My Property Investment Strategy
22 Jan 2008
I’ve recently received a few emails from curious beavers asking me what my property investment strategy is, and what the best way to invest in property is. I’m always reluctant to sell the ‘best’ method because it’s a subjective question and the answer is based upon an individual’s situation and intentions. Ultimately, it depends on how you want to play the game- low or high risk.
I’m not a “power-buyer” by any stretch of the imagination. By that I mean that I don’t buy several properties per year. Firstly, I couldn’t afford it, and secondly, that’s just too high risk for me. I’m a bit of a pussy. My portfolio is slim, but I believe it to be sound and profitable for my future. All I’m trying to do is secure my future and perhaps attract shallow women and buy a Ferrari along the way.
Admittedly, I’m a bit of cynic, perhaps it’s not the best way to go into business, but it is my way. I base my investments on “what if shit happens” scenarios, so I always take the low risk route, ensuring that if shit does happen my back is covered. The rewards may not be as fruitful as those well-executed, high risk, power buyers, but I know I’ll get my fruit in some shape or form eventually, and that’s perfectly acceptable to me.
I don’t use any magical formulas. Property isn’t like buying stock; property is far simpler, in my opinion. You just need to buy property where the figures stack up i.e rental income covers the repayment mortgage- ‘repayment’ being the operative word.
Just to clarify, I’m not recommending my strategy to anyone. My strategy works for me (it’s all about me), it involves a method that I feel secure with. I believe in my strategy; it’s simple and easy; most idiots can manage it. However, some times I underestimate the power of stupidity, so it’s best I don’t encourage anyone, in case a highly evolved, mutant idiot bites the bate and messes up completely by doing something ridiculous.
So what’s my strategy?
- I try to buy 1 property every 1 to 2 years
- I put down a 25-30% deposit on each property
- research the areas, so I know my rental income will cover a repayment mortgage
- I check what the demand for rental property is like with in the area
- I get a good mortgage plan that allows me to remortgage and make overpayments without any penalties before a maximum of 2 years
- I use the rental income to pay off complete debt over a period of the mortgage. I don’t buy-to-sell, I buy-to-own.
Why is choosing a repayment mortgage so important to my strategy?
Most buy-to-let investors have interest-only mortgages, so they’re completely relying on equity growth through a generous market. Historical data shows that eventually, property prices always go up. But like I said, I’m a “what of shit happens” kinda’ guy. If house prices don’t increase, those investors won’t make a dime and they run the risk of having negative equity. That scares me. I don’t want to rely on hiking house prices alone. Interest-only is fine for short-term investors, but unbelievably impractical and risky for an investor that wants to eventually own the property debt free.
By having repayment mortgages I’m able to chip away at my outstanding balance every month, consequently building equity. I make sure my rental income covers my mortgage so I don’t have to pay out of my own pocket. When my mortgage comes to an end, so will my debt. I will be debt free, I will own the property outright and all I invested was the initial 25-30% deposit.
Remortgaging is also extremely important. I save a lot of money by evaluating my mortgage plan every few years. If there is a better deal on the market, I will switch policies. More details on The Importance Of Remortgaging.
Why is putting down such a high deposit important?
Most investors put down a maximum of 15% deposit. It’s extremely difficult to make the figures stack with a low deposit. The odds are you won’t be able to find a property that will generate enough rental income to cover a repayment mortgage on a monthly basis with a 15% deposit.
I’d rather save up 30% and make the figures stack. Essentially, in real money, that’s no different than putting down a 15% deposit and paying out of your own pocket for a few years to cover the shortfall you may encounter on a monthly basis. In due time, the monthly payments will eventually reduce, consequently the rent will eventually cover the mortgage. However, that method requires discipline. I’d rather save until I can pay the 30%, buy, and let my rental income do the best of the work. That way I don’t need to budget every month for my mortgage payments.
What makes my method low risk?
Long term property investments with repayment mortgages won’t be affected by blips in the market. If the market dips and house prices drop, there will still be time to recover. Whereas, short-term investor who has owned a property for 1 year on an interest-only mortgage can easily get into a bracket of negative equity if the market takes a turn for the worst. The investor will either need to hold onto the property or sell at a loss.
A property crash won’t affect my plan. After 20 years of investing my rental income into various properties, the market can take a 70% hit and at worst I would breakeven. The odds of a 70% hit are extremely unlikely, but if “shit happens” I’ll be ok. How did I calculate that 70% cushion? Well, I put down 30% on each property, and the rest of the mortgage is paid by rental income, so I only stand to lose that initial 30%. After 20years, my mortgage debt would have been cleared, so I can take up to a 70% beating.
It’s extremely low risk, but as mentioned, the rewards probably aren’t as fruitful as the more savvy power investors out there. It’s all about your intentions…
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Talk / 10 Comments left so far
Unfotrunately I know little about buying property abroad. I'm a local investor.
However, for really good info, and to converse with people that really know their stuff on international property, I would go to totallyproperty.com.
Hope i've directed into the right direction. Sorry I couldn't have been of more direct help. Good luck with whatever you decide to do.
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I would love to be able to adopt a similar strategy but I would need to save for a while to be able to come up with a 30% deposit for each property i buy. I prefer to put in less money from the outset lets say 15% to buy a property, i would then most likely have a situation where there will be a shortfall in the money in -rent and money out -mortgage. Like you said i would have to put in money every month for a few years- but i prefer that because it means i only put 15% of my own money at risk and still have that additional 15% sitting in my bank account. It means less exposure for me.
I feel fairly safe with 15% equity because i know that historic data on the property prices have only shown a drop in prices of about 17%.
I agree that having a long term strategy for property investment is key. Even if there was a fall in prices by 15% or even 20% - I will not sell. Every property i buy i always make sure i can afford to keep that property going, so i always cashflow (put money aside for all potential costs) my property for at least 2 years.
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I keep hearing that, "well, over time they go back to the original level and beyond." This, historically is the case, however we are now in a situation where food prices are rising 20% PLUS p.a. oil is without doubt going to rise above $100 a barrel or more permanently. So to combat this continious rise, the Bank of England may have to allow interest rates rise significantly to soften these inflation levels. They cannot do it now because of the unbelieveable banking crises.
Then one gets to a point where, it is impossible to pay off the mortgage with rent alone. Causing negative equiety, for people who could pay thier mortgage and bankruptcy for people who could not.
Comments please.....
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If someone blows up your house...
If you lose your job tomorrow...
'pie in the sky' stuff, son.
I've been paying off mortgages with rent for a few years now. It's been fine.
I'm paying off capital each month, so I'm reducing debt, right? So over time my monthly payments on interest will reduce, but my rent will increase (inflation). Interest rates will never increase to the levels that will seriously affect homeowners, otherwise the country will be in the same position again.
I tell you what, come back to me in 5 years time, and i'll tell you how much equity i've built up via rent.
On a brighter note, you'll be pleased to know that I increased rent last month, and my tracker mortgage lowered its rate today because of the 0.5% base rate drop. So, i'm all good.
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you have an interesting strategy and I agree its low risk, however doesn't it leave you with a rather large tax bill every year as you can only offset mortgage interest payemetns against rent.
This is one of the main reasons main investors (including myself) put in a lower deposit. I don't want to make income on these properties that gets taxed at 40p in the pouond, I think that I am better off focusing on paying off my own house where I live as there are no tax advantages to having an outstanding debt on it.
Interstingly in Australia there is a very advantageous tax regime for the propoerty investor and you can offset losses on rental properties against your personal income tax, this was one of the main things that drove the recent property boom in Australia.
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Why would profit be unobtainable? Granted, the profit will be taxed. But that's the same with any business or any person. The more you earn, the more you get taxed!
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I initially started this website because I wanted to document my every step from property idiot to property landlord,
in hope that people would find my site and help me along the way. I literally didn't have a clue about being a landlord
when I started this website.
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