I am new to buying BMVs so could someone answer me this question. It is fine at the moment buying props and lets say you buy five or ten, what happens when the interest rate goes to four and five percent in few years and your mortgage payments equal or surpass your rental income. Also in three years or so lets say you have to remortgage, would not a large percenage of your profit from the last three years be gobbled up by the remortgage costs. I realize I must have this this somewhat wrong otherwise Ajay would not be so succesful ?
When Interest rates rise - we need to increase rents to survive or fail. You are right in your assertion that if mortgage payments surpass rental income , we fail . Ultimately we can only cash flow for a limited period . This is why the Buying price is so important - if you are buying below the REAL value , then you will be able to sell .
Regards remortgage costs - No , IMHO, those arent such a problem . I view remortgage costs ( finance fees ) very like the monthly interest charges - they certainly are part of the total finance fee for the loan . Typically the finance fees are added to the loan or remorgage. Bear in mind that the full cost of these fees can be put against income as an expense .
Example - So if the finance fee is 3% , and your borrowings are £1m - typically , although not currently , you will remortgage every 3 years , so this is on average a 1% cost each year equivalent to £10k which goes directly against your income - ie reduces your profit. But remember that you actually receive this £10k to go spend - you just dont pay any income tax on it. It does of course increase your borrowings. I always think it is a balance to keep total borrowings down to reduce risk - while making the most of having a property portfolio. I dont advocate the strategies espoused by others which are to continually remortgage at increased values and rely on that money as income - but I do believe that we can accept a small annual increase in borrowings which should be offset by increasing annual rents.
1. Always try to keep your borrowings below a LTV of 70% - this seems to be where the banks feel comfortable at present - By keeping borrowings below 70% - it will allow you to borrow more ( perhaps only up to 70% ) in future if that is required to cash flow the business. 2. Always try to keep your borrowings below the total amount you actually paid - IE remember you can only claim the interest payments you make - against your income - on the value of the loan up to the price you paid for the property . Taking money out over and above this might seem attractive from a cash flow point of view - but it has consequences down the line .
Like Ajay , I use gross yield ( annual rental income / purchase price ) as a guide to purchasing at the correct price . But unlike Ajay , I then use another yield to judge how well the portfolio is performing - I consider the rental income / the outstanding debt to be the best measure of how the portfolio is performing. That is because the largest single cost which will determine how the portfolio performs is the actual interest you pay - which is based on the outstanding debt - not the purchase price or the value of the property.
Chris , the final point I'd like to include here is a comment on the yield required for a successful property . As above I prefer to consider the actual rent / outstanding debt as a measure of portfolio performance - and my target is 10% . Currently I am a little below that , and have designed measures to reshape the portfolio to get me there . I believe that this level of yield will protect my portfolio from an upsurge in interest rates - which is the number one threat .
