1232% return for Chichester buy-to-let landlords since 1995?

A landlord contacted me having read last week’s article, whereby I suggested a simple two bedroom terraced house in Arundel Park had risen over 300% in value in the past twenty years.

He commented on what an amazing return that was, before I flummoxed him in saying that the overall return the landlord achieved was likely to be FAR greater than that.

You see, one of the key advantages of property compared to most other investments is the fact the banks are willing to lend you money against your purchase. Those that have done this in the past, rather than paying 100% cash, have massively increased their returns.

Last week’s example was of a two bed terraced house in Chatsworth Road, purchased in January 1995 for £49,000, which is likely to be valued at around £200,000 today (an increase of 308% in twenty years, or 7.3% compounded per year).

However, if the property were bought with an interest-only 75% mortgage it would mean the landlord would only have required £12,250 of their own money i.e. the 25% deposit, whilst borrowing the remaining £36,750 from the bank.

The landlord’s original £12,250 investment would be worth £163,250 today (the £200,000 value minus £36,750 mortgage). That’s a whopping return of 1232%, or 13.8% compounded annually. That’s before factoring in the rent that would have been received in those twenty years!

Of course, this leverage can also work against you in a downturn, which is what caught many out in 2007/2008. Consider an over-developed city centre apartment priced at £200,000, which could be bought with just a 5% deposit. A great use of finance if the price keeps going up, but if it was to drop just £10,000 you would’ve lost all of your initial investment and beyond this you would be facing negative equity i.e. you owe the bank money!

This is why many risk averse people are happy to purchase property outright with cash. There’s no chance of being forced to sell the property at a loss, meanwhile you receive more of the rent and still benefit from potential house price increases.

The phenomenal historical returns demonstrates why property continues to be such a popular form of investment. It also explains how a group of motivated buy-to-let investors have become particularly wealthy, especially if they were re-investing their rental profits to fund more deposits to buy yet more property.

If you’re looking at property as an investment, please get in touch if you’d like to know what would (and would not) make a decent buy-to-let in Chichester.

(This article was featured in the Chichester Observer's property section on 4th June 2015)

Clive Janes, CRJ Lettings.  www.crjlettings.co.uk

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E-mail me on clive@crjlettings.co.uk or call 01243 624 599.

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