I had an interesting email from someone
in Grantham a few weeks ago that I want to share with you (don’t worry I asked
his permission to share this with you all). In a nutshell, the gentleman lives
in Barrowby, he is in his mid 60’s and still working. He has a decent pension, so
that when he does retire in a couple of years’ time, it will give him a
comfortable life. He had recently inherited £120,000 from an elderly aunt. One
option he told me was put it into a savings account. The best he could find was
a 2 year bond with the Post Office which paid 1.9%; meaning he would get £2,280
in interest a year. One of his other options was to buy a property in Grantham
to rent out and he wanted to know my thoughts on what he should buy, but he had
concerns as he didn’t want to take a mortgage out at his time of life. He was
also worried about all the tax changes he had read about in the papers for
landlords.
Notwithstanding the war on Grantham landlords
being waged by George Osborne, the attraction of bricks and mortar endures for
many. As our man is a cash buyer, he would not have to deal with the intricate cut to mortgage interest tax relief that will diminish, or even eradicate, the profits of many Grantham landlords.
It’s true he would face the extra 3%
in stamp duty to buy a second property, but with some
good negotiation techniques, that could soon be mitigated.
I told him that buying a Grantham buy to
let property is all about the total return on investment. True, he could put
the money in the Post Office bond and receive his interest of £2,280 a year or,
as he rightly suggested, invest in property in Grantham. The average yield (yield being the equivalent of the interest
rate on the property) at the moment in Grantham is 4.11% per annum, meaning
our potential F.T.L (First Time Landlord) should be able to, depending on what
he bought in the town, earn before costs £4,932 a year. (However, I told him there are plenty of landlords in Grantham earning
half as much again (if not more), if he was willing to consider more specialist
investment types of properties – again, if you want to know where – look at my
blog or drop me an email).
The bottom line is that the success of
investing in Grantham buy to let property versus a savings account with the
Post Office (or whatever Bank or Building Society is offering the best rate) will
depend on the performance of those assets. Unlike with a savings account, with
property the capital you invested can also go up (and yes, it can go down as
well – more of that in second). Property values in Grantham have risen in the
last twelve months by 5.5% meaning, that if our chap had bought a year ago, not
only would he have received the £4,932 in rent, but also seen an uplift of £6,600
…meaning his overall return for the year would have been £11,532 (not bad when
compared to the Post Office!).
..
but the doom mongers amongst you will say, property values can go down,
as they did in 2008, and in 1988 and 1979. Yes, but after 1979 prices had
bounced back to their ’79 levels by 1984 and went on to grow an additional 58%
in the following four years. Then again, they dropped in 1988 and did take 13
years to reach back to those ’88 figures, but the following six years (between
2001 and 2007) they then increased by an additional 66%. Now, according to the
Land Registry, average property values in Lincolnshire currently stand 6.14%
below the January 2008 level, and anecdotal evidence suggests that in the nicer
parts of Grantham, we are well above these sorts of levels. Therefore, all this
talk of property crashes is unfounded.
