If this is how you feel, I would encourage you to think
again. Here is a simple strategy where you can fairly
easily pay off your home mortgage in full and build
a property portfolio in just ten years. It’s a
safe, steady strategy.
For
the sake of this example let’s assume you’ve
got some equity in your home. In fact for many years
you have been working hard to pay off your home mortgage.
Please note that if you are only ever going to have
one property (the home you live in), then it is a very
good idea to pay off your home mortgage as quickly as
you possibly can. By paying off your home mortgage you
will be reducing one of your biggest outgoing expenses
and you will reach financial independence far quicker.
However investors think very differently to this.
For
most people their home is the biggest asset they will
ever own. Many people are content to pay off the mortgage
happy in the knowledge that over time the value of their
asset will increase. If your home is worth £200,000
now then you could just sit back and relax and in 10
years time your property will probably double in value
to £400,000. How would that make you feel?
Does
this mean you are financially better off? Well, if your
house is worth £400,000 you may feel much better
than when it was worth £200,000. But in reality
you are no better off. You see all the other properties
will also have gone up to in value. If you wanted to
move from your existing house, to a similar size house
that would also cost you £400,000. In real terms
you’ve had no net gain. And for you to benefit
from that increase in value you would have to sell the
house and downsize to a smaller, cheaper property or
move to a cheaper area which is what many people do
when they retire.
Investors
recognise that it’s beneficial to have more than
one property because they can profit from the increased
capital value of their entire property portfolio, especially
if they’ve used other people’s money to
buy that portfolio. Just to clarify here. When you release
the equity from your home you are in fact using other
people’s money which is secured against your home.
It’s not your money!
Consider
this alternative strategy. Instead of trying to pay
off their own home mortgage as quickly as possible investors
will do the opposite! They will use as much equity as
they can from their existing properties to buy more
to expand their portfolio.
Remember
in this example we are going to assume you’ve
got £200,000 of equity in your own home and let’s
say you could release up to 80% of the value of that
equity, which means that you would be able to release
£160,000 to use as seed capital for your deposits.
To
keep the example simple we will assume the Buy To Let
(BTL) properties you would purchase are worth about
£100,000 in today’s market.
If
you were to use 75% Loan To Value (LTV) mortgages, that
means you could get a £75,000 BTL mortgage on
each investment property and you would be required to
put in a £25,000 deposit.
With
seed capital of £160,000, you would have deposits
for six investment properties (6 x £25,000 = £150,000)
and you would have £10,000 left over to cover
your purchasing costs such as solicitors and survey
fees.
You
would then be the proud owner of a property portfolio
containing you own home (worth £200,000) and 6
investments at £100,000 each (6 x £100,000)
with a total value of £800,000. How would that
feel?
Don’t
forget that you will also have some debt! There is the
£160,000 mortgage from your own home, and you
also have six BLT mortgages of £75,000 (6 x £75,000
= £450,000) which means your total debt is £610,000.
That might feel like a lot of debt and that might scare
you, but the great thing is you are not going to be
covering the cost of that debt. The tenants in your
rental properties should be covering the cost of all
the borrowing.
Having
done the initial hard work finding and buying the right
six properties you sit back and wait! I would always
recommend using a good quality letting agent to manage
your properties for you, so that you don’t have
the hassle. If property prices were to double on average
in the next 10 years your total portfolio would increase
in value from £800,000 to £1.6M. Your outstanding
debt which was taken out as interest only mortgages
is still only £610,000. That means you have almost
£1M of equity, that’s quite a good lump
of equity to have.
At
some point in the future you would want to pay off the
mortgage on your own home. Each of the investment properties
would be worth £200,000 with a BTL mortgage of
just £75,000. What you could do is re-mortgage
some or all of those investment properties to pay off
your own home in full. Let’s say you re-mortgage
each of the six investment properties to release just
£27,000 from each one. That would give you £161,000
in cash which you would be enough to clear all of the
debt on your own home and you would still have the six
investment properties (with just over 50% borrowing)
giving you a rental income and almost £1M in equity.
So
here’s the big question! Would you rather do nothing,
just sit back, wait and in time your home may double
in value from £200,000 to £400,000 without
any of the effort or, would you rather educate yourself
take some action and in the same time period end up
with almost £1M in equity instead of just £400,000?
Now take your time…..don’t make any rash
decisions…. which would you prefer? I think I
can guess which it would be.
Let
me ask you, how long would it take you to save £1M?
For most people it would never happen. But in this example
it was possible by purchasing just six investment properties.
To build a strong pension you don’t need hundreds
of properties in fact less than 10 would be enough for
most people.
I
hope this article has inspired you to take control of
your financial future.
This
information in this article is taken from Simon Zutshi’s
book “Property Magic 2010 and Beyond: How to buy
property using other people’s time, money and
experience.” Property Magic is an Amazon No 1
best seller and highly recommended. You can buy
it here
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