How leveraging works to grow a property portfolio

how_leveraging_works_to_grow_a_property_portfolio

Growing a property portfolio with no cash in the bank

In the investment blog, I discussed how Tom and Mary built a property portfolio and quit their day jobs. In just a few years they were able to create a portfolio valued at more than £7 million. If you’ve ever been puzzled by how quickly property investors can buy properties and add to their rental income, this post will answer your questions.

Unlocking equity to start a property portfolio

The way that most property investors start out on their property investment journey is by using the existing equity in their home as the deposit on their first buy-to-let property.

Let’s say that you bought your home for £100,000 ten years ago, and you did so with a £20,000 deposit and a £80,000 repayment mortgage. At a mortgage interest rate of 4.5% (and we’ll assume it has remained unchanged over the life of the mortgage to date), your annual repayment would be around £5,340. Over the ten years, you will have repaid around £22,000 of your original £80,000 borrowing.

If your home is now worth £200,000, your total equity is £142,000 (the value less the amount you still owe). With a loan-to-value ratio of, say, 70%, the maximum amount of equity you can release from your home is:

((£200,000 x 70%) – (£58,000)) = £140,000 − £58,000 = £82,000

If you do this, with a loan to value ratio of 70% on a buy-to-let mortgage you’ll be able to fund a property investment of £273,000 (with a buy-to-let mortgage of £191,000).

Leveraging as a property investment strategy

If you buy off-plan, generally you’ll buy at a discount to the market value, which is the calculated value on the day you buy.

Let’s say the discount is 10% (a good average in today’s market). Your outlay of £273,000 has bought a property valued at £303,000.

If the market value increases by 10% by the time your property completes, your property will value at around £330,000.

If you’ve done your sums and worked through your cash flow projections, you should hope to be in positive cash flow (though it may be small).

If, after a couple of years, your property has increased in value by another 15%, it will now be worth around £380,000. Remember, your buy-to-let mortgage is £191,000. The total equity you have in your investment property is now £189,000.

With a loan-to-value ratio of 70%, you can release £75,000 and fund the purchase of a second buy-to-let property with a price of £250,000 (with the help of another buy-to-let mortgage of £175,000).

Make that second investment another off-plan property, and once more you benefit from a discount and any growth in the property price between purchase and completion.

Leveraging your portfolio of properties

As property prices increase, you simply rinse and repeat, releasing equity and borrowing to invest. Each time you do so, you access the benefits of leveraging – using other people’s money to earn more money and make more profits (given that the market moves in your favour).

You could soon have a portfolio of several properties, with a high value, good equity buffer, and producing positive net income. You may even be able to quit your day job – and you’ll have accomplished this with no starting cash in the bank.

Cheers,

James Cox

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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