I often come across people that ask a question that goes something like this: I have £x,000 to invest in property, what should I do? Today, we shall consider how we could answer that question where x = £150,000. In addition, we highlight the big points of leverage and diversification. With no less than 7 different strategies covered, there is bound to be something for everyone with a reasonable starting investment fund. Next week, we look at a smaller starting fund, so stick with it!
Today’s must do’s
If you have a starting investment pot of around £80,000 to £250,000 then consider which strategies outlined in today’s show may suit your personal situation the best. If you want to discuss some of the possibilities in more detail, then just get in touch.
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
I often come across people that ask a question that goes something like this:
I have £xk to invest in property, what should I do?
Today, we shall consider how we could answer that question where x = to £150,000
Next time, we shall take a look at a different situation, where perhaps is a lot less than £150,000. However, for now, let’s take a look at some options we might consider with a reasonably sized investment pot.
I recently came across a forum post that went something like this:
- I am a new investor.
- I have investments and access to a equity that would give me a starting investment pot of around £150,000
- I am looking to purchase 3-4 properties in a short timescale
- Am I best using the £150,000 combined above to purchase 1 property or am I better apportioning the amount into funding deposits and arrange B2L mortgages to purchase 4 properties instead?
My response went something along these lines…elaborated a little for your benefit dear listener J
First of all, I would always start with knowing what you want to achieve (the why and what) before deciding on the strategy (the how).
This is so fundamental and a significant number of new or even fairly experienced property investors dive straight into strategy: ‘should I do BTL, HMOs, flips or development?’ or even tactics: ‘where should I buy, what is a great BMV discount and what tenant profile shall I target?’.
I have said it before and I will say it again…it depends.
It depends on what we are trying to achieve when we are trying to achieve and how much we want to try in achieving it!
We should, therefore, start with goals and purpose and then consider strategy…forget tactics for the time being is my advice.
However, before we plough ahead into the meat of the subject, there is another question implicit within the question posed…should I buy 1 or 4 properties?
This means we must also talk about two BIG subjects as well:
Diversification & Leverage
Whilst buying one will keep our transaction costs down, buying more than one with a mortgage (so 2-4 properties), would allow us to leverage our £150k investment pot up to £600k in purchasing power.
If you are an investor with a long-term time horizon, just work out a 3% p.a. capital growth and the corresponding net equity position on each of these scenarios and it would probably direct you to 'go large' and consider some form of leverage.
For those of you that are driving, at the gym or a long way away from a calculator right now, the results over a 20-year period are as follows:
Based on a single property of £150,000 bought in cash, the property value will grow to nearly £271,000, with the same amount of equity due to their being no mortgage debt to clear.
However, based on 4 properties costing £600,000 using 75% LTV mortgages, this will grow to nearly £1.1m in total property values, with a net equity position of more than £633,000 once the mortgages are cleared.
By using mortgages to leverage up our purchasing power, we have actually multiplied our potential investment returns by a whopping 245%
Whilst you let that sink in a little, let’s look at the diversification point.
In addition to the capital and equity growth, we also get the benefit of diversification by spreading our money around. If we had one property empty due to a void or refurbishment say, then we would still have 1-3 more potentially still earning us money to cover our costs.
It’s clearly not just as simple as this, as there are lots of other factors to take into account, such as the loan repayments, various risk factors, other costs, management, taxation and so on.
However, at face value at least, investing in 4 properties would seem to provide an opportunity to enjoy some of the potential benefits of leverage, whilst also spreading the risk about of the properties being empty, underperforming the national average in terms of capital growth and so on.
Then, of course, we have the real meat of the question…what should I do with £150,000?
Here are just 7 potential strategy ideas to consider:
The safe as houses no debt income-protection model
Yes, this is the buy one property with cash and enjoy the rental income at an annual gross return of 5% to 7% typically. If you are looking for a steady income of around £9,000 a year, with a modest to low risk profile, then this may be the perfect plan. Any capital growth on top of the income would probably be a bonus to enjoy one day or possibly a legacy to leave behind instead.
There would have to be a property values crash never before recorded in the UK for this to wipe out our asset base. Equally, as long as we select a good location with a low maintenance property, it should be fairly worry free to manage too.
Grow the pot - buy, add value & sell on for a profit to grow the investment pot
The point here being that if we have a requirement for an income stream above the £9,000 per annum mentioned just now, then we need to sweat our capital a little more.
If we consider that the average salary in the UK was £26.5k in 2014, we may be inclined to agree that ideally we need to make our capital work a little harder for us. Adding value and selling on a property, allows us to add the resulting profit to our initial investment pot that we can then call upon at a later date.
To illustrate, if we could increase our investment fund by 7.5% every 9 months, then in just 3 years, we would have increased our starting investment fund of £150,000 by 33% to £200,000.
If we then applied the same principle as in the safe as houses model earlier, that would increase our gross income from £9,000 a year to £12,000 a year with only 4 investment projects under our belts.
Or, assuming that we continue to repeat this model every 9 months, it would take us 11 years to achieve a big enough investment pot capable of producing that £26.5k annual gross income.
Grow the asset base - make the pot go further by adding value and refinancing
This is similar to our first point, however, this time, we refinance and retaining the property to pull out say 80% or so of our initial investment and go again.
This could turn 1-4 properties into say 7 properties from the same starting fund by adopting this approach.
This could be done in around 5 years with one project at a time, or in around half the time buy running two projects at the same time, in what I like to call higher ‘deal velocity’.
Climb up the property food chain
By buying a bigger property, we can enjoy a variation of our grow the pot or grow the asset base options from earlier. Here we would buy a property for say £300k, use our funds for deposits, fees & works and sell / refinance at say £350k to £400k instead
The main benefits of this approach are:
- As a number of costs involved in a property transaction are nominal costs rather than percentage costs, a higher project value can help to reduce the impact of these more fixed costs
- It could be argued that working on a slightly larger project has a similar time commitment to a smaller one and so our personal return on time investment could be higher
- It allows us to gain access to the benefits of gearing through higher deal velocity to produce higher cash profits more frequently
- These are often happier hunting grounds – smaller refurb projects are hard to find as many people are looking for them and can access them more easily with smaller investment pots. As we hunt for bigger fish, we will need a bigger spear gun and not everybody has one of those!
The steady long-term debt pay-down model
This is a variation on the safe as houses model, only this time, we buy 3 or 4 properties with a mortgage and then throw all of our net rental profits at one property to pay the debt down to 0%.
Then we repeat this on the other properties, if not to 0% debt to say 25% LTV each, to create a snowball effect and so a relatively low-risk retirement or long-term income fund.
Even in the biggest property crash, values did not fall below 50% of their previous peak and so targeting a LTV well below this level is very prudent, whilst at the same time allowing some of the benefits of leverage to be enjoyed.
The short-term income model
Here we buy properties capable of being rented as multi-lets or serviced accommodation for example instead. This sort of strategy does involve greater management time, however, higher yields are currently being realised with the right property and location selection.
The small developer model
Invest into a small building plot or conversion project directly or in partnership with someone else doing the same or on a slightly bigger scale.
Lots of research and advice will be required to make this work, however far higher returns are possible, along with a higher risk profile too of course. There is always a trade-off!
A variation could be to invest into a SSAS pension, clawback some income tax to create additional leverage and then invest into commercial conversion projects instead. This would be an advanced strategy requiring professional advice and support to carry out, though.
There we go then, no less than 7 different alternatives that we COULD adopt if we were fortunate enough to have a starting investment fund of £150,000.
However, we should always 'start with the end in mind' with our purpose & goals, as each of these potential strategies will suit some more than others, depending on time horizon, time capacity, skills and capabilities, risk appetite, investment return expectations, tax status, lifestyle preferences and so on.
I hope that gives plenty of ideas to consider should you be asking yourself the question, what should I do if I have a reasonable starting investment fund along the lines of £150,000. This same set of possibilities could still be open to people with a starting fund in the range of say £80,000 to around £250,000 I would suggest.
Next time, we shall tackle the same question but with a much lower starting pot instead.
That’s all we have time for today. By all means do drop me a line firstname.lastname@example.org if you would like to discuss some of these options. The show notes, are over at the website www.thepropertyvoice.net
Right now, though, I’d just like to say thank you for joining me on the show again today and until next time on The Property Voice Podcast…it’s ciao ciao!