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Property Investment versus Traditional property purchaseTHIS PAGE HAS BEEN UPDATED IN OUR FREE GUIDE - PLEASE REQUEST OUR FREE GUIDE FROM THE ABOVE TAB The fact that you are visiting our website would suggest that you understand the potential of property as future investment and in particular want to take control of your finances by building a portfolio of properties to provide for a secure future. Through our experience with clients however we concluded that whilst many people understand the investment power of property, they tended to view property investment through the same eyes as they would a traditional property purchase, an understandable though potentially expensive mistake. Consider the following two examples:- A/ Our first example assumes that you have £30,000 to invest and shows the difference between using it to invest in an off plan property, or to purchase a resale property in the same part of Spain using the money available as a deposit and taking on a mortgage for the balance. B/ The second example assumes that you have £100,000 to invest and will illustrate the potential difference, whether you use the capital to invest in several off plan projects, or use the money to buy a Spanish property outright. Many people feel comfortable when they don’t have a mortgage, but our view however, is to use other peoples money (OPM) as far as possible. Paying 3.5% interest versus capital growth on a property at 8% just does not need very much consideration in our opinion! Please have a read through and take the time to fully digest the information in the examples. If you have any questions please email or call one of the partners for a more in depth explanation. Another point to consider if you are comparing property investments in the UK with Spain is that the mortgage rate here is almost halved and you will not be penalised with a buy to let mortgage, as they are processed in the same way as a standard mortgage. Example "A"Mr and Mrs Jones have £30,000 to invest as do Mr and Mrs I P Spain and they have both decided to invest in property in the same area of Spain.Mr and Mrs Jones take the TRADITIONAL approach which is to look for properties within their budget. As non residents they are aware that the majority of Spanish banks are willing to lend up to 70% of the properties value and that the costs involved in purchasing a resale property in Spain amount to approximately 10% of the purchase price. Therefore £30,000 provides “purchasing power” for a £75,000 property approximately. They purchase a property within their £75,000 budget; £30,000 is invested with £22,500 being a deposit and £7500 being costs. The balance of the purchase price would be £52,500 and this would be met by securing a Spanish mortgage which would require a monthly repayment of £258.29 based on a capital repayment mortgage over 25 years. Mr and Mrs Jones intend letting the property during the 12 weeks
peak holiday season
They were very pleased with their profit, but let us now look at how Mr and Mrs IP Spain get on with a more modern approach to property purchase.
Mr and Mrs I P Spain understand the principles of property investment and take a different approach. They become PROPERTY INVESTORS. They understand the concept of “geared” investment and
decide to invest their capital in “off plan” property. 1/ Off plan property can be purchased usually with an investment of around 30% of the purchase price plus 7% VAT, with nothing further to pay until the property is completed. Therefore £30,000 would have the “purchasing power” for a £93,500 property in an off plan scenario. 2/ off plan property is marketed at the developers “incentive price” to encourage take up of the off plan project and in all probability a property costing £93,500 would have a current value in the region of £110,000 to £115,000 were it available as a completed property. For this illustration we will assume it would be worth £110,000 if completed. They decide to purchase an off plan property for sale at £93,500. They invest their £30,000 (30% deposit =£28,050 +VAT) leaving them with a balance of £65,450 + vat =£70,031 2 years later the property is completed and the balance of the purchase price has to be met by securing a Spanish mortgage for the amount of £70,031 which would require a monthly payment of £344.61. Please bear in mind that for the purposes of this illustration we have assumed a repayment mortgage over 25 years. Assuming the same rent is secured over the same 12 week period as Mr and Mrs Jones then the annual rental income is £4800 and the annual mortgage payments are £4,135.32 giving a gross annual profit of £664.68. Although in reality the rental income would be in excess of this figure as a £93,500 property would attract a greater rental income than a £75,000 property.
Total gross profit £51,616.04 which represents a 5 year ROI (return on investment) of 272%. Same investment capital, same time frame, different application resulting in almost double the profit.
Example "B"Mr and Mrs Jones have £100,000 to invest as do Mr and Mrs I P Spain and they have both decided to invest in the same area.Mr and Mrs Jones take the TRADITIONAL approach which is to look for properties within their budget. They purchase a property for their £100,000 with a view to
letting it out during the 12 weeks peak holiday season After 5 years Total gross profit £70,930 They were very pleased with their profit, but let us now look at how Mr and Mrs IP Spain get on with a more modern approach to property purchase.
Mr and Mrs I P Spain understand the principles of property investment and take a different approach. They become PROPERTY INVESTORS. They understand the concept of “geared” investment and
decide to invest their capital in “off plan” property. 1/ off plan property is marketed at the developers “incentive price” to encourage take up of the off plan project and in all probability a property costing £100,000 would have a current value in the region of £120,000 to £130,000 were it available as a completed property. For this illustration we will assume it would be worth £120,000 if completed. 2/ Off plan property can be purchased usually with an investment of around 30% of the purchase price, with nothing further to pay until the property is completed. However, the majority of developers will reduce this figure to 20% or 25% for multiple purchases. For the purposes of this example we will assume a 2 year build period and the investment required is 25%.
2 years later the properties are completed and the balance of the purchase price has to be met by securing a Spanish mortgage which is far easier and less expensive than one secured in the UK. There is often pre arranged mortgage on offer with the constructors bankers although IP Spain will help to secure you the very best value. The combined mortgage costs for the 4 properties would be £1,475.98 pcm or £17,711.76 per annum. Please bear in mind that for the purposes of this illustration we have assumed a repayment mortgage over 25 years. Assuming the same rent is secured over the same 12 week period as Mr and Mrs Jones then the annual rental income is £4,800 x 4 properties or a total of £19,200 per annum of which £1,488.24 is profit. Over the same 5 year term (2 build period and 3 once completed) and assuming the same moderate 8% growth, each property would have a value of £176,319 of which £76,319 is profit 4 properties with this level of profit equates to £305,276 Total gross profit £309,740.72 Please note that there will also be capital repaid within the 3 years mortgage payments which will further increase profitability.
For more detailed information covering all aspects of investment property in Spain request a copy of our free guide. NB. These examples are for illustrative purposes
only and should not be construed as fact. Of course we have not included
every conceivable cost but we have tried to give a fair comparison
between two of the routes that you could take with your investments
calculating figures on both sides like for like. There are also many
other considerations such as maintenance costs and tax issues that
would have a bearing on the final profit received. |
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After
5 years
Therefore,
their £100,000 fund allows them to invest in 4 off plan
properties at £25,000 each, although it could have
been possible for them to purchase 5 properties with the same amount
of capital by negotiating a 20% deposit.