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 25-40% 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 if 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 have 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…