I wanted to share with you a live case study of a property I’m currently buying. This is current, provided you’re reading this around May / June 2017. Otherwise it’s a bit older, but whatever, you get my point.
So I’m going to break this down into a few sections for you.
If this kind of case study format is useful for you, then let me know and I can do a few more – either old deals I’ve done, or when I do a new deal.
Right, let’s get to it then.
Why I’m doing it
It’s what I do. I’m a property investor who has a business model that uses my cash to buy assets that will provide me with more cash indefinitely. It’s a pretty fun model to be fair, and it’s one that’s been done for hundreds and thousands of years by the wealthy.
My ultimate goal is to have a bunch of properties, with no mortgage debt, that are all rented out. I don’t want to take over the world or anything, I just want to provide a decent standard of accommodation to a small group of people, at a fair rent. And the magic number for me is 50 properties.
I’m not one of these greedy Landlords who wants to squeeze every last penny out of the tenant. I’ve been a tenant myself. I’ve got family members who are tenants. I know how much of an impact your home has on your happiness, so I don’t want to be a reason someone is miserable! Life’s too short to be that much of an asshole. Especially when it’s only for a few hundred pounds a month.
But I digress.
So that’s my Goal. Build up a bigger portfolio. Pay down the debt. Live happily ever after.
What I’m doing
I’ve kind of just given away the strategy I’m following… but let’s look at it in a bit more detail.
I look to buy properties for anywhere between £60k – £150k, that rent out at around 7% gross yield. So if I buy it for £60k, then it needs to rent out for at least £350 per calendar month (pcm). If it’s £150k, then it works out at £875pcm.
Again, not setting the world on fire, am I? There are people out there who won’t touch a property unless it’s returning 15% Gross Yield. It’s certainly achievable, and I’ve done it myself quite a few times. But as a process driven kinda gal, I like to use targets that I know I can achieve all day long. Of course, I’ll aim for higher if I can, but I’m talking about minimums here.
So in this case, I’m buying the property for £110k and it rents out currently for £650 pcm. That gives me a yield of…. 7.1% (phew!).
My strategy then looks to use finance for between 60 – 75% of the purchase price. How big a mortgage I get is usually linked to the rent that I can get for the property. If I’m just scraping by at 7% yield, then I’ll go more towards the 60% LTV. If I’m getting more rent, I’ll increase the level of debt.
Kind of logical, isn’t it? If I get more money coming in each month, I’m more comfortable paying out more each month as well. This shit ain’t rocket science people! In this case, I’ll have a 70% LTV mortgage and I’ll explain the logic in the finance section.
In order to buy this property, I need a deposit of £33k. This money has come from my existing rental profits, working with my property investor clients, and a couple of other businesses I have.
Fast forward a decade or so and my strategy generally consists of paying down the debt as quickly as I can – my stretch goal is to pay it all off in 8 years, but I’m happy aiming for 15 years. I’ll then take a view on whether or not to refinance it again to use the equity to buy other properties. Chances are I will as this is a great way to turn 1 house into 4.
All these bellends that tell you to refinance every five minutes and live off the remortgage money, what they don’t understand is – paying down your mortgage debt using rental income is basically the same as the house going up in value. It has the same effect. I’ll turn my £33k deposit into £110k worth of equity. Is that a 234% increase? If it takes me 15 years, that’s still 8.4% compound growth each year. So that’s nice. But the cherry on top is the fact I’ll then be getting £650 each month for the next 15 years as well.
So that hopefully gives you a bit of an idea of what I’m doing and why I’m doing it.
To me it’s ridiculously simple. But that’s cos I’ve done it for years. Hopefully I’ve explained it in a way that makes sense to you.
If you need me to clarify anything, drop me a line and let me know what bit isn’t clear. I’ll mock you for being a dumbass, then I’ll explain it again.
Next time, what steps I took to find the place and how I ran my analysis to see if it was going to be worth my while buying.
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