Okay, so I’ve told you how to get one property. But how do you get 43 properties in five years? The key is remortgaging. Remortgaging is all about releasing the equity that’s locked up in the property that you currently own.
So if you’ve bought your first property for £50,000 and you can get it revalued in excess of £70,000 then you can access some of that £20,000 equity to buy further properties. It is this release of equity that enables you to buy further properties as this equity can be used as deposits for further properties.
The revaluation trick
I bought a property in June 2001 for £23,500 in Northampton with a £6,000 deposit, did nothing to it, got it revalued at £42,000 by a different lender four months later, released £18,000, used this for further deposits and bought four more properties! In effect one property enabled me to get four further properties. This is possible if you watch out for these bargains.
The reason a £23,500 property can be revalued at £42,000 is that when you get a revaluation the valuer is only giving an opinion on what the property is worth and it is only a guide. However, the mortgage company takes this as the market value to lend against.
When filling out the form for a remortgage never be conservative about what you think the property is worth. If you bought it for £23,500 say it is worth double that, like I did (£47,000) and the valuer may came back at £42,000. This actually happened. This way you can raise the maximum amount of the cheapest borrowings to buy further properties.
I know the effective mortgage payment increases when you remortgage but the additional properties you buy and the income these further generate more than compensate for the increased mortgage payment. Let me show you by way of example:
Rob buys his first property two years ago for £60,000 with a 25 per cent deposit.
Mortgage (at 6%) £225
If an application is made that revalues the property at £80,000 and the lender is willing to lend 85 per cent then the funds that can be raised are:
£80,000 x 85 per cent - £45,000 = £27,250.
With this £27,250 Rob can buy three further properties for £60,000 each placing £9,000 deposit each (3 x £9,000 = £27,000) but the original mortgage payment has gone up on property 1 due to the extra borrowings:
So by a combination of revaluing, releasing equity due to increased borrowings and purchase of further investment properties profit nearly trebles from £375 to £1,274. This is because the equity Rob has released, borrowed at six per cent, generates income far in excess of six per cent due to the purchase of three investment properties. The profit generated from these three further properties covers the additional interest cost of remortgaging the original property and an extra £899!
Do not be worried if the revaluation breaks the rule of 12, i.e. the property gets revalued to £80,000 but you are only getting £600 per month rental. Remember borrowing is cheap, so if you can get borrowings at six per cent to get a return in excess of 20 per cent on property then do it. Only hesitate from doing this when borrowing rates are in excess of returns that can be had from the property.
Risk analysis for the future
Basically this section deals with things that can go wrong. When you are in business you are always susceptible to going bust. It happened to Railtrack, so it can happen to you! What makes a successful business is not only the ability to make a profit and generate cash but to also continue to do so. This means being able to:
- React to changing market conditions quickly
- Protect against threats to your long-term income
React to changing market conditions quickly
The profit you generate is dependent on two basic elements – rental income and mortgage expenditure. If either of these elements change in your favour (market rental income increases or market mortgage expenditure decreases) then you are stupid not to capitalise on this. You need to keep your eye on the market for both these elements. The easiest way to do this is:
- Rental income – Simply scan the ‘accommodation to let’ adverts in the local paper once every two months or so and see what a similar property to the one you own is going for. If the market value rent has risen for your property then increase your rent accordingly when you are able to do so. You are able to do this after the duration of the lease has expired.
- Mortgage expenditure – If you’re on a fixed rate and interest rates are dropping, then consider remortgaging at a lower rate. Approach your lender initially and tell them that you are considering remortgaging and they may even reduce the rate – it’s worth a try.
The more money you make by keeping abreast of changing market conditions the more you have set aside for further reinvestment, hence further profit.
Protect against threats to your long-term income
The key to managing risk in the long-term is diversification – not putting all your eggs in one basket. The way to do this is to vary the following factors when investing in property:
- Area – Try to invest in different towns and cities. Rental demand or property price changes can vary according to area due to significant increases in crime rates, redundancies, pollution etc.
- Property – Buy both private and ex-local authority properties. Consider both flats and houses. Do not stick exclusively to two-bedroom properties – consider studios as well as four-bedroom properties. This way you are not stuck with seeking a particular type of tenant.
- Tenant – Consider both DSS and private tenants.
- Borrowings – Go for a mixture of fixed and variable borrowings. Do not stick exclusively with one lender.
The following table details the threats to your long-term income and how diversification minimises the impact of the threat.
|Effect of diversification|
|Interest rates increase dramatically.||Because some of your borrowings are fixed the increase in interest rates will not fully impact on your mortgage cost. Depending on how risk averse you are will depend on the ratio of fixed to variable borrowings. Even if you are of risk factor 7 I still recommend you fix some of your borrowings cost.|
|Demand for rental properties in the area fall significantly.||This could be due to heavy job losses in the area. As you have properties in other areas the impact of the job losses is not felt on the whole portfolio. If this does happen then the key is to just cover your mortgage payment until demand picks up. If you drop your rent to an attractive price just above your mortgage payment you will ensure that you will get a tenant before most other landlords. If it is unlikely that demand will pick up then consider selling.|
|Changes in housing benefit entitlement.||Some councils have cut back on housing benefit and insist that the tenant contributes more to the rent. The tenant usually struggles to do this. If you have invested in different areas then your portfolio is not subject to one council change. Also if you have taken on a combination of private and DSS tenants then the impact is lessened.|
This is not an exhaustive list. These are just some of the threats that I have faced but have been able to weather due to diversification.