Why Buy to Let is Different
Outside of the problem areas of London and the South East and even in these tough economic times property values are still rising. On top of that rental voids are at an all time low since records began. This is due to an unprecedented level of demand for rental property.
That covers the first point – the supply and demand aspects of property combined with increasing population and scarce land leads to a general upward trending of property throughout history to date. The second part is even more important. Not only is your asset more likely to grow or retain value than any other you might borrow against but the low rental voids mean that your debt has a very high chance of being serviced without taking account of asset growth.
Some Exciting Maths and Concepts – Let’s Compare Buy to Let Yield
It stands to reason that if you have just one property and it stands empty it is more likely to inconvenience you than if you own five and one stands empty! Now let’s look at an example of another reason why you might wish to own five properties instead of one.
For both cases we assume rent will increase in line with property value, however for Landlord B mortgage rates will increase over the coming years so he will only make 1% no matter.
Landlord A owns a £100,000 rental property. It will grow at 5% per annum and he makes 5% per annum in rent.
Landlord B chooses to invest his £100,000 in multiple properties using borrowing. He buys cheaper property, so buys 5 properties at £80,000 each with a £20,000 deposit and £60,000 mortgage. His properties will only grow at 4% per annum and he will only make 1% from rental (the rest goes towards his mortgages).
3 Years Later:
Landlord A has
(£100,000 * 1.05 * 1.05 * 1.05) + [£5,000 + (£5,000 * 1.05) + (5,000 * 1.05 * 1.05)]
= 115762.50 + 15762.50
Landlord B has
(£400,000 * 1.05 * 1.05 * 1.05) – £300,000 + $3000
[note class=”info”]If you have the ability to select a range of suitable properties and manage them effectively the potential upside to borrowing against your portfolio to allow you to invest in further property can result in a bigger return on your cash than simply purchasing one property. The downside is of course the risk of price falls in the short term eroding your cash at a faster rate also. As a result a long term strategy and an ability to keep your properties rented is extremely important.[/note]
Naturally this article is just intended as food for thought and is not investment advice. Property prices can both rise and fall and should be seen as a long term investment. You should consult your financial adviser if you have any doubts about what type of investment is best for your requirements, this is not a service we offer. One of our specialist buy to let advisers can assist with finding you the best products across the whole buy to let market if investment in property or expanding your portfolio is of interest to you.