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Back To Reality

With the euphoria of the Olympics Games over people minds will be getting back down to reality. The Games serve to act as a distraction for most of the nation, to feel and be a part of something greater than their own mundane existence.

Many football supporters only feel alive when 11 people they do not know, and who in turn do not know them, kick a leather ball through a rectangle.

The economic reality is Sir Mervyn King, BoE governor, downgraded the 2012 growth forecast to zero. Whilst the reality hits home, there are a few industries which will not only survive but even thrive, in the coming years.

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One sector we have got a lot of interest from is pharmacists. They seem to make money regardless of the weather, as people are still getting ill, and will pay to look after their health.

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Recently I came across a couple of young pharmacists who are just starting out and are looking to get more firmly entrenched into the field. We secured a deal last week for a one of them who is contracting himself out, and today I received a call from one who has been trying to purchase a pharmacy for a number of years without any success. Both are currently locaming.

The latter complained the sector is now dominated by Asians and they are not letting their business go unless they get top money. The amount of money they ask for is equivalent to the turnover of the business, this leaves very tight margins for the purchaser to make any money from the business.

He was saying it is very difficult to get their foot in the door so he is keen to explore whether it is worth shifting his whole focus completely to see if property can give a viable alternative to running a pharmacy. It’s a big shift in mentality, considering he has spent four years studying the subject, and geared himself up to being one.

The situation has become so dire if the right one comes up he will need to shift locality to the business, thereby cutting off his proximity to the family, difficult when you have young children in school.

The margins are 20-25% of the turnover, this means the business will give him a £200,000 to £250,000 margin on a £1m business with a £1m turnover. I have made an assumption that the cost of running the business will be £100,000, this means there will be a profit of around £150,000 for a £1m business.

A typical example of the kinds of property we deal with in Central London would be a three bedroom flat costing £350,000. This would generate £550pw in rent. If we assume a £100,000 deposit and £250,000 borrowing, the interest rate cost would be about £12,500 (we’ve assumed 5%), and if we allow £4,000 for the service charge and management, we will get a cost of £16,500. Against a yearly rental of £28,600 you will get an income of £12,600. A 12.6% net return on your money.

If we assume a 5% rise in property value you will get a further return of £17,500. Together this gives a return of £30,100 per annum.

There is a distinction in these two figures, the rental yield is paid monthly and is pretty accurate as it is the open market rental. The other is a post dated cheque it may or may not happen. This property is centrally located, and most commentators agree the market is still set to rise in Central London.

So with this health warning out of the way, the returns can be from 12-30% on funds deposited.

If we assume a 50% borrowing on the pharmacy for £1m, you will be putting in £500,000 and the cost of borrowing on the other half will be £25,000 per annum (we’ve assumed 5%). This means you will get an income of £125,000 on a £500,000 deposit which is a 25% return on your funds.

Of course the 25% consistently is higher, but here’s the point: the income described generated from property is not dependent on you working, in fact it’s not even dependent on your being alive.

This of course is without factoring in a wage whilst investing in property, if this was included then the rate of return would be higher, assuming a wage of £50,000.

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The income generated from property is passive, this means you can do what you wish with your time and the funds will flow in.

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This means there is no limit to how many properties you can purchase as it will not strip away from your time.

If you’re running a business there is of course only one of you and so there will be a limit to what you can do, each extra business means you will need to spread yourself thinner and thinner.

From our comparison investing into property emerges the stronger option. The lifestyle benefits too which we haven’t considered here will be beneficial and these cannot be measured in monetary terms.

Our next Central London property seminar is being held in Ilford, IG1 on Thursday 27th Sept 2012, at 7.30pm. If you would like to book a place please email info@sowandreap.co.uk or call our office on 0207 313 4595. Seats are limited, so early registration is recommended.

The Real Deal

Bernhardt Crescent, Marylebone, NW8

  • Purchase Price: £351,000
  • Large, fully furnished three bedroom flat
  • High rental yield of £26k can be achieved
  • Lift
  • Long Lease
  • Resident parking with permit

Suresh Vagjiani

Managing Director

Sow & Reap

A Property Investment Company

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!Tips of the Week

Make sure you have the right kind of insurance to cover your liability. You will need to select the proper package for your type of rental property, many have exclusions from certain types of tenants e.g. DSS tenants

Warren Buffett says: “Be fearful when others are greedy, and be greedy when others are fearful.” Right now the market is fearful, it’s the time to strike

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