A sum of £50,000 invested in the buy to let property in the North East of England in 1996 would be worth nearly £6.3m today, £1.6m more than if the same amount had been invested in London.
According to a report by Hamptons International, the North East has emerged as the fastest place for buy to let investors to grow the most valuable portfolios due to the power of higher rental yields, which accounted for 61% of returns over the past 25 years.
These figures assume that all price growth and rental income (after mortgage interest, maintenance costs and tax) was reinvested back into the portfolio, and that the investment was made as a limited company, with all prices adjusted for inflation. The calculations also assume that equity derived from rising prices is extracted, taxed and then reinvested. This means the loan-to-value of each property in the portfolio – essentially how much the mortgage borrowing is in relation to the property value – never falls below 75%, even if house prices have gone up.
Someone who invested £50,000 in buy to let property across Northern England in 1996 would currently have a portfolio worth nearly £5.2m, or if they’d invested the same amount in London 25 years ago, a portfolio worth £4.7m.
“The stark difference in returns across the country is a product of the house price cycle and the point at which the landlord bought – the results would look different for someone who invested a year earlier or later,” the report said.
“An investor who timed the cycle perfectly over the last 25 years, always investing in the fastest growing regions, would see double the average return compared to someone who invested in the slowest areas. In 2016, the values of portfolios in London and the North East were about the same, but, over the last five years, faster price growth and higher yields pushed up returns further North.”
Price growth has been magnified by buy to let mortgage leverage, which essentially means investors have been able to reap the benefits of growth on a value which is several times the size of their initial deposit.
The report said: “The scale of returns seen here wouldn’t be possible without significant price growth combined with leverage in the form of a mortgage. When prices rise 10%, an investor with a £50,000 deposit and 75% loan-to-value mortgage will see a return of 40% on their initial investment, before the costs of servicing a mortgage.”