This article educates the reader on the five fundamentals of professional property investing, specifically focused on Hull’s city in the East Riding of Yorkshire.
The topics covered:
- Leverage
- Return on Investment
- Rental Demand
- Stress Testing
- Exit Strategy
Leverage:
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 a property. They are less likely to lend you money to grow your business and still 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 me show you an illustration. You have 100,000 to spend on an investment property. The following scenarios show how you can spend that money.
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Scenario 1 – Buying one property worth 100K with all your cash:
Buying 1onehouse 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 now have a property worth 105K and 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 4fourproperties, not just 1oneproperty this time. The following year, inflation raised property prices by 5%, the same as sin cenario 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 turn on investment and associated risk. As a professional investor, you must weigh up your appetite for risk and your investment’s potential return. Let’s revisit the 2twoleverage scenarios and examine the return on investment.
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.
Rental Demand:
Of course, investment property only becomes an asset if you cent 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 low. 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.
Financing Deals:
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 (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 you from remortgaging unless the property has been held for at least six months. If you can demonstrate added value, tou have a better chance of achieving tyour desired valuation.
On average, Property Prices double every 11 years. This means a 100K property is worth 2200K 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 2twoproperties, you can sell one, pay off the mortgage on the other, and still have one 1onecash-flowing property with no mortgage. This principle can be scaled up to any property 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 in Hull that need refurbishment can be bought for as little as 20K. It would help if you bought 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 get most, if not all, of your cash returned.
Deposit Finance:
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.
Mortgage Host:
If you can’t get a mortgage, find someone else who can and offer to share the property’s cash flow. 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 are lower. If You’ve done 1onedeone al with an investor and made them more money, they will be happy to do another deal with you.
Hull property prices are low, which leads to lower risk for Cash Investors when funding a deal.
Stress Testing:
With any of your investments, we advise you to stress-test your investments at higher interest rates. While it enjoys historically low interest rates, it buys lots of property deals. Is temptingHowever, interest rates have only 1oneway to go, awhichis up. Test that your investment still produces cash flows at the higher interest rate, so it remains an asset, not a liability.
Test your investments at higher interest rates. Hull investment properties still have positive cash flow at 8-9% interest rates at current rental values.
Exit Strategy:
With any investment, you must know your exit strategies. Knowing where the exits are on an airplane is vital in an emergency. Similarly, you need to know where your exits are from outside the investment deal in an emergency with investing.
Selling your investment:
You can sell a property ifyou need to come out of an investment for any reason; the properties that will be easiest to sell will be the most popular tn that area. If you own an expensive, executive detached house in a desirable location, the number of buyers is reduced and constrained to residential buyers. However, if you have a cheaper investment property, you can sell it otoinvestors and residential buyers. This is important when considering your investment.