thepropertyguy

[thepropertyguy]

The Power of Leverage

Hello

Welcome to our second blog, the first which will jump into why property is such a good investment compared to other investment types. A massive reason is leverage. You may have heard it called “gearing” and some people, simplistically view it as using other people’s money, there is much more to that than purely leveraging but we will leave that for now.

 So, What is leveraging?

Well in property investment it’s an extremely powerful way to rapidly expand your property portfolio. It can take many forms but the most common and best known is through a Buy to Let Mortgage. For property investors, understanding leverage is key to rapidly increasing their portfolio, income and their wealth. I am often asked, how does leverage work, so I will tell you….

 Property leverage is using borrowed money, usually in the form of a mortgage, to purchase a property instead of buying the property outright without any loan against it. 

The amount of leverage will vary but will make up a certain proportion of the purchase price with you, the investor paying part of the total purchase price with your money (capital).   

The ability to borrow money when buying a property is one of the reasons this investment class is so appealing. You can’t do it against many other asset classes and the reason is that property investment is “as safe as houses”

Let’s illustrate this point and take the example of shares. I walk into Barclays Bank….

Me “Hello Mr Barclay, I would like to borrow £100k, please”

Mr Barclay “of course, what do you need a £100k for?

Me “I would like to purchase some of your lovely Barclays shares, please”

Mr Barclay, red-faced “I am sorry, Sir but we can’t lend you money for that”

I leave the bank with no money and leaving Mr Barclay in a state of – what just happened?

The reason for this, is that they perceive the risk of shares as being too high for them to provide a loan, even if it’s for their own shares!! However, if I said I wanted to buy a property that they could touch, stroke and feel, they would happily lend me the bulk of the cash.

In short, it gives you the opportunity to purchase something that is valued more than the capital that you either have available or want to use. You can then use your money to buy multiple properties on that basis, instead of just the one

Hang on but you have to pay the loan back every month, I hear you cry?

The answer to this is Yes and No! Of course you have to pay the loan back, at some point. However, most investors use an interest only mortgage rather than a traditional residential, repayment mortgage. In our next blog, I will discuss the differences between the 2 and why interest only, is usually the way to go. So, assume it’s just an interest only mortgage, you will only be paying the interest, every month, you will not be paying the capital back to the bank, every month.

To leverage a property an investor will need to apply for finance, usually a loan. A lender will value the property and the rental income for that property in that location. It will also consider your personal financial position in order to make an assessment on whether they will lend to you and at the amount of the purchase price they’ll cover and the terms on which they’ll do it.

You may have heard of Loan to Value or LTV. This is the proportion of the value that a lender is prepared to offer you. The higher the LTV, the higher the interest rate because they see this as a higher risk, of them not getting their money back. A LTV of 75% gives the lender a good balance of capital in the property (lower risk) and you a good interest rate (everyone’s circumstances are different but a rule of thumb) A lender would offer loans of 75% of the total purchase price meaning the investor will need to cover 25% with their own money. Let’s keep the maths simple, if a property price is £100,000 the lender will loan £75,000 and the investor will pay £25,000 towards the purchase.

Benefits of leveraging in property investment 

The key benefit to leveraging in property investment is the potential to increase the returns on the capital investment as you will be the one who gets 100% of the capital appreciation on the whole property value, not just the capital you put in the into the property. You also get 100% of the rental income and a 100% of the rental appreciation. All for 25% of the investment.

Leveraging allows you to do more with the money that you have available.

If you only ever put in 25% for a property purchase and use a mortgage for 75% loan-to-value you will be able to spread your money much better than if they purchased a property all in cash. This increases the return on investment as the capital can achieve four times as much as it would on its own (at an LTV of 75%). The uplift is relevant to the capital, not the amount borrowed.

Lets give you a comparison between using leverage and not. Again, keeping the maths simple, you have £100k to invest. For simplicity, we will strip out all of the taxes and fees and these will be higher for buying more properties. Here at Honest Property Investments we ensure full transparency of all costs that many others omit but we will all lose the thread if I included one of our calculators to show the working out!!

                                    No Leverage                           Leverage

Property Price                 £100k                                 4 x £100k

Rent                                £600 pcm                           £2400 pcm

Interest repayments        £0 pcm                               £600pcm

Net income pcm              £600 pcm                           £1800 pcm

Net income p/a                £7200                                 £21,600

Portfolio value                  £127.6k                             £510.5k

after 5 years assuming 

5% p/a                            £27.6k                                 £110.5k

Net capital growth

after 5 years

  Can you borrow too much?

YES!! This can be called over leveraging. Before the financial crash, lots of buy to let investors saw this as free money, the banks lent them increasingly more money at higher LTVs (remember this is riskier) and when the money dried up, these investors didn’t have the cash flow to service void periods etc and that’s why they ended up in difficulty. Across you whole portfolio, often having an LTV of over 75% is unwise. Don’t let this scare you though, keeping within limits and not getting greedy will ensure you don’t get into difficulty.

Further Leveraging

This is where the magic happens, using the example above after 5 years, if you hadn’t leveraged, you have gained £27k, which won’t be enough for a deposit for another property (remember prices have increased since the original purpose). However, with a leveraged portfolio, the existing properties can assist in the purchase of further buy-to-let properties, perhaps a further 3. It can then snowball if you don’t over stretch.

Finding a buy-to-let property for investment

The ability to leverage is one of the best ways for you to increase the amount of profit available, especially through capital growth.

To find the greatest success using leverage to fund a buy-to-let property you need to buy property in locations that have good potential for capital growth and offer strong rental yields, with a strong demand.

Buy in the wrong area, this really limits your ability to scale at any sort of pace. If you’re thinking about investing in property but are unsure what is a good area and what is a good investment area to maximise the potential for capital and rental appreciation, I would be delighted to offer advice to ensure you make a well-informed purchase get in touch, either through our website www.honestpropertyinvestments.com email, [email protected] phone or through Whatsapp. 

Cheers

Chris

#property investment #edinburgh #passiveincome #hands off #buy to let #wealth creation #lothian #scottish borders #property #real estate investing #investors #investment

[thepropertyguy]

So the Journey Begins

Welcome to my blog. This will be the first in a series of blogs that we hope add value to you and your property investment. In this blog, I purely introduce myself and give you an insight into my property journey. In future, I will be blogging about specific aspects of property investment with aim to provide knowledge and add value.

First a bit about me. I am Chris, I was brought up on the Wirral but lived in Scotland, pretty much all of my adult life. I arrived in Edinburgh with £105 in my pocket and a bag full of food because it was cheaper at home than in Edinburgh! I didn’t have access to other money, my student loan was about 3 months late and I had very little. If, I had to live, I had to work, whilst studying (nothing unique). There was no bank of Mum and Dad. I am not saying this for sympathy but to illustrate that property requires, time dedication and skill, especially in the early days. Anyone can do it from whatever background.  

I have been investing in property for over 10 years officially but its actually 12 years, I just didn’t know it at the time!

I was looking for a flat to buy a flat in Edinburgh to live in. I was looking at 1 beds properties and became quite obsessed with finding the “right one”. However, one day I broadened my search and saw properties much more expensive than I could afford. Their prices were reducing, fairly regularly. I had stumbled across repossessed properties at near the bottom of the market. My obsession, which I now recognise as basic research skills, coupled with my local knowledge (very over-rated and can lead to problems) gave me an advantage at securing the right property to live in, at a price that gave instant equity and wealth.

The property, I found was the opposite of what I wanted. I like period properties, this was a new build in the new town of Edinburgh. The flat had a balcony which anyone who has lived in Scotland, can tell you is a little used luxury due to the weather! I viewed the property on a cold dark November evening. The electricity had been cut off and I viewed it by torchlight. I only viewed it, once and always recommend buying a property that you could actually see! It is amazing what you think you want and what ends up being right for you are not always the same thing.

Looking back, this is the only time, I married together what is an emotional, sometimes irrational personal property purchase with an investment to increase my wealth and financial freedom. Whilst investing in property is also about providing good quality homes for people, whether it has the style of kitchen that you like or the bathroom isn’t to your taste, it’s irrelevant. It is about making a return on your investment, which can only be done if people want to live there. You need to make the home, pleasant and accessible. Your home is different, its personal and you may love the quirks that might drive other people away but it’s what makes you happy.

Anyway, I digress, I was within what the banks thought was affordable for me but still more than my self imposed notional budget. However, I was convinced that it would be an investment for the future and that it was undervalued even within that market by around 20%. I then asked a solicitor to make an offer. Arguably, my first mistake, I chose them based on how far they were from my work and they happened to come out near the top of a google search. I’ll let you decide if you thought I was provided good value for c£1000 fee.

This was my first purchase, I asked “what would a reasonable offer be?”

I was told “well its offers over £145k, so you could offer a bit less”

I said “what’s a bit less?” and replied “what about £143k”

I said “no, lets go for “£130k”.

The offer was made and predictably rejected. They wanted £138k and no less. I then asked my solicitor,

“what I should offer next?”

The advice, I received was “well, if you want the property, you can always pay the £138k”.

At the time, I was excited about potentially buying my first flat and wasn’t very level-headed and said “Ok”. Don’t get me wrong, it was well worth it and set me up on my property journey but I didn’t even try with a second bid. I have never negotiated so badly since, lesson learnt.

So, I lived there, my now Wife and now Mother to my amazing daughter, moved in. We had a few good years in that flat but we wanted to move to start a family, out of the City. The market had picked up but I knew there was much more value to be extracted out of the flat, than to sell it at that point. So, we found a house in the Borders, it was a new build (again!) at a time that builders were still struggling.

We looked at a few properties on the development, finished but unsold due to the market. I then made another mistake. The sales rep, June, I think she was called, asked what did we think? My then fiancé, kept her cards close to her chest. However, I am naturally, very decisive and said “well it’s this one or none of them”. I fell in love with the view this property offered.

June then says “what about number 26, it’s the same house down the road”

I replied “number 26 looks into some elderly person’s bedroom, this one has views over the village and across the valley, it’s this one or none of them”.

I obviously showed my hand way too soon.

It was on the market for £200k. I told June, it was way over-priced anyway and that if she wanted a sale she had to make me an offer. She did the typical sales person charade of suggesting that she had spoken to her manager and she could offer it to us for £190k. I knew she had 3 properties, very similar to shift and was needing a sale. I politely but firmly declined and informed her that she wasn’t even in the right ballpark, so we would leave it. 3 days later she rang, she had moved heaven and earth and offered to me for £185k. This time, I was playing hard to get and said “we love the house but the price isn’t close enough for us to make you an offer but thank you for thinking of us”.  

A long story short, overall, June came back to me several times over the period of about a month, with offers. I hadn’t even made an offer to her, just expressed my interest. Without understanding the theory (I do now) I was getting her to negotiate with herself. Eventually, she offered it for £175k, I said no but I will pay £170k, she said “no it had been reduced enough”. I just responded, “Ok then, I am sorry but I won’t offer that, hopefully keep in touch, take care”.

A week later, a very excited June rang me up saying “congratulations you can have the house for £170k”. My offer the week before, was genuine, my integrity is not for sale. However, the devil in me thought, she has had a week to get a higher offer, strung me along hoping I would crack first, knowing that we wanted it. I wasn’t happy with June and I didn’t feel the need to be grateful. So cheekily, thinking on my feet, I said “I am sorry that was my offer last week, you declined it. I have just booked a holiday (which was true) and can’t pay £170k, its £168k and this has gone on too long, if you don’t agree by the end of the day, I am withdrawing my offer”

I was told, “I can’t do that and that her boss has approved the price, now” I simply replied

“You declined the offer last week, it is therefore not on the table now, I am not waiting around, if you need to go back to your boss, please do so. If it makes it any easier, we can be completed within a month” I did this to sweeten the pill, it made no odds to us.

June’s boss agreed. For that type of house, we paid the least of anyone on the development about £40k less than some people had paid for the same type. We did well, however, this was funded by remortgaging the flat in Edinburgh as a Buy to Let. I wanted to keep it, I knew it would be worth a lot more in the future. We used money taken out of the flat as a deposit for our home and so our Buy to Let journey began.

I won’t outline, every deal from then on. It would be crass and of little value. However, we let that property for about 3 years. The tenants had been fine, we treated them well and in return they treated the property well. They were young people and went their separate ways but the “lead” tenant, really valued us as landlords, (we just tried to be sound people) and he asked if we had other properties that he could let as we had been, so good to him. We didn’t do much, over and above, a case of beer here, bottle of wine there, when we inspected it. However, we didn’t have anywhere else for him, but that doesn’t stop him, every now and again, emailing asking if we have anything that he could rent.

I am waffling again, we sold the flat, made a decent profit and then used that to leverage (you can learn the basics of the power of leverage in my next blog) to purchase 3 other properties, sending our passive income onto another level by comparison.

We have since bought, sold and let other properties since. We have values that we hadn’t given much thought to, which has meant providing good homes to people, dealing with issues on their behalf, quickly and efficiently, which has improved their lives. Until recently we acted like landlords (we were and are) however, now we are very much investors living by our same values. We have undertaken a significant amount of training, mentoring as well statutory and voluntary compliance, to ensure we know how to act to the highest standards.

I hope this blog wasn’t too self-indulgent, it wasn’t intentional, but I thought I would explain where we have come from, instead of some random guy talking in the abstract or academically, we have lived and breathed property for some time, we have made mistakes, we have made good decisions, which hopefully you can learn from.

In my next blog, I will discuss, why you should invest in property. Good bye for now, if you fancy a chat about property or how we can help please get in touch.

Cheers

Chris

#property #property investment #passiveincome #passive_income_ideas #hands off #edinburgh #scottish borders #lothian #investor #financial freedom #property experts #buy to let #landlord #investors #property solutions #ethical property investment #honest property investments