24% Return on Capital on a West Midlands BTL

Earlier this year I promised to review various areas of the UK to establish what returns are available and what I would be buying if I was starting out again today.  Note that I’ve been a landlord for nearly 25 years and stopped buying four years ago to retire and live off the fruits of my investments.

This week I discovered a development in the West Midlands, just 2 miles from an M6 junction and conveniently located for commuters to Birmingham, Wolverhampton and Walsall, which provides a gross yield of 8.77% based on rental income of £475 based upon a unit cost of £65,000.

Sorry it’s taken me so long to start this series of articles by the way. I got distracted with fighting mortgage lenders who thought it would be a good idea to meddle with their terms and conditions!

Anyhow, back to how to get 24% Return on Capital on a West Midlands BTL

You might be wondering how I managed to turn an 8.77% yield into a 24% return on capital invested so I will explain. It’s not financial magic or any manipulation of figures I can assure you. It is more of a case of a well thought out financing strategy which is implemented in two stages. The starting point is that you need a 40% deposit but you end up getting half of this back within the first year based on the financing structure I have used. 

This is how it works …

Purchase price £65,000

Monthly rent £475

Gross rental yield is calculated as 8.77%

Initial mortgage £39,000 based on 60% LTV

Deposit required of £26,000 (plus purchase costs which I have NOT factored into the overall ROCI)

Tracker mortgage at bank base rate base plus 1.49%

Mortgage interest cost £118.75 (based on interest only paid monthly)

Given that the property is a leasehold I have budgeted on 30% of rental income being required to fund the costs of; advertising/letting, management, Gas checks, maintenance, ground rents, service charges and void periods (lost rent due to arrears or when the property isn’t let). This equates to a monthly cost of £142.50

Monthly cashflow (rent minus interest and budget for costs) is therefore £267.83

Based on these figures this gets us to a return on capital invested equates to 12.36%. This is your net annual cashflow expressed as a percentage of the equity you have in your property.

This property breaks even when interest rates hit 10.96%.

They opportunity to double to return on capital invested first occurs six months after completing the purchase. At this point you could look to withdraw £13,000 of your capital through an Equity Loan, thus reducing your capital invested by half. This would not affect your monthly payments but would increase your return on capital invested to 24.72%. For more details about how equity Loans work click the blue text above.

You will notice that I haven’t factored any capital growth into my forecasts. I always look upon this as a bonus for regular buy to let deal like this on the basis that I cannot control property values.

A bit about the properties I assessed

1. They are available to buy right now
2. They are already rented and fully managed, hence they are income producing from day one
3. The location is also excellent, perfectly situated between Birmingham City Centre, Wolverhampton and Walsall.
4. These are NOT new build properties

I found out about these properties through a buyers agent who charges a finders fee of £2,500 per property purchased (payable only at the point of completion). Therefore, it would be very unfair of me to go into as much detail about the properties as I normally would. However, if you would like an introduction to the buyers agent please complete the form below.

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PS – this is the second in this series of article. The first explained how it is still possible to get double digit returns on buy to let property in Central London.

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