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Investment vs Debt

According to the latest newspaper headlines Britain has a debt epidemic and what is more it’s growing. More than 5,300 people a day are seeking advice on their financial situation. The Citizens Advice Bureau dealt with a staggering 1.4 million debt problems last year – 11% up on the previous 12 months and double the figure just eight years ago.

However, as landlords we shouldn’t be scared of taking on debt. Spending money on holidays, cars, flash clothes is pure consumption. Nobody buys a new suit or a car thinking they will secure an income from it or indeed sell it at a profit somewhere down the line.

Being a landlord you are an owner of a business and in that respect you should be regularly evaluating whether with a little bit of targeted expenditure it’s possible to increase not only the value of your investment, but also your rent and thereby your total investment returns.

What do I mean by this?
Take for example the case of a two bed apartment currently let at £1000 pcm. The property has been let for several years and it would be possible to let it again without too much difficulty. However, the interior is looking pretty tired and the kitchen, whilst clean definitely has more of a ‘country cottage’ vibe going on and didn’t really fit with the modernist decor of the rest of the flat. The options is either to let it as is and probably have to accept a slightly reduced rent to allow it to compete on price with more expensive new build units. Alternatively, it would be possible to spend approximately £5000 on a new kitchen, redecoration and even some new flooring throughout. The projected financial results of this would be as follows:

1. The rent could be upped by £125 per month generating an annual increase in income of £1500
2. The void period would be likely to reduce by several weeks per annum giving an annual saving of approximately £460

Payback period
At just under £2000 per annum increase in net revenue; this gives you a pay back period if you used your own ‘hard cash’ of just over 2.5 years. This is pretty good for any commercial project where a pay back period of 5-7 years would be considered viable. Remember also that this expenditure would probably put £5000 on the capital value of the property for the next 5-10 years at least.

However, there is a catch – where do you pluck ‘five grand’ out of the air from. It’s great if you have it but it is still a considerable amount of money for most people to find. This brings me back to my original point. There is nothing wrong in borrowing money. Debt is not a bad thing per se, when it used to invest in a way that levers greater returns from your business.

In the above scenario the expenditure of the £5000 would almost be instantly recouped by a corresponding rise in the capital value of the investment. In addition the cost of the interest and capital repayments should be met from the additional rent received. Therefore in essence the work costs you nothing.

A two minute bit of research on the Internet at revealed the best 5 year unsecured loan on the market has an interest rate of 5.6%, which equates to a repayment of £95.42 per month. This would be easily afforded out of the additional rent and there and still leave a surplus of just under £30 per month from the projected rental increase. Finally, there are the potential tax benefits. Any interest on the loan can be offset against your rental profits. In this particular case the interest element of the loan accounts for £23.33. Therefore if you did pay tax on your rental business this would mean a saving of about £300 over the period of the loan at the basic rate which would almost double to £560 if you pay tax at the top rate.

The message for landlords is clear, don’t be scared of debt; used wisely it can be a very useful friend.


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