Property Investment advice and tips
INCREASING YOUR RETURNS BY USING FINANCE TO YOUR ADVANTAGE
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Imagine you have £100,000 cash to invest into residential letting. How do you maximise your returns?
Mr & Mrs A don't believe in finance. They use their £100,000 to purchase a brand new property for cash. They let the property for £600 per month, i.e. £7,200 per annum. Due to inflation the rent increases and, eventually, after fluctuations in the property market, the house doubles in value.
Mr & Mrs B are clients of The Money Centre. They use their £100,000 as deposits to buy £500,000 of properties, just like the one Mr and Mrs A purchased. On this basis they also receive five times as much rental income, i.e. £3,000 per month or £36,000 per annum. The other £400,000 is borrowed and they pay interest on this amount of 5%. This works out to be £20,000 per annum. Therefore, net of interest, they receive £16,000 per annum. They are already better off than Mr & Mrs A….. but what happens in years to come? Well it is probably safe to say that Mr and Mrs B's rental income will rise with inflation as per Mr & Mrs A's. However, Mr & Mrs B's mortgage costs remain the same. Therefore, the gap between both couples rental income will continue to widen as time goes on. Then we need to look at the position when the properties have doubled in value. Mr & Mrs A have made a capital gain of £100,000 and have £200,000 worth of investment property. On the other hand, Mr and Mrs B have made £500,000, which is five times as much capital gain.
From day one
|
Mr & Mrs A |
Mr & Mrs B |
Property value |
£100,000 |
£500,000 |
Mortgage |
Nil |
£400,000 |
Capital invested |
£100,000 |
£100,000 |
Rent |
£7,200 |
£36,000 |
Interest @ 5% |
Nil |
£20,000 |
Rent net of interest |
£7,200 |
£16,000 |
Projection for 15 years time assuming properties have doubled in value and that rents have increased with inflation at 3% per annum.
|
Mr & Mrs A |
Mr & Mrs B |
Property value |
£200,000 |
£1,000,000 |
Mortgage |
Nil |
£400,000 |
Rent |
£10,890 |
£54,450 |
Interest @ 5% |
Nil |
£20,000 |
Rent net of interest |
£10,890 |
£34,450 |
Accessing your profits
Assume your properties have increased in value by £100,000. You could realise your gains by selling, however, this would involve paying between 24% and 40% capital gains tax. The bottom line is that you will never end up with more than 76% of your gain if you decide to sell.
On the other hand, you could simply refinance and release up to 85% of your capital gain. The tax man will not get a penny. You are better off already. You have also retained the property so you also stand to gain from the effects of inflation on your rental income and any future growth in the property market.
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