Modeling Property Investment

using leverage

Today I was doing a little financial modelling because I wanted to see what the leveraged gains would look like on a property portfolio.

I had already worked out that property isn’t a good investment without capital gains after you take out all the costs, but I wanted to see what the capital gains would look like on a leveraged property portfolio that was leveraged to zero annual cost.

Here are my assumptions:

A property with a purchase cost of $1m ($700k + $300k mortgage) would yield a rent of $750pw. Income after a rental agent & council tax would be $590. The mortgage cost is $450pw, which is interest of $380pw. This gives a taxable weekly income of $210 (assuming no other costs, which their definitely would be) and weekly after tax income of $140. If we deduct the mortgage principal from that, we’re left with $70. Let’s pretend that’s enough to pay for breakages, amortized costs, etc. (which it isn’t, unless you’re slum lording). I don’t think I could leverage more than this without the property definitely being a weekly cost (and therefore not a retirement option without other clever accounting going on, such as a pot of money to live off [which would then have to be calculated as a cost on the modeled return]).

Based on the above, leveraged capital gain is 2.8% pa if annual property growth is 2% (matching average annual inflation); or leveraged capital gain could be 20% pa if annual property growth is 14% (matching boom times).

This tells me that a property investment (based on this model) is only worthwhile to me if I operate it during a boom, though that might be an unfair assumption because almost all investments perform poorly outside of booms. What I can draw from this basic modeling is that without greater leveraging, I’m unlikely to get more than 20% return from property and it won’t provide me with a livable income at the scale I would be operating. Not very exciting, slightly better than my goals for returns on stocks, but without the dividend income to live on.

I feel like I’ve not finished modeling all my options around this. I haven’t factored scale, other levels of borrowing or living off savings while running a portfolio that requires ongoing financial support with a longer term goal or a rotating portfolio. I also haven’t looked around much to see if I could find a property that had better rental yield for my model.

I suspect property will definitely play a part in my portfolio again (though I also need to consider the human and government element). I will likely revisit this in my more substantial modeling as I approach my retirement later in the year.