The Complete Guide to Property Investment

by Rob Dix

  The sales process

  If you’re feeling nostalgic for the boring, drawn-out and stressful legal process you experienced when you were buying the property, I have good news for you: you get to do it all again when you sell. You’re on the other side of the deal of course, but you’ll still be able to get involved in all manner of cajoling (ah, the memories!), and you’re still bound to have at least one sleepless night when you’re convinced that it’s all going to fall through.

  There are a few extra decisions you get to make as the vendor, though.

  Firstly, you get to set the asking price. Just like when you’re trying to assess the value of a property you want to buy, you should set your selling price by looking at similar, nearby properties that have sold recently. From there you can add a cheeky premium if you’re feeling confident, or go in low if you need to shift it quickly.

  You’ll also need to decide how to sell it: should you use an estate agent, act as estate agent yourself, or sell at auction?

  In a post-Homes Under The Hammer world, selling at auction isn’t a bad idea. Auctions were once the hunting ground of specialist buyers or builders looking for a new project, but are now seen as “somewhere to grab a bargain” by the general buying public. (As one investor put it, he stopped buying at auction and started selling there instead once all the white vans in the car park had been replaced by family cars.)

  As a result, properties can end up being sold at auction for more than they’d fetch through an estate agent – with the added bonus that the legal process only takes 28 days, so you won’t be stuck with an empty property for months on end. There’s luck involved on the day of course, but it’s worth considering.

  If you decide to stay away from auctions, the next decision is whether to use an estate agent or play the agent yourself. In a hot market, there’s a strong case for doing it yourself: all an agent will do is stick the listing online and wait for the phone to ring, so you could save money by advertising it on the online portals directly and taking care of the viewings. Just bear in mind that if it takes you an extra few weeks to sell (compared to how quickly an agent could shift it), your gains could be wiped out by the extra holding costs you’ll incur. The same applies for any extra time taken as a result of not having an agent playing Chief Nag in the dance of the solicitors.

  And then, of course, your final decision is which offer to accept. How far should you push a buyer? Should you favour a slightly lower cash offer over a higher bidder who’s relying on a mortgage? It’s up to you, but one thing’s for sure: the person who’s most desperate for the deal to happen will come off worst. So put yourself in a position of strength by doing everything you need to do to attract plenty of bids. Make the property easy for someone to fall irrationally in love with, and you can’t go too far wrong.

  PART 3:

  BUILDING A LONG-TERM PORTFOLIO

  By the time you’ve followed all the steps in Part 2, you’ll have made your first transaction. Whether you’re holding it for the long haul or you’ve sold it on again for a profit, you can officially call yourself A Property Investor. Congratulations!

  While your first investment experience no doubt caused you a fair amount of stress and fear, there’s a good chance you’re now hooked. As soon as the first month’s rent drops into your bank account or the proceeds of the sale are transferred over by your solicitor, all the boredom, frustration and confusion you’ve experienced get forgotten – and you just want to do it all again.

  Which is just as well – because as we saw in Part 1, making a real difference to your financial life involves doing far more than just buying one property.

  Knowing how to buy an individual property (and buy it well) is a necessary component of successful property investing, but on its own it isn’t enough: even the best purchase won’t allow you to retire, quit your job or whatever your goal is.

  So you’ll need to expand your portfolio, making effective use of the cash, equity and skills at your disposal. You’ll need to understand the property cycle so that you can time your buying and selling activity correctly – which is probably the most important factor that most amateur investors don’t have a clue about. You’ll need to execute your strategy successfully through all the ups and downs of the market, using downturns as a golden buying opportunity rather than a reason to be fearful. And eventually, the time will come when your goal has been achieved and it’s time to think about an exit strategy.

  No book could call itself “complete” without covering these topics, so strap yourself in for Part 3 – where we’ll take you from being “someone who’s bought a property” to having the mindset of a strategic, long-term property investor who’s prepared for enduring and large-scale success.

  Chapter 15

  Financing portfolio growth

  If you ask most investors what their current barriers to growth are, they’ll say “access to finance”. And while raising funds for deposits is undoubtedly a major challenge, I feel like it should be that way: nobody has an inherent right to collect large numbers of houses, and there’s no reason why banks should lend money if you’re not putting anything into the deal yourself. We had a brief, anomalous period of history where anyone could shovel up large numbers of properties without putting any cash into the deal, and that didn’t end particularly brilliantly.

  So, rightly in my view, if you want to buy multiple properties you’ll need to put the effort into raising the finance. Broadly speaking, there are five ways of making this happen:

  Socking in more of your own cash

  Creating equity that can be accessed

  Waiting for the market to create equity for you

  Raising funds with a parallel strategy

  Bringing in outside finance

  As we go through, you’ll notice that some of these financing techniques were the basis of the strategies we saw all the way back in Part 1.

  Option 1: Putting in more cash

  It’s simple and it’s effective, and we saw this option in action back in the first strategy of Part 1. If you’re able to save up enough money from other endeavours to consistently fund deposits, then you don’t have much to worry about – and as you start re-investing rental profits too, you start a “snowball” effect that allows you to put in progressively less of your other savings over time. Every property you buy gives you more monthly profit, and your percentage of debt against equity reduces over time because your borrowing stays static while the value of the property increases.

  There are really no downsides to this approach. If you’re able to save up (say) £20,000 each year to use as a deposit, you’re winning at life. If you’re able to save up enough to buy a property wholly in cash each year, then you’re really winning at life and you should just post me my First Class tickets to your private island so we can talk through the rest of the book in person.

  Well, I said there were no downsides, but you could consider a downside to be that you’re not getting as much bang for your buck as you would if you pursued a more sophisticated strategy. For example, if you were able to save up £20,000 each year and propel your portfolio growth by buying below market value and refinancing, you could use that extra £20,000 to either buy even more properties or invest in a totally different asset class.

  This is true, but there’s no law that says you have to maximise everything all the time. It all comes back to having a meaningful goal in mind before you start: if two people have the same goal but one of them has a lot more cash they can invest in achieving it, the person with more cash won’t have to work as hard or accept as much risk to get to the same place.

  Option 2: Creating equity

  This is the refinancing (or “recycling”) strategy we saw in Part 1. By buying at a great price and/or adding value, you’re effectively creating equity out of thin air – which you can tap into to invest in further properties.

  A quick recap: let’s say you buy a property for £100,000 using a deposit of £25,000 and a mortgage f
or £75,000 (75% loan-to-value). If you subsequently manage to get the property revalued at £135,000, you can refinance to 75% of its new value and borrow £101,250. You pay back the £75,000 you borrowed at the start, and you’ve got your original deposit back to use again.

  However, we also discussed earlier that even though your loan-to-value remains the same, your monthly interest payment goes up: at an interest rate of 5%, your monthly interest payment would have jumped from £312.50 to £421.87.

  As a result, this strategy only works with properties that yield relatively well in the first place. If the property in our example only brought in £400 per month in rent (a 4.8% yield), you might just about break even after other costs with mortgage payments of £312.50 – but you wouldn’t be able to refinance and increase your payments to £421.87 because you’d be losing money every month. If the property brought in £600 per month (a 7.2% yield), you’d have no such problem.

  As long as you’re buying properties that yield highly enough, this is a pretty great strategy: you’re creating equity that didn’t exist and using that equity (instead of your own cash) to fund your next deposit.

  It doesn’t particularly matter whether you create that equity by buying at a great price or by adding value. Indeed, the most common situation is for there to be a bit of both: a property that needs some work (potential to add value) will languish on the market because nobody wants to take on the task, and as a result you can buy it for a bargain price.

  One thing to keep in mind for planning purposes is the timescale in which you can tap into this extra equity. As a rule (although there are exceptions), you’ll need to own a property for at least six months before you can refinance at a higher level – and once that time comes, you’ll need to produce evidence for the value you’ve added to justify a higher valuation. If you haven’t added any value and just bought at a great price, a mortgage company will be reluctant to give you a higher valuation so quickly – and you might need to wait a couple of years before the full value can be realised.

  It’s also worth bearing in mind that this approach becomes less attractive if you’re a higher rate taxpayer buying properties in your own name, because increasing your mortgage balance will have an unpleasant effect on your tax bill. You’ll need to factor this into your calculations to make sure you’re still making a post-tax profit after refinancing.

  Nevertheless, however you create the equity cushion, in theory it allows you to have enough money for just one deposit and “recycle” those funds infinitely by pulling all your cash back out to use again. In practice, it’s very difficult to get all of your cash back out – but even if you can get half of it out, that doubles the speed at which you can grow your portfolio compared to saving up a whole new deposit each time.

  Option 3: Waiting for the market to rise

  I’m no military strategist (which shouldn’t come as a shock), but I doubt any great battles have been won through a strategy of “waiting and hoping”. Sure, property prices generally increase over time – but if that’s what you’re relying on to release equity, you effectively have no control over how fast you go.

  As long as you’re in no mad rush and can fund any further acquisitions with more cash in the meantime, buying properties with an eye on medium-term capital growth is a perfectly valid thing to do. Doing so intelligently involves targeting the right type of property at the right time.

  Consider the property first. All else being equal, a desirable property in a prime location will experience the strongest growth when the market is doing well. Buying such a property and waiting for growth doesn’t give you a lot of control, but you have a better chance of success than if you buy a flat in an edge-of-town housing estate and do the same thing.

  Then consider timing. There are times when house prices are going nuts, and other times when they’re flat or falling. Clearly you don’t want to be buying at the peak of the frenzy and risk the music stopping just as you complete, but equally you don’t want to be buying at the start of a protracted period of flat prices if your strategy relies on refinancing or selling in the next couple of years. The same goes for selling: you absolutely don’t want to be a forced seller when the market is struggling (the coming chapter on surviving a recession will protect you against this risk), but if you can see the market approaching its peak, you can offload properties and lock in your paper gains.

  There’s also the idea of “hotspots”: you could buy in an area that’s primed for explosive growth then just wait and hope, but that’s a lot harder than you might think. Unless you’re unusually skilled or have incredible local knowledge, I consider chasing hotspots to be a distraction. Whenever I’ve bought in a hotspot, it’s been a total accident.

  This is all tied into the idea of the property cycle, which we’ll turn to in the next chapter. The message for now is that “wait and hope” is never an ideal strategy because you aren’t in control, but it’s possible to combine it intelligently with another approach. For example, use a primary strategy of just putting in more cash (Option 1) or buying properties where you can build in equity (Option 2), and also buy in such a way that the market is likely to give you an extra boost within the next few years.

  Option 4: A parallel strategy

  A common parallel to the buy-to-let strategy is buy-to-sell: make a profit from flipping a property, take that profit to use as the deposit on a buy-to-let, and put your original capital into your next buy-to-sell project.

  Assuming that trading is something you’re comfortable with and can execute successfully, this is an expansion strategy without many drawbacks. You’re using the same skills and knowledge to both raise the capital and invest the capital, and if you can’t exit a buy-to-sell deal for some reason, you can always temporarily add it to your buy-to-let portfolio.

  Just like with Options 2 and 3, this strategy is best when combined with another source of funding too. If buy-to-sell projects are your only source of funding for your buy-to-let portfolio, you’ll find yourself at a standstill if things don’t go as planned.

  For example, say your goal is to do two flips each year to make £30,000 post-tax profit, and then use that £30,000 as the deposit on one buy-to-let property. If in any given year one of your projects goes badly and you only end up breaking even, you can’t add to your buy-to-let portfolio that year.

  An alternative parallel strategy is to raise funds by selling opportunities to other investors. If you’re able to find more attractive deals than your funds allow you to buy, you can always sell these deals on and take a “sourcing fee” – which goes towards your next deposit.

  This isn’t really any different from putting in more cash – it just happens to be cash that’s raised from property endeavours rather than a day job – but it’s worth mentioning all the same because it’s a strategy that many investors employ very successfully.

  Option 5: Joint ventures

  If you don’t have piles of spare cash lying around, plenty of other people will – and many of them will be happy to co-invest in property to make a better return than they’d get in a bank.

  Joint venture deals can be structured in any way that suits both parties, but some of the most common are:

  The investor gets a fixed percentage return on the cash they put in (typically anything between 6% and 12% per year, but can be anything you negotiate).

  For buy-to-sell, one partner puts in the money and the other does the work. Profits are split at the end.

  For buy-to-let, both partners pool resources and co-own the property for years to come – splitting the costs and the rental income. (This is probably more suitable for family members, as it’s a long-term shared financial commitment.)

  Joint ventures can be a great solution for experienced investors who’ve exhausted their own cash or have it tied up in other projects. What I’m dubious about, though, is seeing joint ventures touted as a way to get started in property for someone who doesn’t have access to cash for a deposit. I don’t see why
anyone would hand their cash over to someone without a demonstrable track record – and I don’t think it’s a good idea to make your mistakes and learn your lessons on someone else’s dime. An exception to this would be taking money from family: it’s still dangerous territory, but the motivations are easier to understand.

  When it comes to structuring a joint venture – even with a close friend or family member – I strongly recommend drawing up a formal agreement stating:

  Who’s putting what in

  Who will be performing which tasks

  What security each partner will have

  What Plan A and Plan B for the project are

  What happens at the end if it concludes successfully

  What could go wrong, and what you will do in each situation

  The last point is an important one, but it’s often overlooked. It’s fun to sit back and dream about how you’ll spend your massive profits, but the wheels fall off joint venture agreements when things don’t go to plan and the partners can’t decide how they should be resolved. Thinking about this sort of thing in advance has two main advantages. Firstly, it makes sure you’re on the same page about the project in general. And secondly, it means you can use the agreement as a “manual” about what should happen in any situation.