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Property Leveraging - Property Investment Advice
Leveraging is the way in which many property millionaires have made their fortune. It's a simple process whereby you invest as little of your own money as you can and borrow as much as possible from someone else...
1. Know how leveraging works. As an investor, you want to get the biggest possible return on your investment. Leveraging helps you achieve this. Say you buy a property for £100,000. You put in 50%, or £50,000. You borrow 50% or £50,000. The property goes up in value by 25% to £125,000. You have made £25,000 on your £50,000 investment. That's 50%. But you could have put in 20% or £20,000 and borrowed the other 80% or £80,000. The property goes up from £100,000 to £125,000. You've now made £25,000 on a £20,000 investment; a 125% return. The bigger the return from your property investment, the sooner you can move on to your next deal. Most would-be entrepreneurs start off by remortgaging to free up existing equity in their own home. You use this as your 20% deposit. As property prices rise, you then have more equity in your own home and that first property purchase, and can remortgage or sell as appropriate to generate more funds. You keep repeating this process.
2. Recognise the rewards and risks involved with leveraging. There are many examples of success. 'John' put a 5%, £8,500 deposit down on a luxury flat to be built close to York racecourse. He obtained a 15% discount, bringing the property down from £200,000 to £170,000. The property came to market 18 months later and sold at £225,000. A return of £55,000 from a £8,500 investment - you can calculate the percentage return on that. 'John' profited most by buying off-plan at a discount and into a rising market - which is what many property millionaires do. However, as with any potentially high-reward investment, there are potentially high risks as well. Leveraging is most successful in a rising market. The equity-deposit-more equity/sale sequence works well when property is going up at 20% a year. But if there were a property slump - either nationally or locally - leveraging can go wrong. If you have borrowed heavily and can't sell or rent to cover your outgoings you may be in financial difficulties.
3. Understand the best time to leverage - it is when prices are moving up. Perhaps surprisingly, many entrepreneurs are investing in property right now; but selectively. They know that nationally property prices aren't going to see 20% rises in 2005. But there are hotspots around the country that should see these sorts of returns. For property millionaires, leveraging is a routine exercise. You find a growing locality. You seek an off-plan development that looks like it will be in-demand once it has been built. You invest a little. You borrow a lot. Prices rise. You clear your borrowings. You bank your profits. You start again. But you can only do that in an upward-moving market. If the market is doing nothing, you really can't leverage. If you sell, you've probably not even got your investment back. You can hold on until prices do rise, but you then have to let to cover your borrowings in most instances.
4. Work to the property-profiting criteria used by successful property entrepreneurs. The location has to be on the up, and the quicker the better. Visit, count cranes, check high street stores, see how many estate agents are moving in. Feel that movement! The property has to be in short supply, be hassle-free and be increasing in demand. A classy property such as a city-centre loft coversion or a waterfront apartment tends to rise faster and sell on quicker than a three-bed semi on a sprawling housing estate. Avoid anything too unusual though. Lenders may be less willing to fund these purchases. You're also looking for something that's clean and presentable. You want to buy in and sell up quickly. You don't want to be delayed with renovations and other time-and cost-consuming work. Think about your lender too, of course - where you're getting your 80% from. If you are going to make a fast turnaround sale you need to be able to do that without incurring heavy costs; redemption penalties etc.
5. Bottom line advice? Focus specifically on locations that that look likely to deliver 20% price rises within the year. It's not worth doing it for much less than that. Try to buy-low - off-plan, forced sales, auctions - to give those initial built-in profits. Read the small print on your borrowings - it's often easier to sort out short-term financing than setting up a mortgage with all sorts of terms and conditions. Add value by selling at the right time - a feelgood media story, when similar properties aren't on the market, when the sun is shining and people are in a buying mode in spring, as examples. Bank part of your profits and use the rest for a deposit on the next deal. Keep it simple - do one at a time in one place. If need be, buy in, live in the property and sell it and move on. This avoids the hassle of managing agents, tenants and other buy-to-let costs. Where to buy in 2005? Try PMC for a month free-of-charge and you'll find out!
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