So, to become a professional landlord you need bundles of cash – false! A portfolio can be amassed from nothing or as little as £500, as I did five years ago. We have access to cash reserves that we do not even know about because we are not fully aware of certain financial products on the market.
The term ‘initial investment’ implies that starting capital is required. However, even though it is advisable to have an initial investment, it is not mandatory to set up a multi-million pound investment portfolio – no matter what business experts say. I’m sure you’ve heard many testimonies of multi-millionaires who started with a couple of pounds in their pocket. What made these people succeed was their attitude to risk. To become a millionaire in business you have to take a certain degree of risk. Otherwise, we would all be rich! However, I expect that many readers do not have the same attitudes to risk as the millionaires I have just mentioned. The beauty of property is that you can invest in property according to your own personal attitudes to risk.
Lets look at the risks in investing in property. There are three core elements making up the income & expenditure account - income being rent, expenditure being the mortgage payment and maintenance. All these three elements can be fixed if need be, and as long as income exceeds expenditure, you’re in the money! That’s right -guaranteed profit. There are financial products out there that can guarantee rental income, fix mortgage payments and fix maintenance expenditure.
Consider which risk class you fit in based on the table below:
There are other permutations of this model but most people fall into one of the seven categories. The higher the risk factor you are, the more money you can make, but the key factor is whichever risk factor you are, you will make money.
The initial investment you require is completely determined by your attitude to risk. The lower your risk factor, the higher the initial investment will be. For example, an investor who falls into risk class 1 has to finance the whole purchase price of the property in order for him not to have to meet a monthly mortgage payment. Hence, he is not dependent on the punctuality of the tenants’ rent payment. This way his investment in the property market is restricted to his savings in the bank. On the other hand, someone with a risk factor 7, with nothing in the bank, can borrow on an unsecured personal loan basis. He can then use this as deposits for a number of properties on a buy-to-let mortgage scheme and acquire a number of properties.
Let’s look at a specific example:
Mandy buys a property for £40,000 in Northampton. She guarantees her rent from a rental guarantee company, borrows nothing and pays for a maintenance insurance contract which covers the cost for all major incidental maintenance expenditure. Her monthly return is:
Arnie borrows £18,000 on an unsecured basis at 8 per cent APR over seven years and uses this to fund three properties for £40,000 each in Northampton on a buy-to-let mortgage basis at 85 per cent ‘loan to value’ at 6 per cent APR. This means that he has to put down £6,000 each on the three properties. This adds up to £18,000 unsecured borrowings. The £3,000 that Arnie has goes towards professional fees on all three properties.
Arnie earns more than Mandy but Arnie has a greater borrowing requirement. Currently this proves the principle that BORROWING IS CHEAP.
The reason for this is because the returns to be made from property are far greater than the cost of borrowing. Typically the return from property is around 20 per cent and the cost of borrowing is around 6 per cent at current rates. This assumes that you have chosen the right property, which this book shows you how to do in Chapter 4.
Taking this example further let’s say property prices increase by 10 per cent over three years. Then the total profit made by each investor by way of rental profit and capital appreciation profit over the three years is:
Comparing these two investors shows that Arnie who started with £3,000 has earned 66 per cent more than Mandy who started with £40,000! Looking at the actual return from your initial investment being:
Profit x 100
Initial investment
Then the returns for each investor are:
You can see that both investors have made returns in excess of any high interest building society account. You can also see that Arnie has made phenomenal returns far in excess of most investment funds or even technology stocks at their peak. The best thing is that you are investing in property, which all of us have some degree of understanding in, rather than a stock which you know little about and have to rely heavily on the financial press and tipsters.
But an even more important principle than the one above is that WHATEVER YOUR ATTITUDE TO RISK IS, YOU WILL MAKE MONEY!
The reality is that in the last three years we have seen average property prices grow by 10 per cent every year rather than 10 per cent over three years. This equates to 33 per cent capital appreciation over the three years. Thus the annual return from property over the last three years for both investors was 24 per cent and 662 per cent respectively. This example gives you an indication on how I have amassed great wealth through property as any money invested has grown by over six times each year because I have a risk factor of 7. So every £1,000 I invested was worth £6,620 in year 1, £13,240 in year 2 and £19,860 in year 3.
In the reference chapter you will find all the providers for guaranteed rent, buy-to-let mortgages and maintenance insurers and contractors.
Now once you’ve decided what risk factor you are this will determine how much initial investment is needed. Assuming a property is at a purchase price of £50,000, the following initial investment will be needed:
This assumes a 15 per cent deposit for the mortgage and £1,000 fees for solicitors, valuations and the initial void period when waiting to find the right tenant. Risk factor 6 investors borrow the initial deposit and risk factor 7 investors borrow the initial deposit and associated fees by way of secured or unsecured borrowings.
Raising The Initial Investment
So you’ve decided which risk factor you are and this has determined how much initial investment is required. How do you then go about raising the initial investment? The following table ranks in order the ‘cost’ to you starting with the cheapest first, the cost being the effective interest rate being paid on the initial investment as a result of your choice of investing in property. BOE means current Bank Of England base rate in the table below.
This is not an exhaustive list. You may have other good ideas for raising finance but if you can’t raise the finance the project can’t go ahead. It’s as simple as that. The only other way is to change your attitude to risk. This means being willing to take a bigger risk and hence increase your risk factor thus reducing the initial investment needed. Greater borrowings will be inevitable.
I raised my initial investment by saving as much of my salary as I could. While my colleagues were spending everything they earned on high rents on apartments, expensive holidays and designer clothes I saved my money by living in one room in a shared house, holidaying in the UK and wearing unbranded clothes. After five years I live in a large detached house with swimming pool, holiday abroad three times a year and wear only designer clothes. You need patience and a medium to long-term vision if you truly desire to have enough wealth to live the lifestyle you want.
If All Else Fails
If you are struggling to find the initial investment there are still two further tricks you could consider:
There is still one way you can acquire a property if you are a first time buyer. There are certain lenders that provide 100 per cent residential mortgages that are free of fees. This means the lender funds the whole purchase of the property and pays for all the valuation and solicitor fees.
This product is for residential purposes only. However, you can make the application with the intent to live in the property but then inform the lender when the purchase completes that you intend to let it out now as you have changed your mind. Some lenders don’t mind and simply charge a letting fee of £50-£100 per year. Some lenders, usually building societies, charge additional interest, typically two per cent, on the loan. You have to look at your figures very carefully to ensure the rent can cover the 100 per cent financing plus the additional interest if need be.
A list of 100 per cent fee-free lenders can be found in the reference chapter.
Create vendor deposit
This is where you basically get the vendor to pay your deposit! This is best explained by following the example below:
Gavin wishes to buy an investment property for £54,000 but he only has £3,000 to invest. The minimum deposit he needs is 15 per cent of £54,000, which equals £8,100. You may think he cannot go ahead. However, if he got the vendor to inflate the purchase price to £60,000, then the deposit required is 15 per cent of £60,000, which equals £9,000. If he got the vendor to contribute £6,000 and Gavin contributed £3,000, with the total contribution being £9,000, then Gavin can purchase the property. Everybody’s a winner.
The vendor gets:
£60,000 - £6,000 = £54,000
The inflated price Vendor contribution Original asking price
Gavin gets an investment property costing £54,000 for £3,000 initial investment.
This trick is completely legal but relies on the property being valued up to £60,000. This is likely because of three reasons:
There are tax issues. The vendor has to declare the inflated sales price to the Inland Revenue and thus will have to pay more capital gains tax as his gain is deemed to be higher. For the vendor this may not be a problem as the Inland Revenue gives you an allowance in excess of £7,000 for a capital gain. If this inflated price does not take the gain above this allowance then there is no increased capital gains tax to pay.
