When it comes to property investing strategies, everyone has an opinion. Ask any investor and they’ll tell you why their property investment strategy is the best.
Sometimes you don’t even have to ask. You’ll often get advice from people who haven’t even invested on what strategy you should follow. So is there even such a thing as the best property investment strategy, and if so what is the best property investment strategy for long term growth?
The best property investment strategy for any investor is the one that allows them to achieve their goal. This could be a financial income target, a certain number of properties owned, an amount of equity, or any other target you’ve set yourself. The below strategy will allow you to reach any goal you have set yourself, the only factor affecting the amounts involved? Time.
Important Facts To Get Out Of The Way
Define rich. To get on the Times Rich list you need to be worth £100m. If we assume that’s a bit excessive for everyone to aim for, let’s just assume you will consider yourself “Rich” if you have £10m of equity or £500,000 of annual income. I’m sure by most people’s standard that would count.
We know that over the past 40 years property prices have grown on average 7.6%, and produced a rental yield of 5.0%. Average. That’s an important word here. If we assume anyone could have achieved a 5% yield, then 7.5% yield shouldn’t be that difficult to achieve surely? And we aren’t looking for properties in the next hotspot, just an average UK city or town that will appreciate by the average amount.
This strategy is replicable by anyone, so I’m not assuming you have any special skills or inside knowledge or have above average luck. I am assuming you’ve got some money behind you though.
£25,000 to be exact, which comes in very handy for…
So What’s The Plan?
Find yourself a property for £100k achieving a rental yield of 7.5% and buy it with a 75% mortgage. There goes your £25k. Now we play the waiting game, for 4 years to be exact. Once 4 full years have passed, refinance your properties back up to 75% LTV and use the equity alongside the saved up profits from the rental as the deposit.
So for the first 4 year growth phase – assuming 10% loss of rent to cover things like voids, contingencies, etc. – you should have saved up £16k of rental profits and have equity of £50k.
For the ease of calculations let’s assume you sell everything and start all over again with £66k to invest. In reality you would remortgage to pull out the money, but let’s keep it simple.
That buys you £264k of property, with equity of £66k and annual profits of £9k. You’re now 5 years older by the way, happy birthday x 5!
But this strategy doesn’t rely on time intensive HMO’s, or skilled development works with a special team of builders. This is just buying a property, flat / terrace / semi-detached, that will rent for a 7.5% yield, and is no better or worse than any other property out there.
The beauty of this strategy lies in its simplicity and…
The Incredible Power of Leverage
Here comes the fun part. That’s all there is to it. Let’s say you do this another 6 times, and on the last refinancing event, actually what you do is consolidate the portfolio and sell all your properties and buy a completely unfinanced portfolio instead. No more bank debt.
That means in 28 years, you’ve turned your £25k cash into equity of £22.75m with annual profits of £1.5m… OK so I overshot the goal, stop a few years earlier and you’ll have equity of £10m. In fact stop 6 years earlier and you’d be receiving £500k in annual profits.
What about inflation, I hear the sceptical cry. Well at an average of 2% for inflation, that still equates to equity of £12.9m and annual profits of £870k.
Not bad for £25k invested.
Surely It’s Not that Easy…
I have glossed over so many elements here that it is borderline criminal, but the basic facts are all accurate and the strategy itself is true and repeatable. Will it be as plain sailing as I’ve just made out?
Absolutely 100% no.
You will have tenants that refuse to pay rent, you’ll have a car drive through your front bay window, a chimney will fall off, someone will decorate your entire house in black paint, interest rates will sky rocket, interest rates will plummet, property prices will collapse, property prices will soar, expensive licensing will be brought in…. it goes on and on.
All of these things have happened before, and they will inevitably happen again.
So can anyone really do this? The simple answer is yes. You can follow this strategy exactly as I’ve laid it out, but with one exception. The timings are complete guess work. Realistically you need your portfolio value to increase by at least 25% before it is worthwhile refinancing (or selling) to repeat the process. This could take 12 months or it could take 10 years. The process doesn’t change, just the timing.
The Best Property Investement Strategy – Final Qualifier
Is this a strategy I follow? Yes and no. Fundamentally I follow a very similar strategy, but I have added some additional elements in.
I have the experience and knowledge to develop properties, so I will almost always buy a property in need of work and then refinance it once the works are completed. This means instead of 25% of my money tied up in the property, I usually leave around 10% in. So that £100k house would usually cost me £10k of my own money, but still have £25k of equity in it.
I also repay my mortgages overtime. Property prices have gone up on average (between 1952 and 2015) by 7.6% per year:
However, with property prices not going up in a nice steady 7.6% each year, I don’t want to find myself in the position of selling my properties during a property crash in order to clear the outstanding mortgages. I’m massively in the minority with this particular view, but I prefer to de-risk my investments as much as I can.
The Best Property Investement Strategy – Summary
Buy, rent, wait, refinance. Repeat ad infinitum (or nauseum). As with most things, the devil is in the detail.
This article was created with the help of Damien Fogg, from the excellent resource buytoletstrategy.com. I would also highly recommend the podcast that he creates with Anna Harper: The Property Investor Podcast.