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DRS

Whats Wrong With This Property Investment Model?

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Ok here goes. All the numbers are for example, but the returns/borrowing costs etc are real

I borrow £100k from the equity in my house. I put this down as a deposit on a commercial prop lets say high street shop. I borrow £250k from a commercial lender to make this happen.

So total borrowed is £350k and I've taken it all on interest only. Now the investment prop is a prime located shop with a blue chip tenant on a 15 year lease. Because its a 'safe bet', the return is 'poor' ie 6%. This 6% return will exactly cover the interest payment I owe the two banks for the £350k. Since all the money is interest there is no tax implications on the rent.

So without a penny out of my pocket the debt is serviced. The commercial tenant is responsible for maintenance and upkeep. No void periods as its a 15 year commercial lease.

After 5 years there is the usual rent review. If luck is in, the rent goes up 10%, this automatically means the value of the prop goes up 10%. I can then sell for £385, ie £35k gross profit for doing absolutley nothing. If the rent doesn't go up I sell the property for the same price I bought it for and am out of pocket for buying selling costs. In reality though you'd keep it another 5 years waiting for the up lift next time.

Now if you do this a few times, every 5 years you are in for a significant windfall.

So unless IR go through the roof, which seems unlikely over the next few years, whats the problem?

<_<

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So unless IR go through the roof, which seems unlikely over the next few years, whats the problem?

<_<

Some issues:

- This is a large, geared investment. A small drop in the value means you are already out of pocket by a large chunk.

- You need to recoup Stamp Duty and other purchasing costs before making a profit.

- Rents can go down as well as up. A few years ago my dad moved his small business to a nicer office round the corner and slashed the rent by 30%.

- The occupant could go bust, possibly leaving you as a creditor but unable to recover back rent as they are a liquidated limited company with no remaining assets. You will also then have a costly void period.

- Will a bank really lend you a cool quarter mill on this basis?

frugalista

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After 5 years there is the usual rent review. If luck is in, the rent goes up 10%, this automatically means the value of the prop goes up 10% . I can then sell for £385, ie £35k gross profit for doing absolutley nothing. If the rent doesn't go up I sell the property for the same price I bought it for and am out of pocket for buying selling costs. In reality though you'd keep it another 5 years waiting for the up lift next time.

<_<

no it doesnt if commercial property isn't such a hot investment at the time investors will be demanding a higher yield

Edited by lowrentyieldmakessense(honest!)

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Frugalista.

If price drops, you just hang onto it for 10 years. No skin off nose as its self servicing

Appreciate your comments re SD/CGT thats why I said gross profit.

Rents can go up and down however you quote the office market which is very different to retail . Also you quote your dad MOVING office NOT having a downwards rent review during the time of a lease.

Yes, the occupant can go bust, but thats why I'm quoting prime retail blue chip tenant ie Boots/a high street bank etc. Now any company can still go bust, but the ones I'm talking of have been around longer than you or me, so very low risk.

Yes bank will lend. Wheres the problem for them.? You've come up with £100k cash( ie 30ish %) and propose to buy a high st shop where the rent from a blue chip covers their interest

LRYMS.

I take your point. In my simple mind i see the yield being a product of the following

1) The location

2) The quality of tenant

3) The cost of borrowing

4) Relative returns from other types of investment

1 and 2 won't change. 3 could change as I've said and therefore people will need a higher yield, true.

4, yields from com prop have been lower than equities for some years and probably also true over the long term. However institutions and individuals need a balanced portfolio and will so always need some property.

As the loan is serviced for the next 15 years without a penny out of ones pocket(as long as irs don't rocket) one will never have to rush to sell and so ample time to pick the advantageous time to sell.

Thanks for your thoughts so far

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LRYMS.

I take your point. In my simple mind i see the yield being a product of the following

1) The location

2) The quality of tenant

3) The cost of borrowing

4) Relative returns from other types of investment

1 and 2 won't change. 3 could change as I've said and therefore people will need a higher yield, true.

4, yields from com prop have been lower than equities for some years and probably also true over the long term. However institutions and individuals need a balanced portfolio and will so always need some property.

As the loan is serviced for the next 15 years without a penny out of ones pocket(as long as irs don't rocket) one will never have to rush to sell and so ample time to pick the advantageous time to sell.

Thanks for your thoughts so far

you dont have much of a safety margin if the rent just covers the interest - based on 6% interest rates - are banks really gonna lend the money - let me guess (Yorkshire Bank or RBS).

If the value is £350k and the yield goes from 6% to 8% then the capital value will have fallen by £87.5k.

agree in part re balanced portfolio but there are times when the portfolio should be under or overweight in property and in my opinion this is not the time to be overweight.

Edited by lowrentyieldmakessense(honest!)

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LRYMS, what factors do you think would make the yield change from 6% to 8%? Yields have had townward pressure for the last 5 years. Would it be purely due to IR rise?

DRS

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LRYMS, what factors do you think would make the yield change from 6% to 8%? Yields have had townward pressure for the last 5 years. Would it be purely due to IR rise?

DRS

interest rates

performance of other investments

change in sentiment towards property

inflation

less demand for the relevant property (i.e. downturn in the retail sector)

fact that yields are currently at historic lows

fall in the value of sterling

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Ok here goes. All the numbers are for example, but the returns/borrowing costs etc are real

I borrow �100k from the equity in my house. I put this down as a deposit on a commercial prop lets say high street shop. I borrow �250k from a commercial lender to make this happen.

So total borrowed is �350k and I've taken it all on interest only. Now the investment prop is a prime located shop with a blue chip tenant on a 15 year lease. Because its a 'safe bet', the return is 'poor' ie 6%. This 6% return will exactly cover the interest payment I owe the two banks for the �350k. Since all the money is interest there is no tax implications on the rent.

So without a penny out of my pocket the debt is serviced. The commercial tenant is responsible for maintenance and upkeep. No void periods as its a 15 year commercial lease.

After 5 years there is the usual rent review. If luck is in, the rent goes up 10%, this automatically means the value of the prop goes up 10%. I can then sell for �385, ie �35k gross profit for doing absolutley nothing. If the rent doesn't go up I sell the property for the same price I bought it for and am out of pocket for buying selling costs. In reality though you'd keep it another 5 years waiting for the up lift next time.

Now if you do this a few times, every 5 years you are in for a significant windfall.

So unless IR go through the roof, which seems unlikely over the next few years, whats the problem?

<_<

so hows the commercial property market

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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