How Investors Profited From
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I don’t think we’ll ever witness such an opportunity again in our lifetime.
Property prices hit rock bottom, selling for 50% less than what they commanded at the top end of the market in the late 80s. Thousands of home owners defaulted on mortgage payments. This forced them to become tenants as they lost their homes through repossession.
During this time, shrewd investors found bargains throughout the country. Meanwhile, home owners struggled to keep up with mortgage payments with interest rates as high as 13%.
The 1988 Housing Act abolished security of tenure for tenants. Landlords gained the power to evict problem tenants more easily, and so the prospect of making a profit from buy to let for investment became even more attractive.
During the mid-90s, specialist lenders began entering the market, offering new combinations of products and services to landlords. This is what we now refer to as the buy to let mortgage.
Early property investors discovered how to profit from buy to let for investment. The ratio of the selling price to the anticipated rental income made this an interesting business proposition. After deducting all the costs from the equation, there was a healthy income to be made. No one even considered the properties’ capital growth; people were after income.
Let’s have a look at how investors were able to profit from buy to let for investment during the 90s.
A two-bedroom terraced property available in 1992 in the Middlesex area was valued at £63,000, with a monthly rent of £550.
ExampleThe yield for this investment was 10.4% Yearly rental x 100 = Yield £6,600 x 100 = 10.4% |
| Rent per year | £6,600 |
| Less | |
| Mortgage interest (6.5%) | £3,480 |
| Management 12% plus V.A.T | £930 |
| Building insurance | £200 |
| Repairs say at 5% of rent | £330 |
| Landlord's yearly gas certificate | £70 |
| Void period say one month | £550 |
| Total reductions | £5,560 |
| Total Profit | £1,040 per year |
Check that out, you've made a total profit after costs of £1,040 that's a return on capital of 11%
ExampleYearly Profit x 100 = ROCE £1,040 x 100 = 11% *Initial deposit is 15% of the purchase price of £63,000. |
A three-bedroom flat available in 1992 in Southern England in Portsmouth and the Brighton area was valued at £30,000, with a monthly rent of £320.
ExampleThe yield for this investment was 12.8% Yearly rental x 100 = Yield £3,840 x 100 = 12.8% |
| Rent per year | £4,080 |
| Less | |
| Mortgage interest (6.5%) | £1,657 |
| Management 12% plus V.A.T | £575 |
| Building insurance | £150 |
| Repairs say 5% of rent | £204 |
| Landlord's yearly gas certificate | £70 |
| Void period say one month | £340 |
| Total reductions | £2,996 |
| Total Profit | £1,084 per year |
Here you've made a total profit after costs of £2,996 that's a return on capital of 24%
ExampleYearly Profit x 100 = ROCE £1,084 x 100 = 24% *Initial deposit is 15% of the purchase price of £30,000. |
A two-bedroom terraced property available in 1992 in Northern England in the Newcastle area was valued at £15,000, with a monthly rent of £240.
ExampleThe yield for this investment was 19.2% Yearly rental x 100 = Yield £2,880 x 100 = 19.2% |
| Rent per year | £2,880 |
| Less | |
| Mortgage interest (6.5%) | £828 |
| Management 12% plus V.A.T | £423 |
| Building insurance | £150 |
| Repairs say of 5% of rent | £144 |
| Landlord's yearly gas certificate | £70 |
| Void period say one month | £240 |
| Total reductions | £1,855 |
| Total Profit | £1,025 per year |
And here you've made a total profit after costs of £1,025, that's a return on capital of 45%
ExampleYearly Profit x 100 = ROCE £1,025 x 100 = 45% *Initial deposit is 15% of the purchase price of £15,000. |
As you can see from the examples above, the early 90s were the best time to profit from buy to let for investment. Property prices at that time were undervalued, which enabled investors to benefit from huge capital appreciation. This allowed them to release equity and build buy to let property portfolios.
Now things are very different. Click here and let’s look at what’s happening in 2007.
Return from Buy to Let For Investment to Home Page
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