You don’t need cash savings to invest in property
When you invest in buy-to-let, you get to take advantage of the benefits of leveraging in property investment. Put down a deposit of 30% and borrow 70%, and any profit is made on the whole amount, not just your 30%.
In this post, you’ll learn how most property investors start out with the simple property investment strategy to retire early,, even if they don’t have the buy-to-let deposit handily stashed away in their bank account.
Just how good is leverage on property investment?
Let’s say you invest in a buy-to-let for £200,000. You borrow £150,000 to fund your investment. Let’s say that your mortgage interest rate is 4%, and the property value increases by 8% a year. That’s a little under the long-term average over the last 70 years or so. In around ten years, the property will have doubled in value.
If you’ve structured the deal right (we can help with that), your tenant will have paid the mortgage during the period of investment. You’ll be left with a gross profit of £200,000 for your £50,000 investment. The property doubled in value, while your investment quadrupled.
I want to invest, but I don’t have the deposit
There aren’t many people who have £50,000 available to invest as a lump sum.
You may have invested a good amount in a pension, but that won’t be available until you’re at least 55 years old. Even then, you could be hit hard by the tax on the withdrawal.
You might have some savings or investment money in an ISA, but that’s got some significant tax advantages. It might be rainy day money that you’d prefer not to touch.
If this sounds like you, then you’re no different from the majority of buy-to-let investors. The likelihood is that you are worth a lot more than you think. You might even be sitting in your pot of wealth right now. That’s right, your home.
If you bought your home for, say, £100,000 ten years ago, it might very well have doubled in value. Or perhaps even more. That equity is sitting there doing nothing. It is, in effect, the money you’ve got saved which is doing nothing.
Releasing equity to invest
A mortgage broker will give you the best buy-to-let mortgage advice. They’ll tell you the most cost-effective way to release equity in your home and invest in a buy-to-let property.
You’ll need a deposit of around 30%. If the property you’re considering is valued at £200,000, you’ll need to release £60,000 as a deposit. You’ll probably release equity by taking a second mortgage of £60,000 on an interest-only basis. At an interest rate of 4%, this will cost around £200 per month.
Financing your equity release
Okay, so now to find that £200 to finance your equity release. You might be able to fund this from the rental income on your buy-to-let. At the UK average 5% gross yield, your buy-to-let will produce £10,000 of rental income. Your buy-to-let mortgage (at 4%) will cost £5,600. Other costs including property management, repairs and maintenance, redecoration, and so on average around £2,600.
That’s a total of £8,200. This means that you are now around £600 short of funding your first property fully (including the equity release on your home). There may be a small amount of tax to pay on your rental income, depending on your tax position. However, as you can see, if you can find around £50 to £100 per month, you’ll fund the early years of your first buy-to-let property investment.
As time passes, you’ll find that your cash flow position should improve. You’ll be able to increase the rent, for example. Even if your first buy-to-let is cash flow negative, it could swing to a positive cash flow property quite quickly.
Err on the cautious side
I’d always recommend that you err on the cautious side. Work out your cash flow projections two years in advance, and factor in a rise in interest rates. If interest rates don’t increase, put the ‘extra’ rental income in a separate account as a contingency fund.
(Read the investment blog “How will a mortgage rate increase affect the buy-to-let investor?” to discover the impact of an interest rate increase on your investment and cash flow).
Of course, the above is an illustration only. Like all illustrations, it makes some assumptions. To talk about your personal situation, and how the 3+1 Plan could work for you, contact Gladfish today on +44 (0)207 923 6100. The sooner you start, the sooner you’ll be able to retire and enjoy your life.
Live with passion
Bret Alegre-Wood
