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 largely a subjective question and the answer is typically based on an individual’s situation, including objective and appetite for risk. So I don’t.
However, I’m more than happy to share my personal strategy, which allows me to sleep comfortably at night. But just to be clear,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.
I’m not a “power-buyer” by any stretch of the imagination. By that I mean that I don’t go bonkers and buy several properties per year. Firstly, I couldn’t afford that level of activity, and secondly, that’s just too high risk for me. I’m 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. That’s my objective. What’s yours?
I base my investments on “what if shit happens” scenarios, so I mostly always take the low-risk route. The rewards may not always be as fruitful as alternative investment strategies that come with greater risk, but I know I’ll get my fruit in some shape or form eventually, and that’s perfectly fine with me.
I don’t use any magical formulas (I don’t believe there are, despite popular belief). 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).
So what’s my strategy?
- Buy 1 property every 1 to 2 years
- Put down a 30-40% deposit on each property
- Buy property with a rental yield of at least 6%.
- Ensure there is a healthy demand for rental property in the local area.
- Find a BTL mortgage product that allows me to make overpayments without penalties.
- Use the rental income to pay off debt over a period of the mortgage. I don’t buy-to-sell, I buy-to-own.
- Make lump-sum overpayments to further reduce debt (I generally overpay the mortgages with the highest interest rates first)
Why is choosing a repayment mortgage so important to my strategy?
Most buy-to-let investors opt for interest-only mortgages because it means they’re able to keep their mortgage payments as low as possible (without reducing debt), but that also means they’re completely relying on equity growth.
Interest-only mortgages are more suitable for short-term investors, but unbelievably impractical 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 and lowering interest payments. I make sure my rental income covers my mortgage so I don’t have to pay out of my own pocket. Eventually I will be debt free, I will own the property outright and all I invested was the initial 30-40% 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.
Why is putting down a large deposit important to my strategy?
Many investors cap their deposits at 15% (although, it’s getting increasingly more difficult to find lenders that will accept such a small deposit). From my experience, it’s tough 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, so each month you’ll need to dig into your own pocket.
I’d rather save up 30% and make the figures stack.
What makes my method relatively low-risk?
Long term property investments with large deposits and repayment mortgages are less prone to be impacted by blips in the market. Short-term investors who own one property for 1 year on an interest-only mortgage can easily fall into 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.
Of course, housing slowdowns and crashes aren’t unusual- they come and go like the wind passed through your anal-passage. After a property slowdown, history shows that house prices exceed beyond their previous peak when the next boom kicks in (which can take several years).
A property crash won’t affect my plan because I’m in it for the long term, so I can ride out the crashes. 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…
Disclaimer: I'm just a landlord blogger; I'm 100% not qualified to give legal or financial advice. I'm a doofus. Any information I share is my unqualified opinion, and should never be construed as professional legal or financial advice. You should definitely get advice from a qualified professional for any legal or financial matters. For more information, please read my full disclaimer.