12.5% return on cash invested on a newly refurbished Manchester based development

Last week I was presented with a Manchester based buy-to let investment opportunity which looks particularly attractive. The gross yield is just over 11% but with the benefit of gearing, and having allowed for all costs, the cash on cash returns are coming out at 12.5%. 

I have done some due diligence (you should always do your own though, please don’t rely on mine) and part of that was checking out the availability of finance on these properties.

The only possible drawbacks I can see thus far is that the maximum mortgage is 65% of value plus a lender fee of £995 added to each loan. This is due to the properties being priced at £42,500 and being sold as a new development. The issue with this is that BM Solutions are the only lender offering terms. As BM Solutions are part of the Lloyds Banking Group that can sometimes cause problems due to the group having a rule not to provide more than three mortgages to any one client. The Lloyds Banking Group includes Lloyds Bank, BM Solution, The Mortgage Business, Halifax and C&G.

If you can live with that, and especially if you are married or have a partner, and you and your partner have no mortgages with any of these companies, you could, theoretically at least, buy six of these properties, i.e. 3 each.

The alternative, of course, is to buy the properties for cash and then look to refinance them based on market value after say 6 months.

In the meantime, these are the numbers that came out when I analysed the deal using the Property118 Landlords Calculator:-

Property valued at £50,000 each (15 available, 18 already sold at full price)

Discount offered to Property118 to sell the remaining units 15%

Net price £42,500 each

Monthly rent £400 (based on comparables provided by local agents)

Gross rental yield 11.29%

Mortgage £28,620 based on 65% borrowing plus £995 lender fee added to advance

LTV 67.34%.

Deposit required for each property £13,880.

Interest rate 4.84% (Loan via BM Solutions – IFA to advise best product, this one was selected at random for illustrative purposes)

Mortgage interest £115.34 per month

I have estimated that 35% of rental income will be required to fund the costs of; advertising/letting, management, Gas checks, maintenance, ground rents, service charges and void periods This equates to a monthly averaged cost of £140.

Therefore, cashflow based on the current interest rate is £144.57 per month

Based on these figures the return on equity is 12.5% on cashflow alone. This is net annual cashflow expressed as a percentage of the equity in the property. This calculation is also referred to as; return on cash, cash on cash return, return on capital employed/invested, ROC and ROCI. A 12.5% return on equity is far better than you would get in a bank account and far greater than you can borrow money for too. Over the long term you may also wish to factor capital appreciation into the equation too.

This deal breaks even when interest rates hit 10.9%

If this is of interest and you would like to download details of the development with a view to arranging a viewing and/or making an offer please complete the form below.

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