“I’m going to show you a method I’ve used successfully for years to grow my portfolio. It’s not rocket science but it’s very important to understand”
On any given day, the clever people at Google and Facebook do a grand job of ensuring that my inbox and social media feeds are filled with targeted ads and offers from property ‘gurus’. If you’ve ever dared to show the internet the slightest bit of interest in buying property, you’ll know the ones I mean. Usually, it goes along the lines of a smug git standing in front of a large holiday home in the sunshine, or a backdrop of the City skyline. They do a grand job of coaxing you to click to register for his or her course on how to become a property millionaire in a few simple steps, without the need to put any money down.
Allow me to tell you here and now, that if you are one of the poor souls who clicks on these ads, then please no longer read anything that I write or have written, because my words are not for you. I can understand that to some, the prospect of financial freedom with no money down is alluring. However, as the rest of us suspected all along, investing in property is actually capital intensive, hard work, and takes a long time. You will need to invest your own capital and you will need to be 100% dedicated to the end goal. There are no shortcuts and there is no simple way of doing it. You will sweat, you will bleed (sometimes literally), you will scare yourself inside out, and you will hand over all of your money to solicitors, surveyors, banks and contractors until you are living on beans and toast, to get where you need to be.
If you have read my previous articles and blogs, the goal is to become free of the rat race, to let your money work for you, rather than you working like a dog for a paycheck. It’sto become financially free. Don’t expect instant results – it does not come easy at first. Once you get there however, and by there, I mean to the point where you can survive from the income you make from property, the initial hard work is behind you. And assuming you don’t make any silly mistakes, you will prosper.
You will have to make a lot of sacrifices to get there. You will often have to pluck up great courage to tell your partner that two weeks in the Maldives is now one week in Majorca. And you absolutely need to get back that deposit you put down on your new Porsche. You need that for a property deposit. Anyway, your current Mercedes is just fine so stop whining. In fact, if you own it outright, sell it and bank the cash.
So, just to be sure before we progress, repeat after me: I cannot build a meaningful property portfolio and become financially free without investing all of my hard-earned capital.
You’re still with me? Good. Let’s carry on.
Today I’m going to show you a method I’ve used successfully for years to grow my portfolio. It’s not rocket science but it’s very important to understand. I’m not going to ask you to click on anything or transfer money to me. It’s gratis – a gift from me to you.
For me, I always aim to replace the capital I’ve used on any given property within five years of purchase. That usually (but not always) provides me with enough funds to buy another property. I work on around £50,000 as the capital I need to start a new project. Sometimes more and sometimes less depending on the property and the opportunity.
So, let’s look at a simulated example: if the purchase price of our new property is £160,000, we’ll need 25% for our deposit (£40,000), plus the stamp duty (£4,800, or if the property is in Wales its £6,400) and disbursements and solicitors fees (£1,000). We’ll also need £450 or so for the initial valuation and around £5,000 for the refurb costs. So,in this case it’s just over £50,000. Perfect.
For the mortgage on this property, we’ll need to borrow 75% of the purchase price at around 3.3% on a five-year fixed deal, with a lender’s fee of 1.5% of the advance. The total loan will be £121,800. The payment is a whisker shy of £335 per month, on an interest-only basis. This property should rent for £825 per month so we’ll make a gross profit of £490 per month. Of course, we should allow 10% of that for incidentals like insurance and maintenance. So the bottom line on our new property is £440 per month. This will grow each year as you apply an annual rent increase. Over a five-year period, assuming nothing catastrophic has occurred at the property, the profit should be in excess of £26,000. Not too shabby at all.
I assume an average annual growth of around 5% on my portfolio. It’s not always 5% of course, sometimes it less. Sometimes it’s more. But over a five-year period it’s a fairly safe assumption, in my opinion. This past year has been particularly spectacular for property investors, at over 12% in most parts of the country. You’d be hard-pressed to find a landlord without a grin on their face at the moment, whatever size their portfolio.
Following the improvements we made at the outset of ourpurchase which will have added a minimum of £10,000 to its value instantly. Taking my average compounding growth rate of 5% per year, over the course of a five-year period our property should have grown in value to around £215,000.
With the fixed period of the mortgage about to expire, wecan now apply for a remortgage of 75% on the new value, which, once we’ve paid off the initial mortgage, will leave us with around £40,000 of new capital. This is money that our property has earned on our behalf. Its smart money. I have heard so many times people say that the growing value of the property means little unless you sell it. This is incorrect of course; when you remortgage, the capital growth of the property is like the kinetic energy stored within the battery of an electric car. If you tickle it in the right way, it comes alive and pushes you forward.
Through a magical combination of compounding capital growth, a fixed interest mortgage and annual rent increases, that one little property has magically generated £66,000 in its first five years under our ownership. Every single penny of the remortgage funds must be used for purchasing another property. Don’t be tempted to peel off a chunk for the deposit on a Range Rover, or a fortnight in Dubai – capital mustn’t be spent on goodies – that’s what income is for. Add to the capital whatever you have left in cash from the profit you’ve made from the rent, and hey presto, our one property can now give birth to a new property, which will do exactly the same thing, five years hence.
Apply that formula to a portfolio of 5, 10 or 20 properties,all purchased over different periods and you can see that over time, how the portfolio will begin to self-replicate at a rate you eventually won’t be able to keep up with. In a way that’s a good thing because you will want to keep the overall average LTV of your portfolio to around 60%, which is easier to do as your portfolio grows.
Now, without further ado, go back and read that again till you know it off by heart, then go find yourself a rental property and buy it!
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