Portfolio Building Through Cash Up Front Purchasing
Many investors simply purchase a number of properties using mortgage finance up front to create an instant portfolio. However a judicious process of buying a property outright with cash and then raising a mortgage once your first property is refurbished, known as “gearing”, means that you can build your portfolio with minimal further capital investment. The first property is valued and, subject to status, a BUY-TO-LET MORTGAGE is arranged. These funds are then used to repeat the purchase and refurbishment process. The mortgage commitment is covered by the rental income with the difference representing the investor's profit.
Portfolio Building Illustration
High Yield Property
An initial cash investment of £70,000 is used to purchase, refurbish, insure for the first year and let Property 1. The gross rental income is £435 per calendar month. The property is valued at £70,000(1) and a 70% BUY-TO-LET MORTGAGE is obtained, i.e. £49,000(1). These funds along with a further cash investment of £21,000(1) are used to fund Property 2 at £70,000.
This process is repeated until Property 5 is mortgaged to release £49,000(1) of the total capital invested. You therefore hold a portfolio of 5 properties for a total capital investment of £105,000(1) producing a rental income of £10,860(1) per annum net of mortgage repayments and management fees.
|
|
Cash Invested (1) After Mortgaging |
Value After Refurb (1) |
70% Mortgage Obtained |
Monthly Rent Received (2) |
Monthly Mortgage Repayment (3) |
Monthly Profit (1) |
|
Property 1 |
£21,000 |
£70,000 |
£49,000 |
£385 |
£204 |
£181 |
|
Property 2 |
£21,000 |
£70,000 |
£49,000 |
£385 |
£204 |
£181 |
|
Property 3 |
£21,000 |
£70,000 |
£49,000 |
£385 |
£204 |
£181 |
|
Property 4 |
£21,000 |
£70,000 |
£49,000 |
£385 |
£204 |
£181 |
|
Property 5 |
£21,000 |
£70,000 |
£49,000 |
£385 |
£204 |
£181 |
|
Totals |
£105,000 |
£350,000 |
£245,000 |
£1,925 |
£1,020 |
£905 |
That's an annual yield over 10%!!
With a highly realistic annual growth rate of 4% on average over the next 10 years the value of the portfolio would be in excess of £500,000 at the end of year 10!!
Notes: (1) Approximate figures for illustration only, actual values, package prices and achievable yields will of course vary from property to property. (2) This figure is net of MRA's 10% + VAT management fee. (3) Approximate figure based on an interest only mortgage at 4.99% PA.
Note:- Mortgages are subject to status and availability. Remember properties are at risk if mortgage payments are not maintained. As with any investment yields and capital values can go down as well as up.