152% Return for Hampstead Buy To Let landlords in 15 years!

Posted on May 26th, 2017.

Buy to let is essentially different from investing in stocks and shares or putting money in the Building Society. Whilst these other investments (Building Society Passbooks, Stocks and Shares, etc) are passive  i.e. once the  money has been invested it you leave it alone, with buy to let, things are more hands on, in fact it’s  a business. One thing the landlords I speak to say is the fact that they like buy to let because it is both an investment as well as a business. It is this factor that attracts many of my Hampstead landlords – they are making their own decisions rather than entrusting them to others (such as City Whiz Kids in London playing roulette with their Pension Pot).

So if you are investing in the Hampstead property market, you can earn from your investment in two ways. When a property increases in value over time, it is known as ‘capital growth’. Capital growth, also known as capital appreciation, this has been strong in recent times in Hampstead, but the value of property does go up as well as down just like shares do but the initial purchase price rarely decreases. Rental income is what the tenant pays you – hopefully this will grow over time. If you divide the annual rent into the value (or purchase price) of the property, this is your yield, or annual return.

I was talking to a landlord who bought a flat in Wedderburn Road NW3, back in 2002. He paid £300,000 for a rundown 2 bedroom flat in need of complete refurbishment and a lease extension for an additional £60,000, plus £9000 for Stamp Duty tax. It sold again in January just gone for £930,000, a capital gain of 152% in just under 15 years – a gross annual return of 10.14%. See the graph below that illustrates the growth in equity over the lifespan of the investment.

However, the real returns are for those Hampstead landlords who borrowed money to purchase their buy to let property. They have made significantly higher returns than those who paid 100% cash. If the landlord had borrowed 75% of the £369,000 (purchase price plus renovation and lease extension costs) of the Wedderburn Road flat on an interest only 75% mortgage, he would have only needed to invest £92,250 (as his 25% deposit… borrowing the remaining £276,750 – worth today, £413,154) £930,000 less £276,750 interest only mortgage… a rise of 152% or £561,000 and I haven’t even mentioned the rent he would have received in those 15 years! See the pie chart below that illustrates the proportion of equity against the value of the original investment.

This demonstrates how the Hampstead buy to let market has not only provided very strong returns for average investors since 2002 but how it has permitted a group of motivated buy to let Hampstead landlords to become particularly wealthy. In fact, if this landlord had continued to remortgage the property as it went up in value, he could, by my reckoning have had additional two or three properties (albeit with larger mortgages but greater future potential).

As my article mentioned a week ago, more and more Hampstead people may be giving up on owning their own home and are instead accepting long term renting. Whilst the recent changes in SDLT and taxation changes to mortgage relief, having scared off some smaller, less established landlords, there is still opportunity for those who’ve played the long game. The slight falls in house prices have given those with the sort of equity mentioned the buying power to negotiate on price as a bargaining tool for the Stamp Duty hike, sometimes making 2 or 3 purchases at once in a particular block or development. With interest rate at a historic 400 year low, lenders have some attractive deals on offer in a bid to bring Investors back to the market.