The Maths Behind My London Property Investment

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

  • Teri Robertson

    re equities – have you ever bought, just to see 1) the stock price plummet; 2) the company go into liquidation? Its all a risk. Did you get it with an endowment?

    • Hi Teri.

      In short: yes. In 2010 I fancied myself a bit of a future trader and invested in individual stocks. They went right up to a profit of £15k and then in the space of one fateful week plummeted to 0. Losing my inititial investment and all the ‘profit’.

      Since then I’ve got a bit wiser and follow the advice of the passive investing gurus (warren buffet etc). They recommend just purchasing cheap index trackers. This means that instead of owning a bit of one or two companies, you own bits of every major company in the world. For your investment to completely collapse every single major company in the world would need to go into liquidation – if that happens I imagine we will probably have other things to worry about!

      But as you say there is some risk and variance. But the same is true with property – as we saw in 2008 property can go down as well as up. Cash would be the safest asset but even then you are at risk from inflation.

      I detail out my investing strategy here:

      It must be said that I bought quite a bit in December, just before the ftse started in sliding decline. But that’s ok – my investment timeline is 20+ years and it just means as soon as I make some more money I’ll be lapping up as much of the ‘cheap’ index trackers as possible.

      • Eoin

        Hi Sam
        Good article , similarly I’m not a fan of investment properties , have you had a look at REITS? They fit the bill for me given me exposure to property but diversification and liquidity and I can buy small amounts.

        • Hey Eoin,

          I have looked into REITs (Real Estate Investment Trusts) and I love the concept! I think they’re a great way to invest in property without having to specialise in just one house. Plus it’s hands off and the returns are generally very good.

          The only problem is that last time I checked there were no residential REITs here in the UK! All the UK REITs invest in commercial properties and warehouses don’t move in parallel with flats and houses.

          If that’s changed and they’ve released some, I’d love to know about it!

  • Patrick

    hey sam, what about income tax with regards to your income from rent in your calculation; i assume your income is more than the tax free allowance ?

    • Hi Patrick,
      Yes, you’re correct. I would need to pay tax on the profit from the rent. I wouldn’t be able to offset the time cost, but the rest I could. So I would need to pay income tax on £166. I thought that was such a small amount I didn’t want to overcomplicate things by going into it.

  • Suzi Havant

    What about maintenance costs? What about inflation?
    Looks a beautiful flat though.

    • Hi Suzi,
      Thanks! I’ve included a maintenance allowance of £1,000 a year. Plus the outside and communal areas maintenance is covered by the service charge.

      I don’t think inflation matters for the purpose of my article:

      In the first part, both rent and all the expenses should increase with inflation.

      The second part which focuses on equity growth doesn’t take into account inflation. The two figures 5.7% and 9.9% for annual growth can be adjusted for inflation by minusing 3.5% from each. The reason that I haven’t included it and used these higher numbers is that the mortgage won’t grow with inflation, the final value we need to pay off will still be £220k – even though £220k is going to worth less in the future than it is now. I thought that was more readable than using the smaller numbers and having the mortgage devalue over time.

      My first draft of the article had all the maths worked out with inflation – but it was just too convoluted and hard to follow, while not actually adding anything to the points I was trying to make.

  • Richard

    It’s a great article and I’m also not a fan of BTL as it’s illiquid and undiversified.

    However there are several ways to make leveraged investments in the stock market, e.g. via CFDs, leveraged ETFs and futures.

    • Thanks Richard – I’ll update

      • Richard

        NP. I just discovered your blog today and think it’s great.

  • Rich

    I have never found a property that would work for me financially.. they are simply too expensive relative to the rental income.. unless you go the student route and then turn every square metre into a bedroom.

  • Hartha

    With an ROI of under 2%, this purchase can’t be seen as anything other than pure speculation. Why are you speculating on price growth when you believe London property to be overvalued?

    The latest property I bought – in a prime location within a second-tier UK city – gives an ROI of over 10% (based on the same assumptions and level of leverage), while offering (IMHO) stronger capital growth prospects over the next five years.

    To me, given that capital growth is uncertain, I’m only willing to hold property if I’m getting paid enough to make it worth my while even if the growth never arrives. If higher interest rates at the end of your fix coincide with the property being worth less than you paid for it, you’ll have no option but to either sell at a loss or throw in your own money every month for potentially years until the value picks up again.

    (Incidentally, I believe stamp duty on £290k is £4.5k.)

  • This investment isn’t going to look so good when mortgage interest is no longer tax deductible! As soon as you have to start paying tax on rent received rather than rent minus interest costs, your sums are shot and you’ll be carrying a loss every year until you sell. Quite rightly too – buy to let is creating a big problem in the UK property market.

  • Sann420

    Very informative. Thanks for writing such a detailed article. Hope all goes well with your flat 🙂

    • Really? Even if that means you moving in as the tenent for the next 10 years?

  • Polstertron .

    No mention of capital gains tax at 28% on sale. That’s going to eat £94, 572 of your imagined gain. Clause 24 and no ability to deduct mortgage interest by 2020 is going to kill your already non existent profit. It will throw a lot of landlords into 40% or higher tax brackets. I love your blog, but this model is screwed. Landlords know it which is why they are exiting the market. That begs the question of where is the additional capital gain coming from? Interest rates are rock bottom, affordability is stretched, savvy landlords aren’t buying, and FTB’s can’t take up the slack as they don’t borrow on the IO model. Buy to let has created a massive social problem in the UK and it’s got a government missile laser guided at it.

  • These sorts of stories make my blood boil. Cheap people travelling the world on other peoples backs. I cant afford to live in London, the place I have lived most of my life. BTL investors essentially are the root cause of property prices going up. I have worked part of my life after spending years on the dole. Clearly I didn’t get the early boost to be able to afford what this savvy man has done, instead I have paid about £150k in rent over 17 years, to the same landlord. I could never get a mortgage on a call center wage. When I finally started earning house prices went up by as much as I could save each month. 2004-2012 oe there abouts. I totally refused to support this type of savvy invester. Unfortunatly I have. That makes me really angry. However, I have NOT purpchased this inflated asset. instead I took my money OUT OF SUTTON and bought a flat in Amsterdam right in the centre, about £170k, plus I bought a house in Florida about £8k and I currently have just bought a house in Wales for £100k although i could have got cheaper. I still rent in Slough. I have 4 houses and I dont rent any of them out. I live in all of them at the same time in PROTEST to this evil prestilence that has swept our country. My total is less than this INVESTMENT in Sutton. I would not part with my precious LIFE SAVINGS to live in a flat like that. Its an insult, but he has played his part in forcing prices up for everyone and essentially forcing people like me out. I value his flat at £30k. Thats about a years wages. People WORK, and that hurts, they have crap jobs and thats their life, and its insult to injury to make them pay through the nose either for crap like that or crap that has been inflated by BTL thieves that have stolen another mans estate.

    • Laurence Smith

      You’re having a go at him for owning a buy to let property, which if you see above he earns almost nothing on. It literally will cost more to own it than it will for the tenants to rent it. The fact someone like that puts their capital AT RISK means someone can live there. Also you are a huge hypocrite given the fact in your own words you are a BTL thief yourself!

  • LumpofSky

    “That’s right. £66 pounds a year! In other words, our tenant is living in the flat almost for free! “. No he isn’t! He is paying over £13k of his hard earned money to live in your little flat. The above sentence is so arrogant and so out of touch with reality that it is a perfect example of why landlords are so despised. Because you have made a bad investment it means your tenant is getting it for “free” in your mind. I suppose if you were doing well and your investment was paid off by your tenants over 25 years you would consider the fact that you basically got a property for free!? But the opposite is true. Your tenant is paying huge amounts to you and you don’t appreciate this! You should be licking his feet in gratitude for subsidising your pension!

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