Spanish Mortgages - Building a Property Portfolio - 100% Funded by Your Bank Manager!

From little acorns do great oaks grow! Provided, of course, the acorns are actually planted!

In property terms, that translates to identifying the potential of building a property portfolio and being prepared to do something about it. In recent years, both in the UK and here in Spain, there has been a tremendous appreciation in the value of the average property. The reasons for this are many fold; low interest rates, a shortage of property to meet buyer demand (especially in the UK) and a stable economic climate. However, these conditions have changed to a degree and we have seen a flattening out of annual property growth rates. Here, as in the UK, is it a ‘buyers market’. That means that buyers are less than those wishing to sell, so prices have fallen.

But that will, in time, give rise to greater returns as new buyers are acquiring their property at a lower level. So the supposed negative of a downturn in prices gives purchasers a bonus. It is a good time to consider buying again because you are paying less than you would have done just a few months ago.

And whether you wish to build your portfolio in the UK or here in Spain, the principles of funding are the same. If you already own a property you can look to purchase the next with 100% funding courtesy of a lender. You need not use any of your hard earned savings to grow the portfolio.

The basics are fairly simple; we have to provide enough funding to meet 100% of the purchase price and related costs. Here in Spain, we need to allow circa 11% over the headline number to meet taxes, solicitors costs and borrowing fees. If you own a property from which we can access the deposit of 20% and costs to a total of say 30%, then the remainder can be mortgaged on the new acquisition.

And, as with most property portfolios, the rental income on the new addition can be used to meet the debt service of the total borrowing.

‘A picture paints a thousand words’, so let’s see if I can simplify this. I am assuming the following:

• £200,000 existing UK property value. Not mortgaged.
• €150,000 new Spanish property = total cost €165,000
• Exchange rate €1.50 per £ (current rate 1.46 as at 26th August 05)

• €120,000 € mortgage (80% of the €150,000) @ 3% = €3,600 per annum ‘Interest Only’
• £ 30,000 UK mortgage (€45,000 deposit and costs) @ 5.5% = £1,650 per annum (€2,475)

• € 6,000 net rental income per annum (€600
• € 6,075 total debt service (£1,650 plus €3,600)

In other words, not only is the property purchased with 100% mortgage funding but the net cost to you every year is all but covered by rental income.

And that is how property portfolios start.

In time, albeit in several years, both the UK and Spanish property are almost certain to have appreciated with equity being available once again to purchase a 3rd property. And so on and so on.

But what risks are attached to this philosophy? The are several really;

1) that property prices to not rise. Looking back over the nature of the UK market for the last 100 years, the returns on property have always been sound. Yes, there have been slumps but long term the investment is good.

2) you will not achieve the desired rental income. This is always a threat, but a cautious approach to letting (i.e. do not be greedy and consider the positive cash flow promise of long term lets) can overcome some of the vagaries.

Building a property portfolio is a long term plan; you cannot expect to achieve the desired goal overnight. That translates into a realisation that you must invest for at least 5 years and conservatively 10. And there has been no 10 years that have not seen a very strong capital appreciation either in the UK or here in Spain.

To continue the analogy with the acorn, in 5 years it may still be a juvenile, but it will be strong enough to withstand a few storms. In 10 years it will be well established and resembling it’s mighty peers and mature oaks.