This article aims to educate the reader on the five fundamentals of professional property investing, specifically focused on the city of Hull in the East Riding of Yorkshire
- The topics covered
- Return on Investment
- Rental Demand
- Stress Testing
- Exit Strategy
When investing in property, you can benefit by borrowing from the Bank using the power of leverage. Typically, a buy-to-let mortgage requires you to put a 25% deposit down, and the Bank will provide the remaining 75% of the property’s purchase price. Where else can you get them to do that? Banks will lend you money to buy property. They are less likely to lend you money to grow your business and will not lend you money to buy stocks and shares. Despite what the media says, they understand that property is still a safe, secure asset. To show you the power of leverage, let’s show you an illustration. You have 100,000 to spend on an investment property. The following scenarios show how you can spend that money.
Scenario 1 – Buying one property worth 100K with all your cash
Buying one house without a mortgage. Put down 100K and buy the property outright. The following year, inflation raised the price of that property by 5%. The property is now worth 105K. You currently have a property worth 105K and an equity of 5K in that property.
Scenario 2 – Buying four properties, each worth 100K, with a mortgage on each
You put a 25K deposit down on each property and a mortgage for the remaining 75K, spending all your 100K across four properties, not just one property this time. The following year, inflation raises the prices of that property by 5%, the same as scenario 1. Each property is now worth 105K. However, now you have 4 of them, so you benefit from the 5K equity in each. So you now have 20K equity instead of the 5K in scenario 1. You have still spent the same amount of money but have benefited from the leverage of money from the Bank.
2-3 bedroom properties in Hull can be bought for between 40-100K. They offer a superb opportunity to leverage your cash.
Return on Investment
The return on investment is defined below.
Return on investment = Gain of Investment – Cost of Investment / Cost of Investment
In basic terms, how hard is your money working for you? You can choose to invest in a new business venture, shares on the stock market, or property. Each wealth creation channel has its return on investment and associated risk. As a professional investor, you must weigh up your appetite for risk and potential return on your investment. Let’s revisit the two leverage scenarios and examine the return on investment.
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Scenario 1 – Buying one property worth 100K with all your cash
Return on investment (ROI) is 5%, e.g., 5K/100K
Scenario 2 – Buying four properties, each worth 100K with a mortgage
Return on investment (ROI) is 20%, e.g. 20K/100K. Hull is a great place to start your professional property investing career because of the great return on investment. The reason is that property prices in Hull are among some of the cheapest in the UK. So, the cost of your investment is lower. This means not only can your money go further, i.e., you could buy more properties, but each of those properties will go up in price, and if you’ve leveraged your investments with mortgages, your return on investment will be even greater.
Hull gives a better return on investment than more expensive cities in the UK because property prices are lower.
Of course, an investment property only becomes an asset if you can rent it out. If you can’t, that asset very quickly becomes a liability. A quick reminder on the definition of an asset and liability
Asset = Puts money in your pocket
Liability = Takes money out of your pocket
So, to ensure your investment property remains an asset, you need to be confident that it is in an area of high rental demand. Hull is a hidden gem of a city. It is the gateway to Europe via ABP Ports and P&O Ferries and has a thriving export/import industry. Siemens will locate a large wind turbine manufacturing plant there, cementing its status as a center of excellence for Renewable energy technology. It is well connected to the M62 and has a broad manufacturing base. The Deep, the UK’s only submarium, has also established itself as a tourist destination. The University of Hull continues to grow and has a healthy student population of around 25,000. However, due to the relatively low salaries in the region, affordability to buy a house is quiet. This consequently has led to a high demand for rental property.
The following postcodes in Hull are great rental areas. HU5 is close to the University for students. HU7 and HU9 are great for families.
If you aim to own 10, 20, or 30 properties and supply the deposits for each one, you will soon run out of your cash, so how do the Professionals do it? Well, the answer is Other People’s Money (OPM). They buy their properties at the right price. Property money is made when you buy the property, NOT when you sell it. Buying at the right price, i.e., below market value or BMV as it’s called, enables you to refinance with the mortgage lender at the Open Market Value and pull out most of your deposit cash. This allows you to recycle your pot of money to purchase another property. However, in this market, the Council of Mortgage Lenders has imposed a 6-month rule that prevents remortgaging unless the property has been held for at least six months. If you can demonstrate added value, you have a better chance of achieving your desired valuation. On average Property, Prices double every 11 years. This means a 100K property is worth 200K in 11 years. When you sell this property, you pay off the original 100K mortgage and have approximately 100K profit. This means if you bought two properties, you can sell one, pay off the mortgage on the other, and still have one cash-flowing property with no mortgage. This principle can be scaled up to any number of properties you wish to buy. Getting a mortgage can be difficult, but not impossible in this current economic climate. The money hasn’t disappeared. It is just in different places. The trick is to find the people with the cash.
Buy for cash
Some properties needing refurbishment in Hull can be bought for as little as 20K. You must buy them with cash, as mortgage providers generally do not lend below 40K. It also means you can move quickly and not involve Mortgage Lenders and Valuers in the purchase. Once you have refurbished the property, you can get a surveyor to value it, place a mortgage on it, and contact most, if not all,, of your cash returned.
You can help people with cash earn more than they are getting in the Bank by offering them a higher interest rate for borrowing their money to fund a deposit. You can then return their money after refinancing.
If you can’t get a mortgage, find someone who can and offer to share the cash flow from a property. Get a lawyer to draw up an agreement between you and the host. Because property prices are relatively low in Hull, there is more chance of finding investors willing to lend you 10-15K for a deposit. Risks are reduced as the amounts on loan are less. Once you’ve done one deal with an investor and made them more money, they will be happy to do another deal with you.
Hull property prices are low,, leading to lower risk for Cash Investors when funding a deal.
With any of your investments, we advise stress-testing your assets at higher interest rates. Whilewe enjoy historically low interest rates, , buyinglots of property deals. is tempting However, interest rates have only one way to go, and that is up. Test that your investment still produces cash flows at higher interest rates so it remains an asset, not a liability.
Test your investments at higher interest rates. Hull investment properties still positive cash flow at 8-9% interest rates at current rental values.
With any investment, it is vital you know your exit strategies. With an airplane, knowing where the exits are is essential in case of an emergency. Similarly, investing requires knowing where your doors are for getting out of the investment deal in a crisis.
Selling your investment
If, you need to come out of an investment, you can sell a property. The properties that will be easiest to sell will be the most popular in that area. If you own an expensive, executive detached house in a desirable area, the number of buyers is reduced and constrained to residential buyers. However, if you have a cheaper investment property, you can sell to investors and residential buyers. This is important when considering your investment.