In an ideal world, investors want to see a high appreciation in the value of a property over time, combined with a good return on investment in the form of a strong rental income. Unfortunately, it is not always possible to find this combination in the same property. Typically, single buy-to-let properties in the South of England have high market values but are not currently bringing in the strong rental yield that investors are looking for. Conversely, single buy-to-let properties in the North have stronger rental yields but have a lower market value and lower potential for appreciation over time. However, by taking advantage of the benefits of the typical Southern / Northern properties, it is possible to achieve a mixed portfolio with both high value properties and high rental yields.
For example, if you have properties with high market values in the South, rather than selling them to make a purchase, why not leverage the equity within the property? This keeps the property within your portfolio and can speed up a purchase, particularly at a time when it can take 300-400 days to sell an asset. It can also work the other way, if you have existing properties in the North and want to expand into the South or mix up your portfolio. Currently, many investors stick to one region, either the North or South, but there can be benefits to investing in both regions at once.
This case study is an example of a way to structure a mortgage deal to take advantage of the equity in high-value properties in the South of England, and the higher rents in the North.
Case study: Bringing properties in the North and South under one mortgage to finance a purchase
An investor wanted to buy 12 properties in Burnley, Lancashire. In their existing portfolio, they owned two single buy-to-let London properties with a total value of £910,000 (£460,000 + £450,000). The existing rent on the two properties totalled £33,300 yearly (£1,400 per month + £1,375 per month respectively). This equates to a relatively low rental yield of 3.6%. Both properties were already mortgaged, with a total mortgage value of £512,300 (£263,500 + £248,800). The investor had about £400,000 equity within the two properties. The 12 prospective Burnley properties were worth £580,000 as a portfolio and produced a total rental income of £54,300 yearly, equivalent to a rental yield of 9.3% – a much higher yield than the London properties.
To fund the purchase, CPC Finance helped the investor obtain a single mortgage across all 14 properties: the two London properties, and the 12 Burnley properties. We were able to combine the equity built up within the two properties in the South with the rental income from the Northern properties, resulting in a mix in the portfolio and the best of both worlds.
Combining the 14 properties, we had a total asset value of £1,490,000 and a total asset rent of £87,660 (equating to an overall yield of 5.8%). This enabled us to secure a single commercial investment mortgage worth £1,096,875. The mortgage had a 4.25% interest rate and an arrangement fee of 1.25%. This kind of mortgage is typically available with an interest-only facility for up to a 20-year term, with three, five, or 10 year fixed rate. This new mortgage repaid the existing mortgage on the two London properties and paid for the purchase of the Burnley properties with no cash deposit required.
The investor was very happy because he was able to buy the new properties, while retaining his existing portfolio, and did not need to put down any additional money as a cash deposit. He would not have been able to make the purchase if he had sold the London properties, due to the time it is taking to complete on property sales, which would probably have exceeded the purchase date on the contract that he had.
In this case, the London properties were held in the personal names of the investor, while they wanted to buy the Burnley properties as a limited company. However, because the Directors of the limited company were the same names as the owners of the London properties, the bank was happy to provide the mortgage across all the properties. Although there is now a single mortgage across all 14 assets, the investor is free to part redeem the mortgage if they want to sell one or two properties (subject to possible early redemption charges).