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Saturday, February 08, 2014

Advice on a new investment

I was chatting with my accountant the other day.  He is in the market to buy another investment property.  He has one property already, a 3 bed semi which has let consistently well for a number of years.  Originally he thought about buying in London but as prices have continued to rocket he has been put off by the scale of the potential capital investment and the reducing yield and income returns.

City Centre Apartment Beckons

He is now looking at buying a city centre apartment in Nottingham.  His thoughts are that an apartment has benefits on the maintenance front.  No gardens, roofs and communal areas that you need to take care of.  Obviously, you will pay for these things but with a management company the responsibility passes to them.  The dangers are that you are at the mercy of the managing companies and their ever increasing fees.  I warned landlords before of the dangers of this but he assures me that at around £700 pa the management and ground rent aren't too onerous.

Plus side

The new apartment has two very good sized bedrooms and unusually for a modern apartment the rooms are a decent size and importantly the 2nd bedroom has an ensuite making it ideal for sharers. This immediately increases the size of the potential letting market.  It also means that the asking rent is also going to be higher.  The passing rent on this investment is £690 pcm or £8280 pa.  At the current asking price of £110,000 that works out at a gross rental yield of 7.5%.... pretty good.

The apartment is located near the city centre, which is always attractive for young renters.  It also has a parking space which is another big plus.


The apartment is in a largest block which means that if he does go ahead then there will be considerable competition from other landlords but with strong rental demand in the area he shouldn't have a problem letting it.   All leaseholders are to a degree at the mercy of the freeholder and their management company.  Over a period of time above inflation rises to the management charges can start to reduce you net rental yields and your returns.

Investing approach

My accountant demonstrates a classic accountants approach in that he is looking very closely at the financials.  Good.  He is looking at a 50% gearing for his investment and using any excess on his rental account to help repay his mortgage early, ideally within 10 years of taking it out.  Then he has a debt free revenue producing asset in perputuity.  Fantastic!  This is what it is all about. At current house price valuations I'm still not convinced that there is a strong case for real asset value rises especially when real income growth for most of us is so weak.  However, a debt free asset producing an income will help give anybody financial freedom regardless of what happens in the future.  Bricks and mortar may no longer be a guaranteed way of printing money but at least you won't lose your shirt betting on it.

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