Leveraging your capital
The famous phrase “don’t put all of your eggs in one basket” is ever popular during life but not with many once investing in property. I often put my head in my hands with clients who wish to make the highest annual income but decides to buy outright in cash and not leverage their capital to the work harder for them. You have worked hard to gain the money, why not make the money work harder for you?
Let me give you an example of a property purchase, one with cash and one with mortgage funding. Let’s say you are looking to invest £100,000 in property and want to make the highest annual income;
Option one – The cash purchase – A purchase price of £100,000 with £1000 per annum service charges, £50 per annuum in ground rent and achieves £6000 in rental income per year. Good news, you’re £4950 better off.
Option two – The mortgage purchase – Again, the same purchase price of £100,000 but we will be using a 25% deposit on an interest only mortgage so our total outlay at this point is £25,000. Using the same stats of £1000 per annum service charges, £50 per annum in ground rent and achieving £6000 in rental income per year we are down to our £4950 yearly income. We now have to minus our mortgage payments per year which would be £1500 (currently a live mortgage product) making our annual returns £3450.
So we are now £1500 apart BUT have only used ¼ of our capital. You can then go on to purchase an addition 3 properties and using the same formula as above this would give you an annual income of £13,800. Cash annual income of £4950 vs a Mortgage annual income of £13,800. A 2.8x improvement.