Worth the Investment?

Worth the Investment this week looks at a two-bedroom apartment in London.

Address: Gazzano House, Farringdon Road, Clerkenwell, London EC1

Agent: Spirit Properties, Dublin

Apartment type: Two-bed first floor apartment at £385,000

What do you get? Around 68 sq m (732 sq ft) with a lounge/kitchen with contemporary kitchen fitted with Smeg appliances. There is double glazing and polished white stone floors throughout and door video entry system to main entrance.

Gazzano House consists of 10 two-bed apartments, built over a well-established Italian delicatessen business. Spirit properties have negotiated a 10-year lease with a company providing accommodation to professors, lecturers and mature MBA students in London universities. Rent has been agreed at £18,118 and there are no letting agents fees or furniture costs.

Where? Located on Farringdon Road, Clerkenwell it is a five-minute walk to London City financial district, just under three miles to Central London and the West End and just seven miles to London City Airport.

The Thames river walk and the Tate Modern are nearby as are a large selection of shops, bars, cafes and gyms.

How much for investor? After stamp duty at 3 per cent, £11,550 (euro16,711), and legal fees of 0.5 per cent, £2,262 (euro3,273), are taken into account, the acquisition cost is £398,812 (euro577,111).

On an 80 per cent annuity mortgage at a rate of 7.4 per cent over 20 years, the annual repayments would be £29,549 (euro42,795).

This represents a shortfall of £14,451 (euro19,226) a year when rental income of £15,098 (euro21,850) per annum, at £18,118 (euro26,217) per year and allowing for one month's void and one month's costs, is taken into account.

The annual repayments on an interest-only mortgage would be £22,792 (euro32,985), giving a shortfall of £7,694 (euro11,136) and a yield of 4 per cent.

An investor requiring payments equal to rental income on an annuity mortgage would require a 41 per cent mortgage at 7.4 per cent over 20 years.

How much to buy? With acquisition costs of £398,812 (euro577,111), a residential buyer with a 60 per cent mortgage on a rate of 6.25 per cent would have annual repayments of £20,261 (euro29,324) and interest-only repayments of £14,438 (euro20,896). On an 80 per cent mortgage at a rate of 6.25 per cent, the annual repayments will be £27,015 (euro39,098) while on an interest-only mortgage they will be £19,250 (euro27,890).

Stamp duty: £11,550 (euro16,711)

Legal fees: £2,262 (euro3,273)

Service charge: The tenant is responsible for the internal fabric of the building for the term, which effectively means there are no management fees for at least the first 10 years.

Potential: With tenants secured, investors have the immediate security of a 10-year lease yielding at least 4 per cent per annum. In addition there will be rental increase of at least 2.8 per cent increase.

Verdict: The scheme would most suit cash-rich investors seeking a long-term residential investment.

Calculations by AIB