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Super low ROI in Birmingham City Centre?


Lllena

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Hello there

 

I am thinking of purchasing my first BTL property in Birmingham and would appreciate some input. 

 

I wanted to buy in the city centre (B16) because I expect house prices to rise  in the long term due to the various regeneration projects .  My focus is on capital growth, although I know I should not count on it.  At the same time I know I should not settle with an ROI that is too low as I need some margin to avoid a negative ROI.

 

Having crunched the numbers on my chosen property, I realised to my surprise that the the ROI is very low - 3.81% if I buy it personally (1.34% after tax!) and 1.37% if I use a limited company. 

 

Here are the figures, on the basis of a personal loan:

 

Achievable price

£185,000 (Asking price is £195,000)

 

Income    
Monthly rent    £875 
Annual rent    £10,500

 

One-off Cost    
30% deposit at max price    £55,500
Solicitors fees & disbursements    £1,972
Stamp duty    £6,750
Broker fees    £495
Mortgage fee    £995
Survey    £600
Travels    £100
Refurbishment    £8,000
   
Total    £74,412

 

Recurring Cost    
Service Charge    £1,646
Ground Rent    £150
Letting Agent Fees    £1,050
Repairs    £438
Interest (assume 2.71% p.a.)    £3,509
Void    £875
  
Total    £7,668
 

Yield    
Gross yield    5.68%
Net yield    1.53%
ROI before tax    3.81%

ROI after tax 1.34%

 

What are your thoughts about the numbers?  Do you think it would be sensible at all to proceed with this deal?  Or is investing in the city centre a bad idea to start with?   

 

This is a typical property in the area with a typical price and typical rent.  So if this one does not work out, I wonder how any other investments in the city centre could.  

 

I look forward to your replies! Thank you.

 

 

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Hi Lllena

 

People invest for different reasons, so what might be one person's poison might be another's medicine!

 

You mention that you are primarily interested in capital growth, so investing in Birmingham city centre, with it's regeneration, HS2 and general population and employment factors does suggest that might be a decent bet...but it is still a bet as you identify.

 

Personally, I prefer to have higher returns on my investment from an income point of view, although smack in the city centre with a swish apartment is unlikely to generate that, unless I can add a spin on it in some way.

 

In your case, whilst there are one or two assumptions that could be flexed (you did not mention insurance and compliance costs such as gas safety certificates and the repairs cost is a tad low, even with a flat), there are a couple of things that stand out. The service charge is high, certainly relative to the rent at something like 17% of the rent (when including ground rent), which is a pretty big bite. Then, you are budgeting £8k on refurbishment costs, which will bring your ROI down UNLESS that puts the rent up OR allows you to add value / equity, which you can extract so leaving a higher ROI on your cash left in.

 

So, buy a flat with a lower service charge, spend less on the refurb, perhaps put in only 25% deposit and that will help the numbers a little.

 

However, you can also buy a 3-bedroom house around that area for similar or even less money, take this one for example: http://www.rightmove.co.uk/property-for-sale/property-70497980.html with an asking price of £190k and a rental comparison is around £850 a month. A light decoration might be all you need, although no photos of kitchen and bathroom on this particular one might suggest otherwise! But you get the picture hopefully. 

 

With a house, you will need to up the maintenance / repairs budget a bit more compared to a flat, but you eliminate the service charge and ground rent. If you can avoid or significantly reduce the refurb spend OR add enough equity to refinance and pull that money out again later, then that will also help. This is known as BRR, or buy-refurb-refinance and is a value-adding strategy that I personally favour. You could also consider a small house-share to up the rents on this particular one ;)

 

Hopefully, some food for thought there for you there, but if you want some further guidance, please get in touch.

 

Best

Richard

Richard W J Brown a.k.a. The Property Voice

Property Investment Strategist

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