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Property Investment
"Put your money into bricks & mortar" How many times have you heard this phrase? There's absolutely no doubt about it, buying property to let out, when done with due diligence, has consistently proved to be a very lucrative long-term investment. It's an area of investment that has become very popular indeed in recent years, (we've all seen the TV programmes!!) and it's no longer the preserve of the privileged or wealthy, anyone can do it. So why is Property such a good long term investment?There are 4 main reasons
The Power of Leverage:Question (2 parts): Supposing you had £100,000 to invest Part 1. How many pounds worth of paper assets (stocks) could you buy for £100,000?This is not a trick question by the way, with £100,000 you can buy exactly £100,000 worth of stock, (for any seasoned investors, please ignore buying on margins). Part 2. How many pounds worth of property could you buy for £100,000?Obviously, you could buy a £100,000 property outright. But knowing lenders will lend up to 85% you could get a mortgage of say £80,000 (80%) and use £20,000 as your deposit. If you did this you could repeat it 5 times spreading your £100,000 fund over 5 properties as a £20,000 (20%) deposit, this means you could then buy £500,000 worth of property! This is known as Leverage or Gearing. Of course, you would now have a £400,000 mortgage to pay as you've borrowed £80,000 on each of the 5 properties, but as long as you have done your due diligence properly (this is absolutely crucial) the tenant's rental income should cover the mortgages. Now considering that property historically doubles in value every 7 - 10 years, this means your portfolio (on average) would then be worth a cool £million, returning you £500,000 in equity for the original £100,000 outlay, that's a 500% return on your money!! Free Initial Consultation Learn more about Property Investment
How Do You Buy Investment Property?Funding an investment property is done via a Buy to Let Mortgage, lenders will generally lend you up to 85% of the properties value, and you just need to come up with a 15% deposit. Buy to let mortgages are very similar to residential mortgages except the lending is based on the anticipated rental income from the property and not the borrower's income. A buy to let mortgage is effectively self funded from the rental income, however, the lender will still want to check the borrower's status, the only difference being, the lending isn't based on the borrower's ability to pay as with a residential mortgage. When lenders assess a buy to let mortgage application, they (depending on the lenders criteria) are looking for a minimum rental of 100% to 125% times the monthly mortgage (interest only) repayment. The potential rental will be assessed by the surveyor.
The process for buying an investment property is exactly the same as a residential property, the emphasis is on doing your homework and making sure it is in a rentable area and the potential rental will cover the required borrowing to whatever degree the lender requires. How to Buy Investment Property for FREE (i.e. none of your money left in at the end)There are 2 methods used by investors to acquire investment property and have none of their own money left in the deal on completion or within a few months of completion Method 1: Back to Back Mortgage MethodThis is where you look for a property that you can get below market value that needs some degree of refurbishment allowing you to increase its value. You need to do your due diligence to make sure you are confident of the figures before committing to the project. Example: Lets say you negotiate a £100,000 valued property for £90,000 that needs a some refurbishment (say £6,000) and you have identified similar properties (in great condition) are being valued at £120,000. You purchase the property with a standard 85% mortgage (£76,500 borrowing) using a 15% deposit (£13,500) from your own funds, you choose a mortgage with no redemption penalties as you will only have it temporarily. On completion you immediately start the refurbishment and to bring the property up to its refurbished value of £120,000. You now remortgage the property against its new value and borrow 85% (£102,000) of the new value. From the £102,000 advanced, you pay back the original mortgage, get your original £13,500 deposit back, £6,000 costs back plus other related costs (legal, survey, mortgage payments). Here's an example of typical costs assuming the project takes 3 months.
In this example you would need to have £22,895 available to fund the deposit, refurbishment costs and associated purchasing and mortgage costs. On completion you get all of your outlaid money returned to you plus an additional £2,605 meaning none of your original money is in the project...its now FREE with a bonus to cover any void periods or maintenance problems. You do need to be careful that you don't go over budget or the projects don't overrun as this will eat into your costs, it's always advisable to have a contingency for unexpected costs. It is paramount when taking on a project like this that you do your due diligence on the figures before commencing otherwise you could end having to leave a lot of your money in the project. Best bit...if you can make a project like this example work and get all your money back out (and perhaps more), there is nothing stopping you repeating this and building a portfolio with the same initial fund...food for thought! Method 2: Daylight Bridging (aka ‘No Money Down') MethodThe key to this is to find a suitable property to let with good rental income potential that you can negotiate for 17% - 18% below its true market value. It sounds difficult at first but there are plenty of these deals around if you use the right methods to find them (can mean analyzing a lot of deals, but they are out there). Example: Let's say you find a property worth £100,000 that you have negotiated for £82,000 (82%) as the vendor has to sell quickly for personal reasons. First step: You apply for a remortgage of 85% (£85,000) of its true value. N.B. Even though you don't own it you can still apply for a remortgage, however, you can't complete on the remortgage until you are the legal owner. Second step: Once you have a mortgage offer for 85% (£85,000) you or your solicitor apply for closed bridging finance for the amount of the agreed purchase price (£82,000). You also need a solicitor who is familiar with this strategy. Third step: On the day of completion, in the morning the solicitor will use the £82,000 bridging finance and purchase the property for you making you the legal owner. In the afternoon, the solicitor will then drawdown the £85,000 remortgage funds, pay off the bridging finance, legal fees and return any surplus to you. Here's the breakdown.
In this example, the actual outlay was only £600, all of the other transaction costs came out of the remortgage funds. Also in the example there was a surplus of £1,180 leaving a profit of £580 after paying back the initial £600 outlay. This method can be harder to do as it takes a fair amount of skill and research to find deals that fit with the criteria required to make it work. However, when used correctly, you can acquire property for very little money (easily less than a £1,000 initial outlay) completely dispelling the myth that you need a lot of money to build a big property portfolio. Have You Missed the Boat!With the huge growth seen in the UK property market since the turn of the millennium, it may seem like the ‘boat has already set sail' for new property investors. You often hear phrases along the lines of "If only I had bought that second property 5 years ago when it was worth £...." The point is, the property market, like all markets, is cyclical, it always goes in cycles, but if you look at it on a graph over a long period of time (say, the last 40 years) you will see it actually rises on average at a very smooth and consistent rate, today's prices will seem high (compared to the past), but they will also seem like a bargain a few years down the road. Consider this. Property historically doubles in value approximately every 7 - 10 years, after every price boom everyone says it won't happen again yet it always has to date! If you're serious, Jump on the Boat Sooner rather than Later!There will be a continual stream of ‘investment property' boats passing by, the last one will always seem better than the current one, if you want to get to the other side where the money is, you are going to have to jump on one of them, with every boat that passes, the money potential waiting for you slightly reduces, when you do jump on one, you'll soon find yourself at some point, waving back towards the shore at all the other people who wish they had jumped on with you. Homework is the key... make sure any deal you look at works on paper before you pursue it. You can do a vast amount of research from your own home via the internet, you can also get lots of information from estate and property letting agents who will guide you on the best types of property, potential rental incomes and local demand. Mortgage advisers will give you advice and guidance on all the financials regarding investment mortgages. After finding a potentially suitable investment property, let your Calculator make the final decision to purchase and not your Heart (those emotions do funny things to you!). Remember, you are not buying the property to live in but as in investment. Other reasons to invest in property
Finally. Financial Wisdom says there are only 2 ways to earn money - 1) People at work, 2) Money at work. Assuming you're already doing the first one I strongly recommend you engage in the second one (if you aren't already) by acquiring assets that earn you money regardless of whether you work or not. What better way than Property Investment? Free Initial Consultation THE FINANCIAL SERVICES AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES |
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