Down-sizing for better returns

Every now and then, a landlord will come to see me in order to discuss the letting of a property which, owing to its size, value, sometimes location and often the landlord’s circumstances, isn’t an ideal letting prospect. It might be a lovely well-presented property, but for whatever reason, the yield simply isn’t attractive.

In one such case, we had been letting a large very nice 4 bed ex family-home for a landlord for many years while he lived overseas and his wife lived in the north-east. They had absolutely no intention of ever living there again and he had expressed an interest in growing his portfolio.

By selling the property, he released a good deal of equity and, over a period of a few months, assisted by additional funds, we secured a total of 8 properties which were all able to produce a significantly better return on his investment.

By using modest mortgages his profits from the properties have been amplified. Instead of gaining perhaps 8% capital growth on a property valued at £500,000, ( £40,000) he has gained the same 8% on 8 properties valued at over £1.25m  (£100,000)  I have deliberately stated that the mortgages were modest, since by using mortgages in this manner, a landlord will inevitably be exposed to greater losses in a falling market.  A landlord contemplating this sort of venture must always seek qualified financial advice.

In this particular case, even after paying his mortgages, his net monthly income is also better than it was with the single property. In fairness, he has 8 times as many maintenance issues as he had before his portfolio expanded, but since we manage them for him, he’s concerned only with the finances and these are significantly better than they were.

There are obviously costs associated with down-sizing and expanding a portfolio and it isn’t always appropriate for everyone. Nonetheless, equity might be better employed in more than one property. 

Prior to making a decision, consideration of all the alternatives is a must. For example, a house which has been inherited and which has been occupied by elderly relatives for an extended period might easily require tens of thousands of pounds in expenditure to make it attractive for letting purposes.  A decision to sell under these circumstances might be quite easy to make.  If a property has little equity, however, it might make no sense whatsoever to look at this sort of project.

We have been involved in the purchase of dozens of properties for investors over the last 4 years in particular and would welcome an opportunity of reviewing the particular circumstances of any potential investor.