population locations like towns or cities, there will always be a demand which will give you price growth and the ability to withdraw equity in the future.
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We can help with the next steps in regard to property sourcing and options that fit into this strategy model so why not get in touch?