Portfolio growth strategy – how do you fund your next purchase?

Hi David

I am going to begin my response to this thread with a somewhat controversial question; is being a landlord an investment or a business?

I would argue that it is a bit of both but must start of as an investment. If a person has no money to invest then they should not become a landlord in my humble opinion. People must also have an end goal. There is not a one size fits all strategy and market forces will play a part in your growth strategy over the years too. The key to success, in my opinion, is to keep an open mind and to capitalise on the opportunities the markets presents as times change.

Initially I built my property portfolio based on savings. As the years went by and I had invested significant money into my portfolio I began to experience growth in both my rental profits due to inflation based demand and also in the equity in my portfolio based on capital appreciation. I then used refinancing as a tool to release money to grow my property portfolio. Therefore, my mid term growth strategy was very much based on market forces.

We don't really know if or when we will see double digit capital appreciation again although if history repeats itself again, and most would argue that it is inevitable at some point in time during the next 25 years, then you need to be prepared for it and that means investing into a property portfolio whilst time are tough. Given that most people buy for the long term, the strategy I used will again come into vogue at some point.

Without capital appreciation there are only really two ways to fund growth, i.e. reinvestment of rental profits or further investment of disposable income from other sources.

This is now my 25th year in property and I am no longer buying. In 2009 I decided to stop buying and to start living.

There always has to be a goal, I invested into property for my security in retirement. I didn't expect that to happen at the age of 41 (I'm now 46) but here we are. Having had little to no time to invest into the management of my property portfolio I had to systematise everything to buy myself more time. I got a lot better at that after I retired and no longer beneffitted from the gravy train of my previously very successful business.

So what do I do with that time now you might ask? Well the truth is that I realised that sitting on a beach 365 days a year get's very boring after a while, hence I now run Property118 to fill my time as I enjoy helping my fellow landlords. That's not to say that's all I do, I still like holidays and plenty of other things besides and I can have them due to the investments I made in my first 20 years of becoming a landlord 🙂

To read about my strategy please see >>> http://www.property118.com/learning-from-experience/61558/
.

David,
Some thoughts. Owning property is an investment. Letting the property is running a business. And that is the same as HMRC view it. The investment part is just like shares – the price can go down as well as up. (I have lived in other countries where prices really went down! - Ireland, Holland, Spain – is the UK different?) So investing in property is just like shares and there are some companies that do it – British Land, Land Securities. Why do you think an individual is different from a company or that he is better than so called professionals?
Obviously letting one or two properties is not a big business. I know a few landlords that operate the letting side through a company using standard market rates – e.g 10% of gross rents as a charge to the owner so clearly a reasonable income for the business £20-30k needs a managed rental income of £200-300k. And depending on property income yield – say 5% - an investment of £4-6million. You can play with these numbers but you get the same sort of answer.
On the investment side of the equation you have your equity (where you should compare the lost investment opportunity such as shares), and the costs of running the property – maintenance, management, loan interest etc. And just like shares you hope a capital gain from your investment – but that only happens when you sell.
Like all investments you need capital. So would you borrow to invest in shares? A mistake many investors make is thinking the loan is just against the property. Big mistake. You are borrowing the money and the loan is first secured against the property and then against you and all your other net assets. So if the sale of the property does not cover the loan the lender can then get you to pay any shortfall. The higher the LTV on the property the greater the risk for the lender and the higher the interest rate charged. So going back to the investment required to get a reasonable income – who is going to loan you several million pounds to start this business?
Of course you fully understand this.
Now ask yourself do you think property prices will continue to increase as they have done in London? If you think the answer is yes draw up a spreadsheet and look at the world in 10 or 20 years time. Include in that spreadsheet average uk wages, average uk property prices, your wages, interest rates. A lot of this forward info is available on the web – e.g future interest rates. The Investors Chronicle currently shows the 10 year long term Uk yield curve (bank rate) above 3%. With BTL rates typically 3-4% above bank rate …..
The spreadsheet will give you your answers.

Hello, I have done all three. Funded deposits from savings, refinancing property, and also other sources, that is obtaining a loan from my bank at a rate of 6.9% over 4 years. I did wonder if the loan was the right way to go, but as the rent coming in more than covers the loan and the mortgage, I decided to go ahead with it as property prices are low in my area (South Wales) but are now rising.

All 3 options are possible sources but if you can do it without involving your salary it proves to yourself that your investment strategy is funding itself. I would concentrate more on restructuring your existing mortgages by remortgaging or further advances if possible, especially as you say that capital growth is phenomenal, this will release funds to go hand-in-hand with further mortgages for new purchases.

It is important to have a sensible contingency fund for those unforeseen problems though so working on worst case scenarios you should be able to establish what this pot would have to consist of. Just last year, over the space of about 3 months I had 6 tenants hand in their notice for different reasons and this was whilst purchasing 2 further properties with a third one in the pipeline! My contingency fund was there as insurance but thankfully it was hardly touched as luck would have it.

This is the sort of thread where everyone is right - for themselves BUT we are all different. I started as a managing agent over 23 years ago and then when I had a bit more money I started buying flats as my pension. Over 25 years I have continued buying buying flats and getting them let before I move to the next deal. One thing at a time is my mantra and I have imparted this to my children.

I am in a similar situation to Mark but I get a tremendous from business and I have no plans to retire. In fact I recently set up a practice specialising in lease extensions which is rapidly growing and is very interesting.

In recent years I have always bought for cash and have financed the deal afterwards. You can only do this if you have accumulated capital which takes some time but it takes the pressure off and cash buyers can always do a deal.

One thing I have learnt quite recently is the value of a good financial advisor. With a husband who is a chartered accountant and a son with a legal background I thought I was covered for advice but in the last year or so I have learnt a lot from Mark and.i must also give a shout to Howard Reuben who has not only sorted out mortgages for me but has also proved a mine of information about inheritance tax which, as far as I am concerned is double taxation or triple taxation if you think that you paid tax on your earnings and then you bought an investment, then you paid tax on the income from your investment and then the Government will take a third slice when you die.

Lots if luck