Property investment leveraging the right way
Property investment can produce incredible returns, thanks to the benefits of leveraging. A relatively small amount of upfront cash combined with a suitable buy-to-let mortgage is a proven strategy to make free money from property investment. No other investment vehicle has the power to make your money work harder as you get on with your daily routine. Average property value increases of 8% or 9% can be transformed into investment returns of 20% and more on the cash you invest.
However, as with any potentially profitable investment opportunity, there is a caveat. Whether investing in new build property or existing homes, your investment leveraging strategy has to be right to be successful. I’ve encountered plenty of property investors who have got their leveraging strategy wrong. They’ve either lost money, or made less than they should have. Either way, because they’ve failed to prepare properly, their property investment hasn’t performed as it should have.
Here are the five most common mistakes made by property investors when they use leveraging for the first time:
1. Not researching the location
I once asked an investor why he had decided to buy in a certain location. His answer was that the price was right. He was talking to me about a property that had a negative cash flow of around £200 per month. He couldn’t afford to subsidise the property any longer but was still convinced he had done a great deal when he originally invested.
I asked him about the area, and about the shops, schools, transport links, major employers and major investment there. He started to tell me about the magnificent schools, the new shopping mall, and the plans for a Crossrail station: all were over the other side of town from where he had invested in property.
The moral is that a property may look like a bargain, but your property investment must be backed by good fundamentals in the area in which you buy. Even a few hundred yards can make a difference. Before we recommend an investment, we research an area on 108 data points. If it doesn’t stack up as a good investment location, then leveraging an investment will never produce the free money it should.
2. Not buying the right property
Another property investor, Ben, discovered firsthand the nightmare of an emotional property investment. He’d bought a house that he’d always fancied owning, thinking that the value would go up as he benefited from the sitting tenant. He hadn’t banked on the tenant giving the notice to quit. Nor was he prepared for the news that the rental value wasn’t as high as he had thought. He’d bought a great house in the wrong area – a house for which there was no real rental demand.
When you invest, do so with the numbers. Never fall in love with a property, and remember the property is not your home – you want it to become someone else’s abode. First, make sure you buy in the right area, and then make sure you buy a property that other people want to live in.
3. Not calculating cash flow correctly
The cash flow calculation is probably the most important piece of maths you’ll do as a property investor, and yet it’s one of the most neglected and mistake-strewn.
Inexperienced property investors should always seek advice with this – and not from an accountant, but a successful property investor. There are plenty of costs that new property investors don’t take into account, because of their inexperience. My rule of thumb with cash flow is:
- Overestimate costs
- Underestimate rental income
- Allow for an increase in interest rates
- Allow for unexpected void periods
- Make sure you cover every cost possible
Don’t get your cash flow calculations wrong – doing so will lead to a bad property investment.
4. Not getting the right financing in place
Bad financing decisions can put property investment underwater. That’s a fact of investing in property, and yet making a poor choice of buy-to-let mortgage is one of the most common reasons for the benefits of leveraging to disappear in a puff of smoke.
You could have found the absolute best property in the absolute best location for property investment, but a bad mortgage deal will cost you more than you bargained for. Just 1% over the top on your mortgage rate will cost you an extra £125 per month.
When you choose your financing for property investment leverage, choose wisely. The most expensive and least accommodating buy-to-let mortgage is most likely to be from your bank. That’s right, the one who has accepted your loyal custom for years.
My advice here is to always speak to a specialist buy-to-let mortgage broker. They will be able to source the best deal for your investment goals, initial investment, and personal circumstances.
5. Not spending property investment income wisely
It might sound a strange reason for leveraging to work poorly, but it’s really important that when you’re preparing for property investment, you consider what you are going to do with excess income. I’ve recently written about the savvy way to spend property investment income, but here’s a bullet point summary:
- Pay off bad and expensive debt, such as credit cards and personal loans
- Save for a rainy day
- Buy life insurance
- Secure your children’s future
- Go on the holiday of a lifetime
Do these five things, and you’ll reduce your outgoings, prepare for unexpected expenses, plan for the future, and enjoy your investment.
Contact one of our team today on +44 (0)207 923 6100, and we’ll help you to access the benefits of leveraging in property investment and avoid all the mistakes that could stop your investment from performing. We believe that an investment in property should be hassle free, easy to execute, and effortless to hold in a portfolio.
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