Can you start a Property Portfolio with £20,000? - www.accumulatecapital.co.uk
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Can you start a
Property Portfolio
with £20,000?
www.accumulatecapital.co.uk
Forword The astonishing buoyancy of the property market in the past year has attracted the attention of many keen-eyed investors. For those seeking to capitalise on the economic climate, it is difficult to ignore the resounding price increases that we are constantly seeing in the headlines for this industry. For those investors with an acute business acumen, it begs the question: what does it take to be a property developer or a multi-asset BTL landlord? Is it possible to create a property portfolio with the available capital of £20,000? In this asset we will show you how we would build a property portfolio with a budget of £20,000, we will build an example portfolio based on current market research prices and then evaluate the profitability of this investment.
Key Steps to Creating a Portfolio
1. Decide on a budget an interest-only mortgage as it reduces the monthly
payments significantly. This in turn means that you
The first step would be to decide on a budget, for are able to maximise your rental earnings potential.
this we are using £20,000. Many find this route to be more manageable on a
smaller budget as you are able to use the monthly
2. Find a suitable property rental income to satisfy the interest payments.
However, the capital repayment will still need to be
This is, of course, one of the most important satisfied upon selling the property.
considerations as you need to find something that
has enough commercial potential to generate return Usually, the higher the deposit payment in relation
on your capital. to the LTV ratio and expected rental income, the
easier it is to secure a preferable monthly mortgage
With a budget of £20,000, the most common deal. However, this is largely industry dependent as
mortgage deposit for commercial purposes and BTL it depends on the saturation of the market and how
requires 20% of the entire property value. Thus, we much rental income it is expected to generate. Or
are looking at properties with a maximum value of in other words, how likely is it that the return will
£100,000. come back to the lender.
The first place to gather ideas for properties 4. Managing your property
available is to conduct market research, using
estate agent giants such as Rightmove and Zoopla, Once you have purchased your BTL property the
conduct a narrowed search and this will provide an real management work starts. The first step to
idea for the selection of properties that are available consider is advertisement for a tenant to occupy
within that price range. the property. If you choose to be an entirely
independent landlord you will need to consider how
Within this budget we can see that already £20,000 you will advertise your property to ensure that you
may provide some limited choice in terms of reach your target market, whether this is students,
location, property size and type. Generally, the professionals or families. Once you have received
North West or East are the only locations offering tenant applications you will then need to vet these,
this price range for flats, terraced housing or a plot select a tenant and begin the lease contract process.
of land. For this you will need to hire a solicitor to create the
lease contract and ensure that you are abiding by
3.Finding a Buy to Let mortgage the legal obligations of becoming a BTL landlord.
Both of these are key factors to consider in the
If you are looking to actively enter the rental market, management of your property, as hiring a solicitor
you will need to source funds to acquire your and generating your own marketing adverts and
prospective property and the way to achieve this is handling tenant management strategy can be time
to source a BTL mortgage from a lender. consuming and expensive to maintain.
When choosing a buy to let mortgage the terms and ALternatively, it is possible to pay an estate agency
criteria for eligibility are different to a residential to handle all of these things on your behalf which
one. There are usually two types of mortgage will release you from a 24/7 landlord management
deals on offer for this, capital repayment plans and responsibility, however, these services will usually
interest-only plan where you will repay the capital at require between 10-15% of your rental income.
the end of your term. Ideally, it is preferred to select
Cost Analysis
It is no secret that there has been a significant ‘cracking-down’ initiative
towards the Buy-to-Let industry. Therefore, the recent legislative
changes are also important to factor into the decision-making process.
With this in mind, these are the most important changes to consider
when entering into a BTL mortgage agreement for 2021.
1. This will be the first full tax year where you are unable to deduct
mortgage expenses from rental income.
Before, landlords were able to offset interest payments against
rental income. Now, landlords will instead receive a 20% tax credit
on interest payments. This change has been gradually phased-in
since 2017 reducing by a quarter each tax year until removing it
completely.
To manage this, many have sought to set-up a limited company
when buying rental property in order to be taxed at a slightly lower
bracket. Whilst this may be a better long-term option, it will require
more registration and capital at the beginning of the process.
2. The government have also increased the Capital Gains Tax for
the tax year 2020-21. It went from £12,000 to £12,300. This can
be advantageous if you’re selling a second property there will be
slightly more capital that is tax-free. Though, for landlords the tax
rate is slightly higher starting at 18% and increasing to 28%, yet this
may be subject to change.
3. This is the first full year that Private Residence Relief has been
restricted since the changes implemented in April 2020. Previous to
these changes, if you had lived in your property before renting it out
you would be eligible for Private Residence Relief. This meant that
you would not have to pay any capital gains tax on the years that
you lived in the property, a relief that would continue for 18 months
after vacating the property too.
Further, the £40,000 available to claim for lettings relief, this also
applies to a property that has previously been your main home, will
now only be available to landlords who share an occupancy with
their tenants.
4. The Buy-to-Let income tax rates for this year have increased again,
the higher rate threshold for rental income has risen to £50,000 at
which you are required to pay 40% on your profit. The additional
rate threshold remains constant at 150,000, which requires you to
pay 45% on your profit.
Example Portfolio: Cost Efficacy & Income Revenue
With all of the above in mind, how Working out the rental yield for the For our property the potential annual
would we create a property portfolio chosen property - for a 2 bedroom rental income is £5400 and thus
with a £20K budget? terraced house in the same postcode property management fees will cost
on Rightmove as the property we are somewhere between £45-67.50 per
Usually, a property purchase for a BTL purchasing the average is £450 per month. Let’s say we achieve the best
mortgage will require between 20-25% calendar month. possible agreement and agree for full
of the total property value as a deposit. management for £45 per month.
Therefore, on our budget of £20,000 With the sum of the upfront fees
we are looking for properties of around required upon the purchase of the Calculating the rental yield
£100,000 in value. BTL mortgage agreement, £1,650, a
rental income of £450 pcm will not Working out rental yield can help you
From conducting a filtered search on break-even until 4 months time and compare the potential profitability of
property listing websites, housing this is once a tenant is settled into the the property you have chosen. One way
of this value is only available in the property and paying monthly rent. to do this is to use a property website
North East and West in areas such as like Zoopla or Rightmove to check rents
Lincolnshire, Humberside, Newark and Wear and tear fund or furnishing for properties similar to those you’re
a few small flats in Birmingham. budget recommendation - the considering.
more work the property needs upon
Rightmove property - £100,000 - 2 purchase and whether your target The formula to calculate rental yeild
Bedroom Terraced Town House - market of tenants will require furnished = the potential annual rent - monthly
Lincolnshire property will depend on how much costs (mortgage payment, maintanence,
you should set aside for this. Between estate agent fees) divided by the
Let’s say we have put in a successful 10 - 40% of the purchase price is property value.
offer for this property with an recommended for renovation and
agreement of putting down a 20% furnishing funds. So £5400 - (£2472 + 10% property
deposit. management estate agent fee £540) =
However, as the price to furnish a £2,388
Using a mortgage comparison rental property falls largely outside
calculator with the following search of our £20,000 budget that we have (£2,388 ÷ £100,000) x 100 = 2.4% rental
criteria of a £100,000 property and a already used we will be listing this yield
20% deposit, with a 5 year mortgage rental as an unfurnished property. To
term this is the best lender deal find tenants and management services Calculating the profit margin
available: that will help us secure the best rental
income for this property we will add We can also calculate the profit margin
Initial monthly cost: £206 - Initial onto this estate or letting agent fees. from this by taking the rental income of
rate: 3.9% - Total upfront fees: £450 and then subtracting the mortgage
£1,650 - Initial term cost: £14,010 - Estate agent management fees for payment of £206 and the estate agency
APRC: 3.6% full property management (handles payment of £45, which leaves £229
repairs, tenant concerns, deposit income per month.
So for borrowing 80% over 5 years, protection, eviction, rent collection,
with an annual interest rate of 3.6% the property upkeep) usually costs However, this is without the application
total interest payment over this period between 10-15% of monthly rental of BTL income tax as we mentioned
would be £12,772. income. previously and also without extra
monthly costs which you may incur
such as repair obligations and bills.
Evaluation As we have shown, it is possible to begin a profit portfolio for BTL with £20,000, however the first four months would be operating at a loss and the profit margin from doing so would be considerably small. It would be possible to increase this profit margin slightly by cutting the property management service or negotiating a slightly lower monthly mortgage payment or by finding a tenant who will pay slightly above the rental average for this area, as the above example is merely an average and it is important to remember the tax obligations that must be deducted also. In addition to the Stamp Duty Tax, BTL mortgages require an extra 3% of the purchase price in addition to income tax on the rental income and Capital Gains Tax on the profit. With this budget it is very difficult to create an investment income that would grant financial independence as the locations available, the tax obligations on BTL landlords and the time-consuming nature of becoming a BTL landlord would not lend itself to an independently profitable income stream. To achieve this a much higher budget would have to be considered to cover upfront costs, acquire a prime property location where the value is likely to increase over time and with enough rental demand that this would gradually increase the price of rental income over time. Alternatively, it is advisable to enter the property market and make contacts with various estate agencies and property management services by investing alongside a property developer. With the same budget of £20,000 it would be possible to enter a fixed term, double digit return on this investment without requiring the same time- consuming and expensive monthly costs as creating a property portfolio. In conclusion, unless you have the capital and the contacts to acquire a property in a prime location with demand and property management services that would generate a higher rental yield which is much higher than the monthly payments, property development finance would be a better gateway option to begin your property investment journey by raising the capital needed to start a more profitable BTL investment in one or two years.
Canterbury Innovation Centre
University Road, Canterbury, Kent. CT2 7FG
Email: info@accumulatecapital.co.uk
Tel: 01227 936 996
www.accumulatecapital.co.uk
References
https://www.comparethemarket.com/mortgages/buy-to-let/
https://mortgages-enquiry-page.comparethemarket.com/?wip=60c731d2d13a3b6df6939890
https://www.simplybusiness.co.uk/knowledge/articles/2021/04/letting-agent-fees-for-landlords-a-quick-start-guide/#:~:text=So%2C%20
how%20much%20are%20estate,per%20cent%20of%20monthly%20rent.
https://www.rightmove.co.uk/
https://www.barclays.co.uk/mortgages/buy-to-let/how-to-let-guide/You can also read
