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If you’re a regular reader of this blog, you may have gathered that I’m not the biggest fan of property as an investment. It’s illiquid, undiversified, the fees are expensive and dealing with tenants can become a second job.

But having said all that, I’m also a massive hypocrite and last year purchased a buy-to-let property in Sutton, a borough of South West London.

As any financial advisor will be quick to tell you while trying to convince you purchase his services: everyone’s financial situation is different and what might be the best investment for the average may not be right for the individual. I had a few specific motivations.

  • I wanted a massive mortgage. Interest rates are so low, it would be silly to not get as much as possible.
  • I was purchasing it jointly with a family member who didn’t mind doing most of the work.
  • Although I think London property is too expensive, I could be wrong. If prices and rents quadruple over the few years at least I’ll have some somewhere I could afford to live!
  • I have a decent amount tucked away in peer-to-peer lending and in stocks and shares so I could invest in property and remain diversified.

My London Property Investment

We started looking in January 2014. Come February we had made our first offer and it was accepted on the 3rd. We did a survey, everything was going well and then in May it all fell through. Someone in the chain pulled out and our seller couldn’t find another house. We started looking again and on June 16th placed an offer on another place along with ten other keen buyers. We raised our bid, winning a beautiful two bedroom flat for £290,500. We completed on the 10th October and our first tenant moved in on the 31st.

Ten months from first starting to look to our first tenant moving in. Believe it or not, that a pretty typical timeframe. Now onto the interesting stuff, the maths…

The Numbers

The overall costs:

Bid£290,500Original offer £275k,
Stamp Duty£8,7153%
Solicitor Fees£2,268.17
Extending the Lease£60085 years to 999 years
Mortgage Broker£500
Plumbing£210Checks & minor repairs
Electrics£210 Checks & minor repairs
Deed of Covenance£240
Land Registry£135
Miscellaneos£180Keys cut, sky dish, transfer fees
Time Cost£2,000100 hours at £20 an hour
Total Cost£306,098.17

They are all pretty standard and even if you forget to factor in one or two, they all become clear once you look at your bank statement. Let me instead talk about the only slightly odd cost, the final one: the time cost. Looking around properties, travelling, doing research, talking to professional services and negotiations with estate agents takes time, a lot of time! Your time is valuable and should be included when deciding whether or not to make a property investment.

To help fund the investment we took out an interest-only mortgage of £220,000, fixed at 3.98% for five years.

Now let’s look at the yearly income and expenditure:

Rent£13,200£1,100 a month
Mortgage Interest£8,7563.98% on £220k
Estate Agent Fees£1,632Managed. 10% + VAT
Service Charge£1,250
Maintenance£1,000Predicted average
Flat Unoccupied£396Loss of 2 weeks rent a year
Time Cost£1005 hours at £20

The two ones here that most people don’t account for are the cost of the flat being unoccupied and the time cost for all the bits of admin needed over the year.

Depressing Conclusions

That’s right. £66 pounds a year! In other words, our tenant is living in the flat almost for free! They’re just covering the costs of running the flat, as landlords we’re making almost nothing! Imagine if interest rates go up? I’ll be paying someone to live in my flat!! Crazy.

“Ahh”, you say, “but what about capital appreciation? That’s where you make your money.”

That’s true, or potentially true, but it quite a bit more difficult to predict. Are house prices too high? Or are they going to continue rising quicker than our salaries can keep up? Who knows?!

What we can be sure of is that currently, we are in a loss. The flat is worth £290,500 and we paid £306,098 for it. If we were to sell it now we would lose about 4% to fees. We would get back £278,880 – a loss of £27,218.

That means we would need a 10% increase in value just to break even!

All this maths is not only making my head hurt, but is also reconfirming my prejudices against London property investment. To make it even worse, historically house price appreciation has been much worse than equities; over the last 30 years UK property prices have grown by an average of 5.7% vs 9.9% for UK equities. That’s a massive difference!

Was I an idiot for buying this flat?

Well no. My reasons all still stand: property could continue shooting up or rent could increase to the point where I’m driven out of London (at least then I’d have a flat I could move into!).

And perhaps most importantly, there’s that cheap, gorgeous mortgage. That mortgage acts as a multiplier for any increase in the property price.

Let me show you what I mean. Imagine that I’ve held onto the flat for 15 years and it has doubled in value (not an unreasonable assumption given the historic price increases). The flat is now worth £581,000.  Take off the 4% for fees and the flat we get back £557,760 cash. Which means that once we have payed off our £220k mortgage we’re left with £337,760.

Wow! The property has only doubled in price while our initial investment of £86,098 has over quadrupled. [EDIT – Removed sentence about not being able to get a mortgage for equities. Apparently you can get something equivalent!].

Ok, so a great investment then?! Well, again it’s not quite that simple. Just as mortgages multiply the value increase, they can also multiply any losses. If the flat de-values to less than £200k suddenly we owe more than the flat is worth. We could potentially lose more than our initial investment. There isn’t that risk with equities. Also, a quadrupling of your investment is similar to what you’d expect from an investment in stocks & shares over the same 15 years timeframe.

Now that I’ve thoroughly confused you, what does all this mean? Is a buy-to-let London property investment the right move for you? No idea. Make up your own mind. At least the flat looks pretty, eh?

london property investment maths