How To Double Your Return Using Debt | The Millennial Millionaire
- The Millennial Millionaire
- Jan 3, 2018
- 3 min read
Ever thought real estate return is terrible?
What if I told you that you can use debt to DOUBLE your return?
Well that's exactly what this blog will teach you!
Debt it good
Everyone tells us about the negatives of debt, be it school, the media, even family!
Yes, I’d agree loans from Wonga, QuickQuid and other payday loans are a terrible form of debt to hold.
However, things like a mortgage can help you get incredible returns on your capital.
Investing in property without a mortgage
Let’s take a look at the potential yield of a £200,000 property in the UK. Let’s make the following assumptions:
Rent is £900 a month with no void periods
Expenses in a year are £1000
Tenant pays all the bills
Legal fees are £2000
This is your second property. This means that this property is subject to new stamp duty fees.
Hold On...
The total amount of stamp duty paid is:
3% up to £125,000 = £3750
5% for the rest =0.05*£75,000 = £3,750
That’s £7,500 Straight to the government for fuck all.
Now you have the price of the property and legal fees to pay, totaling an initial investment of £209,500.
The rent you receive in return is £900 a month for 12 months in a calendar year. This gives us £10,800 in yearly income.
However, the expenses are likely to cost around £1,000, like lost keys, background checks and the possibility of boiler breakdowns etc. So let us say we receive £9,800 a year in return for our capital.
Our rate of return is therefore £9,800/£209,500=4.678%. Don’t forget this income is now subject to more tax, so the actual yield will be less.
3) Debt galore, let’s get a mortgage!
Okay let’s say we have the same budget, £209,500, but this time we won’t use all of it. We’ll invest in 4 properties however, as opposed to the one.
How?
Well, mortgages of course!
We’ll have the same assumptions as before…
We’re paying £7,500 stamp duty on each of the 4: £30,000 down the drain
£2,000 in legal fees x 4 = £8,000
£40,000 deposits x 4 = £160,000
Let’s make some more assumptions about the mortgage now. So, let’s get 2 year fixed rate mortgages that are interest only and buy-to-let mortgages.
At the moment, it seems that 3% is a fair interest rate to assume on 80% Loan to Value ratios, which each property has. This is because the loan is equal to 80% of the value of the property.
The mortgage will be a yearly expense, so we won’t include it in our initial expenses for the amount invested. Our total capital invested is £198,000.
Now the fun part…
We’re paying for each property 3% of 160,000 in mortgage payments. That is £4,800 a year. A total of £19,200 for all the properties per annum.
We’re also paying £1,000 a year in expenses for each property, that is £4,000 a year total.
Our total expense is therefore equal to £23,200 a year.
Now for our income, £900 a month is £10,800 a year per property.
For 4 properties this is £43,200 a year.
So, our income-expenses is now £43,200- £23,200= £20,000
Well that’s fantastic, so how does our yield now compare: £20,000 / £198,000 = 10.1% This model is one that many real estate tycoons have used to get rich, showing us in layman terms, good debt can lead to wealth.
In the long-term property will go up too, only adding to the yield.
The best part?
With the mortgage route you'll benefit 4 times over from the increase in property value, as you have 4 houses!
Check out my other blog that focuses more so on compounding within the stock market in 4 Steps to Become a Millionaire.
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