Should you buy your buy-to-let in Chichester for cash?

Nationwide recently reported that a record high of 38% of properties nationally were sold to cash buyers in the first quarter of 2015.

It was suggested that some of the increase was due to property investors who are sick of the low interest rates on offer from savings accounts.

This coincided with a conversation I had with a first-time landlord who had £150,000 to invest and asked me what he should buy in Chichester.

“It depends”, I told him.

If you want to own the property outright, you might as well look elsewhere. £150,000 won’t get you too much in Chichester and certainly not something that will offer the “hassle-free rental” he was looking for, complete with decent capital growth.

It might buy a one bedroom apartment, which would rent for around £650pcm, thus achieving a 5.2% gross yield. However, factor in the transient nature of tenants in this type of property alongside the ground rent and service charges and the net return will be far lower. For every 1% the flat increases in value, he’ll make an additional £1,500.

However, if he utilised mortgage finance he could get much more for his money. If he wanted to gain as much exposure to the property market as possible, he could very easily buy £600,000 of property i.e. two £300,000 houses, each with a £75,000 deposit and £225,000 mortgage.

Or he could reduce his risk significantly by taking on a lower amount of mortgage debt (£150,000) and purchase one £300,000 property. This would still give him more exposure to the property market than buying outright, plus he’d be able to afford a ‘nicer’ property that will rent easier and should increase more in value in the future.

In this instance, he may look to buy a three bedroom house in Chichester, which would rent for around £1,100pcm. On the face of it, this results in a lesser 4.4% gross yield but, as it’s a house, there are fewer mandatory service charges or ground rent costs eating into the rent.

You also now need to factor in the mortgage cost. As interest rates are so low, you can currently borrow money at this loan-to-value at 3.29%, fixed for five years (and that’s a buy-to-let mortgage…if you were to utilise equity in your residential home it’s even cheaper).

That would mean a mortgage cost of £412pcm in this example, which can be offset against the rent and therefore your gross income would be £688pcm. This would therefore be a 5.5% return on your £150,000 PLUS you’d now earn £3,000 for every 1% the house price increased.

This is why you need to consider all the options available and what you want to achieve from your investment alongside your appetite for risk. It may be prudent to consider your individual estate and tax situation and how this can be optimised too.

On the whole though, the use of borrowing money is the reason for such spectacular gains from buy-to-let over the past couple of decades. A Telegraph article last year highlighted that £100,000 invested in a property in 1996 would be worth £479,100 in 2014. With the use of a 75% mortgage however, the same £100,000 investment would instead have grown to £1,304,800.

If you are considering investing in the local property market and would like to discuss your options, please get in touch.

(This article was featured in the Chichester Observer's property section on 25th June 2015)

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

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If you are looking for an agent that is well-established, professional and communicative in Chichester, then contact us to find out how we can get the best out of your investment property.

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

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