Gearing up
Most landlords don’t grow a portfolio. And the few that do, typically use rental income and the equity from house price growth to purchase new properties, rather than adding new capital. This can make it a slow burner - developing a portfolio from scratch often amounts to a lifetime’s work.
However, for those thinking about expanding their portfolio, we’ve tracked how reinvesting the profi ts from rental income and rising house prices can generate a snowball eff ect to supercharge growth. We look at how a portfolio evolved for someone who invested £50,000 into a limited company in the mid-1990s which was used to purchase buy-to-let property with a 25% deposit.
We check in on the portfolio every five years. We track how the investment would have performed in diff erent regions to see how small differences over one or two years can add up to large variations in returns over a generation. We also look at the impact of reinvesting rental income, the eff ect of house price growth and how mortgage finance multiplies returns.
But before we start, a brief note on methodology. The investment is made as a limited company in 1996, with all prices adjusted for inflation (£50,000 today is equivalent to around £26,000 in 1996). We assume that all rental income after mortgage interest, maintenance costs and tax is reinvested back into the portfolio. Similarly, equity derived from rising prices is extracted, taxed and then reinvested – this means the loan-to-value of each property in the portfolio never falls below 75%, even if house prices have risen.
The beginning (1996-2001)
Every portfolio begins with a single property. For most investors, the first property they buy will be the only one, but for those looking to grow, it’s the first piece in the portfolio puzzle. The first few years tend to be a learning curve, dedicated to understanding exactly how the rental market works and their full duties as a landlord.
An investor who purchased their first property with a 75% loan to value mortgage in the mid-1990s, not too long after the start of the house price cycle, saw the beginning of their portfolio journey supercharged by house price growth.
After servicing the interest, the initial investment rose in value nationally by an average of 136% through both rental income and capital growth over the first five years. This turned £50,000 into £117,800 with almost threequarter’s of the return coming from house price growth.
Landlords in Southern England saw the strongest returns. Greater capital growth more than off set lower yields and meant a £50,000 investment would, by 2001, have been worth £134,800 in London and £107,300 in the South East. Around 43% of returns in the North came from capital growth, compared to 87% in London.
At the end of this first five year period, we assume that the profit from rental income (£33,500) and capital growth (£92,000) was reinvested back into the company (after tax and an allowance for maintenance costs). The use of leverage (a 75% LTV mortgage) meant that at the end of the period, investors could remortgage and release an extra £203,600 as a result of rising house prices to reinvest.
The boom (2001-2006)
These next five years also saw significant price growth, boosting the value of both the new and the original investment. The use of leverage means that three-quarters of the house price growth is on property secured by borrowed money rather than the investor’s deposit. This amplifies the impact of house price growth fourfold.
By the end of this five-year period and following record-breaking house price growth, nationally the value of the initial investment had increased by 785%. This meant that the £50,000 invested in 1996 was worth £442,000 10 years later (with £79,100 from rental income and £384,600 from capital growth). Capital appreciation accounted for between 82% and 87% of a landlord’s return across the country, but, given that the house price cycle was coming to an end, this meant that money invested in the North East saw greater returns than anywhere else in the country with slightly higher price growth coupled with higher yields. The value of a landlord’s portfolio in the North East rose 1,101% over a decade compared to an increase of 703% in the capital.
The end of the cycle (2006-2011)
With 2007 heralding a house price correction, this five-year period marked the weakest point for portfolio growth. Investors in the Midlands northwards found themselves dealing with negative returns from house price growth, although strong yields from rental income cushioned the blow. Meanwhile, investors in the capital and surrounding markets saw house prices recover within 18 months, but lower yields dampened their total returns. This meant that rising prices accounted for 62% of returns in London, and 38% in the commuter belt.
By 2011, 15 years after the initial £50,000 was made, putting the money into London would have generated a net portfolio value of £676,900 (1,254% growth), compared to £1,098,000 (2,097%) if it had been put into the North East. Strong yields across the North allowed portfolios to continue growing in value, despite fairly substantial house price falls.
The start of a new cycle (2011-2016)
This second house price cycle saw the London market explode into life. During this five-year period, Southern house price growth outstripped Northern growth by the largest margin recorded at any point during the 25-year lifetime of the portfolio.
It also marked the point where the total net value of the portfolio passed £1,000,000 in every region of the country. Despite this, the returns from capital growth between 2011 and 2016 were more divided than at any other time over the investment period.
Between 2011 and 2016, 90% of returns across London came from capital growth, compared to just 28% across the North East, where prices were still recovering. By the end of this period, the value of the £50,000 initial investment had reached an average of £1,813,000 (3,527%) nationally. The London portfolio grew to a net value of £2,409,000, almost identical to the North East, but with the growth coming at diff erent times and in different ways.
The final five years (2016-2021)
The size and value of a property portfolio typically hits its peak after 20-25 years, so an investor who began their journey at 40 years of age would now be pushing 65. While an investor could, of course, carry on growing their portfolio, often for lifestyle reasons they choose to taper growth or begin to downscale and start drawing an income, rather than reinvesting it. The portfolio which started with a £50,000 investment 25 years ago would, in 2021, generate an annual income of £180,900 in London or £624,900 in the North East.
The net value of the average portfolio in England and Wales doubled between 2016 and 2021, buoyed by record levels of rental income and capital growth. Faster house price growth across the North boosted the value of northern-based portfolios, while yields remained relatively resilient. Low yields across the South meant that, despite slower price growth, capital appreciation still accounted for a mammoth 73% of total returns in London.
Portfolio returns varied signifi cantly across the country. A sum of £50,000 invested in the North East in 1996 would be worth the most, at £6,277,000 (12,445% growth) today if all price growth and rental income was reinvested back into the portfolio. This is followed by £5,179,000 (10,259%) for a portfolio spread evenly across Northern England, while London came in third place with a net portfolio value of £4,715,000 (9,332%) over 25 years.
