An Alternative Investment: Thinking outside the Property Box

This week there is a small deal which will appeal to most of our readers. It is a studio flat on Edgware Rd W2 minutes from Edgware Rd Station and Hilton Metropole. It is a self contained studio with a separate kitchen. The property is in a popular purpose built block called Cambridge Court. The property is off market and available exclusively through us.

This deal has been packaged as an investment only. The property comes with the benefit of a tenant paying £300pw. The block has a lift and is well maintained.

This may seem a lot of money to rent a studio property for those not familiar with the area. We assure you this is not an enhanced rental designed to encourage a sale. It is the market rental for this area. In fact in the summer the property can be rented for well over £500pw as a short let. A short let is a period less than 6 months, typically 1 or 2 months. Many use this as a cheaper alternative to hotels in the area.

There are two ways to purchase this property.

One the normal, boring, old school way: you buy the property, it is transferred over to you and you take a fresh mortgage.

The other is an ingenious alternative way, fresh thinking outside of the box by us:

The current owner has a mortgage of £167,000 on the property with the Bank of Scotland. He is paying 1.94% on this amount. This comes to £270pm. In order not to lose this we have created a strategy whereby you can benefit from the same terms. The mortgage terms would be passed on to the buyer via a document mirroring those same terms. This agreement will come with an option to purchase within a fixed period of time.

Though this way is a little out of the ordinary, it will be completely water tight and will come with full legal guarantee. Looking at the property this way you would need to put £70,000 into the property and will be postponing the actual purchase of the property.

We however appreciate many will not want to go down this route especially with it being a relatively low cost property and may prefer to do things in the conventional fashion.

Under this way you will need to put in 25% of the property value which comes to £60,000. And the rest will be borrowed. The table above illustrates both methods more clearly.

A note worthy point is even the more modest return of 5.9% will easily beat the best return offered currently by banks. According to the recent survey by the Money Supermarket the return offered for a 5 year bond is 4.9%. The yearly yield from our property beats this marginally.

This is not where you make your money in a property however. The bulk of the return is made on capital growth. If we assume a modest rise of 5% per annum the property at the end of the year will be £306,000. This means the property has increased buy £66,000, a 100% increase over the 5 year period. A 5% increase for this location is a very cautious estimate; this location was pretty much immune to the effects of the recent credit crunch, especially properties less than £500,000.

To confirm this property you will need to call our offices and place a deposit of £5000 down on this property.

This article is an extract written by one of my mentors Suresh Vagjiani, MD of Sow & Reap

Old School Way New Way
Purchase Price £240000 £240000
Deposit £60000 £70000
Loan Amount £180000 £170000
Annual Mortgage Payment £9000 £3298
Service Charge £1500 £1500
Management Fee £1560 £1560
Annual Rent Income £15600 £15600
Net Income £3540 £9242
Net Return on Deposit 5.9% 13.2%
0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.