Recommendations for next BTL investment?

Reply to the comment left by “Ramus Wood” at “19/11/2014 – 12:35“:

Hi Ramus

Neil Patterson is the economics guru that put the analysis spreadsheet together. I think it a great idea to use Jonathan’s example and I have asked him to do just that.

My gut feeling is that 75% traditional mortgage and 10% equity finance will be better than 65% mortgage and 20% equity finance in this case but we shall see.

Jonathan hasn’t suggested a figure for rental inflation so it makes sense to me to match that to his property inflation figure for illustrative purposes.
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Great. Looking forward to the results. Thanks for this.

Ah sorry I have found Jonathan’s figures:

Mortgage interest rate % =?
Capital appreciation % on property over 10 years = 50% not compounded
Annual rental inflation % = ?

Total Cash available for investment from your own resources = £300,000
Average property price = £125,000
Number of properties to be purchased using JV funding = 12 but this does not take into account costs of purchase and refurb
Number of properties to be purchased using traditional BTL funding = I will go for max depending on answers given
Average rent per property pcm = £750pcm
Budgeted costs excluding mortgage interest as a % of rental income = ?
Acquision and refurb costs per property = ?
Trad financing BTL loan to value to be used = Shall I use 75% or 65% LTV
% Equity Financing to be used (Max 20%) = 10% and 20%
Cash deposit from your own resources to be used (Min 15%) = 15%

OK Mark has asked me to work on these figures:

Mortgage interest rate % =5%
Annual rental inflation % = 5%
Budgeted costs excluding mortgage interest as a % of rental income = 0
Acquisition and refurb costs per property = 0

I will start working

Reply to the comment left by “Neil Patterson” at “20/11/2014 – 09:33“:

Thanks Neil, that was the basis of Jonathan’s simplified deal.

Clearly, nobody in their right mind would budget nothing for acquisition costs, leave themselves with no cash and budget nothing for ongoing expenses. However, this is just an example. Additionally, 80% traditional mortgage finance would be charged at a higher interest rate than 65% traditional mortgage finance. Nevertheless, that was the basis of the requested illustration.

I have asked Neil to work a more sensible example, something that we would do ourselves based on more realistic parameters.
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Ok here are my figures based on Jonathan’s example and the above assumptions:

Using 20% equity finance and 15% cash Deposit = (JV) Or the traditional BTL method at 80% LTV = (Trad)

JV you can buy 16 properties Trad = 12
Interest rate break even point JV = 11.08% Trad = 9%

Net Portfolio rental Profit over 10 years, JV = £1,161,217 Trad = £758,412

Profit over 10 years including rent and capital. JV = £1,761,217 Trad = £1,508,412

After 10 years and repayment of JV finance:

Equity left in Portfolio, JV = £900,000 Trad = £1,050,000
LTV of portfolio JV = 70% Trad = 53.33%

Net (of Mortgage) Total rental income pcm, JV = £10,797 Trad = £9,660
Interest rate break even point JV = 11.17% Trad = 14.66%

Now I will use a more realistic example to include costs:

Mortgage interest rate % =4.5%
Annual rental inflation % = 5%
Budgeted costs excluding mortgage interest as a % of rental income = 25%
Acquisition and refurb costs per property = 5000
Trad BTl LTV at 75%
And leaving 50k cash minimum liquidity. Although this does not satisfy a more conservative 20% liquidity ratio as advised by Mark normally.

Figures to follow.

Using 20% equity finance and 15% cash Deposit = (JV) Or the traditional BTL method at 75% LTV = (Trad)

JV you can buy 10 properties Trad = 7
Unused cash JV = £62,500 Trad = £46,250
Interest rate break even point JV = 8.31% Trad = 7.2%

Net Portfolio rental Profit over 10 years, JV = £483,383 Trad = £298,993

Profit over 10 years including rent and capital. JV = £858,383 Trad = £736,493

After 10 years and repayment of JV finance:

Equity left in Portfolio, JV = £562,500 Trad = £656,250
LTV of portfolio JV = 70% Trad = 50%

Net (of Mortgage) Total rental income pcm, JV = £4,241 Trad = £3,953
Interest rate break even point JV = 8.38% Trad = 11.73%

You can download a PDF of the first spread sheet

here >> https://www.property118.com/wp-content/uploads/2014/11/Jonathan-example.pdf

Download a PDF of the second spread sheet

here>> https://www.property118.com/wp-content/uploads/2014/11/More-conservative-JV-example.pdf

Neil – that’s very helpful, thanks – that’s very detailed and some good food for thought. A couple of questions:
1) What is the “Interest rate break even point”?
2) Is the 10y chosen for a specific reason (e.g. limit to term of Castle Trust funding), or just as an example?
3) What happens if property prices and rental stay flat (0% growth) over the 10 years? Seems unlikely I know, but would be an interesting / useful “stress test”.