Thursday, 14 May 2020

1,333% return for Chichester’s landlords since 1997?

market returns on property investment for landlords
A landlord contacted me having seen one of my recent buy-to-let deals of the week. He was amazed that a simple three-bedroom house off St. James’ Road in Chichester had risen in value by 333% in 23 years. He commented on what an amazing return that was, before I flummoxed him by saying that the overall return achieved was likely to be FAR greater than that.

This tied in with my article from a few weeks ago, questioning whether ‘cash is king’ when it comes to property investment. 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. Landlords that have done this in the past, rather than paying entirely with their own funds, have massively increased their returns.

Referring back to the three-bedroom house off St. James’ Road; it was purchased in 1997 for £59,995. It is now for sale at £260,000, equating to an increase of 333% in 23 years (or 6.6% compounded per year).

However, if the property had been bought with a 75% interest-free mortgage, it would mean the landlord would only have required £15,000 of their own money i.e. the 25% deposit, whilst borrowing the remaining £44,995 from the bank.

That original £15,000 investment would be worth £215,005 today (the £260,000 value minus the £44,995 mortgage). That’s a whopping return of 1,333%, or 12.3% compounded annually. That’s before factoring in the rent that would have been received in those 23 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 at the time. A great use of finance if the price keeps going up, but if it was to drop in value by just £10,000 you would’ve lost all of your initial investment. Worse still, which is what caught many people out, is when values fall further than this and the owner faces negative equity i.e. you owe the bank money!

This is why many risk averse people are happy to purchase property outright with cash (as I discussed when I wrote whether cash was still king). There’s no chance of being forced to sell the property at a loss, meanwhile you retain more of the rent and still benefit from potential house price increases.

The phenomenal historical returns above demonstrates why property continues to be such a popular form of investment. It also explains how long-term buy-to-let investors have become particularly wealthy, especially if they were well-disciplined in 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. 

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Don't forget to visit the links below to view my previous buy-to-let deals and Chichester Property News articles:

c/o CRJ Lettings, 30B Southgate, Chichester, West Sussex, PO19 1DP

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