Double digit returns on London Buy to Let?

Double digit returns on London Buy to Let?

11:00 AM, 2nd December 2013, About 11 years ago 4

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Yes folks, I can confirm that double digit returns on London Buy to Let properties are still feasible! What’s more, the types of properties which produce such returns are not affected by the bubble at the high end of the London property market caused by overseas investors.

With the benefit of investigative work on what to buy, where and how to structure the financing I have concluded that is is indeed still possible to obtain a 20%+ cashflow return on capital invested. My research lead me to a two bed flat in an established area of London, walking distance from Greenwich University. Furthermore, the break-even interest rate on borrowings worked out at 9.5% having factored into my assumption that 25% of rental income would be need to be written off to fund costs over and above the mortgage interest. Double digit returns on London Buy to Let

I have provided a full breakdown of how this was achieved below and as you will see I haven’t factored in any capital growth whatsoever!

London properties need not cost a fortune. My stepson is living in Charlton whilst he is at Uni; he walks to the University of Grenwich daily. He shares a two bed flat with his girlfriend and a house mate and they pay £950 pcm. The capital values are circa £150,000 at market value, thus giving a gross yield of 7.6%.

I have run these figures through our Landlords Calculator and based on 60% mortgage finance with the Principality Building Society at 1.99% the figures come out as follows.

Purchase price £150,000

Deposit £60,000

Mortgage £90,000

Interest rate 1.99% (BoE tracker rate with a margin of 1.49% for two years)

Rent £950 pcm

Gross yield 7.6%

Monthly interest £149.25

Allowance for other costs £237.50 pcm. This is 25% of rent to be used as a budget for costs of advertising/letting, management, Gas checks, maintenance, ground rents, service charges and void periods (lost rent due to arrears or when the property isn’t let.

Net monthly cashflow £563.25

Return on capital invested = 11.27%. This is your net cashflow (i.e. £563.25) expressed as a percentage of your capital invested (i.e. £60,000 deposit). I have not allowed for purchase costs but I have also not allowed for negotiating discounts on available properties in the area either.

Breakeven interest rate 9.5%

After an initial 6 months you could look to withdraw £30,000 of your capital through an Equity Loan. This would not affect your monthly payments and would increase your return on capital invested to 22.54%.

You can find properties like this in SE7 6PX. See our Property Research Tool for more details and also to use the landlords calculator I used to provide the above figures.

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Mike W

11:49 AM, 2nd December 2013, About 11 years ago

Mark, I must object to this form of presenting the effects of gearing. The reason banks provide lower interest rates on lower LTVs is simply because their risk of loosing money reduces whilst your risk (the lenders risk) increases. Most investors (stupidly) assume house prices won't fall and rent will always be paid. The investor never thinks why a bank will loan money on a property at say 4% when the investor thinks the house price will increase at say 4% and he will be able to get a 6% gross - possibly 2% net return.

It is always to do with risk. The bank is not loaning only on the property. The lender is promising to pay too if the bank cant get its money back from the property. The lender takes the risk. The risk of no rental income when the property is affected by something making it unlettable - eg water leak. or a major crash in the economy ....

Mark Alexander - Founder of Property118

12:45 PM, 2nd December 2013, About 11 years ago

Reply to the comment left by "Mike W" at "02/12/2013 - 11:49":

So which part of my article are you objecting too exactly?

I made a deduction of 25% of gross rental income to deal with the issues you have raised and and I didn't factor in any capital growth.

Did you actually read my article and work through my figures before commenting Mike?

The figures I have presented are based on what is actually available in the market today and nearly 25 years of experience.

I have met quite a few people over the years who tell me things are impossible. Usually it's because they have not thought through what they are saying or can't think of intelligent enough questions to ask to find the answers to the mental blocks which are causing them not to take action. I hope that's not the case here Mike and if you would like to ask me some intelligent questions I will do my very best to provide you with intelligent answers.

10:16 AM, 3rd December 2013, About 11 years ago

Hi Mark,

I think your post highlights the importance of intense due diligence on any area.

There are parts of London where property prices are reasonable and there is also potential growth through regeneration and improved infrastructure.

By getting to know areas intimately, viewing lots of different properties, an investor will come to understand where the "value" is in that area.

A £150K flat in London is surely a low risk? The population is set to explode in London over the next ten years, as proven by Boris Johnson making the Private Rented Sector an important part of his plans for the economic powering of London.

And of course, London has one thing that can never be taken away from it: GMT.

This means that London is open for business when markets in the East and West are also open. It's a financial hub, and that is unlikely to change thanks to good old Greenwich Mean Time! 🙂

Mark Alexander - Founder of Property118

12:02 PM, 3rd December 2013, About 11 years ago

Reply to the comment left by "Vanessa Warwick" at "03/12/2013 - 10:16":

Too true Vanessa and Ilya (my stepson) can see the GMT laser from his flat, rented for £950 pcm, value £150,000. It's the one used in the article 🙂

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