PROPERTY INVESTING | STARTER COURSE |

Lesson 3 -
finance: a closer look at leverage

Certain terms within this industry really excite me, they help us to understand why we do what we do.

Leverage is one of those terms.
This is what makes the property investment industry accessible to us all.  

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Don't Hope

Hope is not a financial plan. There are countless advantages of financial planning that come immediately from having a financial plan. From emotional and health associated benefits to social and financial benefits, It has a net positive impact on every aspect of your life.

Have A Process

Sometimes it's not about the money but rather the process of managing the money. Financial goals are important for you to have when it comes to having a stable and enjoyable life. Finances are an intimate part of your life because money is a medium to help you achieve your most cherished life goals.

Get Control

Being in control of your finances is a great stress reliever. With a plan you are less stressed and tend to be more optimistic about your future. Leveraging finances can increase mindfulness which in turn lowers stress levels around money. When you have a plan in place, you are more likely to overcome setbacks.

the Many faces of finance...

There are many types of finance available these days with ‘JV’ or joint venture partners, angel funding, bridging loans, commercial finance companies, banks, independent mortgage companies and even, dare I say it parents savings. 

And although a bridging loan or the angel finance route might prove to be more costly than borrowing from a family member in principle they will all work similarly. It’s often only the interest rates that differ. Borrowing £75,000 from your parents will no doubt come with a lower interest rate attached than that of an angel funder.

For the purpose of continuation, I will assume that the only difference is in-fact the interest applied to the loan and that you are appropriately equipped to alter the figures accordingly.

In my demonstrations below, I will use the route taken by leveraging a standard mortgage company loan.

Use Leverage!

This time that’s us talking; this isn’t so much an example as it is a statement.

We politely intend on gently guiding you to leverage others, but also by adopting our no-nonsense approach; we are categorically telling you to do so!

Certain terms within this industry really excite, they help us to understand why we do what we do. We’ve already talked about the property cycle, you’ll hear us talk about Return On Investment (ROI) in this lesson and others, we’ll repeatedly mention passive income (because it’s awesome), and you’ll hear terms like cash flow, capital growth, compound interest and exponential growth…

Oh yes, that’s why we do it!!

These are all great terms they truly are, but leverage is what makes the property investment business accessible to all. By using leverage, we are able to scale our businesses faster.

Why leverage, i have the capital to buy outright...?

Ok, this one is easy to explain. If you buy a property outright, say at £90,000, you’ll need to wait, wait a bit longer and then wait some more in order to build up your capital to repeat the process. We would estimate with maintenance; this would take, conservatively 17 years to repeat.

IF however, we use leverage on the purchase you’ll only have to use (without fees, which we discuss in depth later on) a mere £22,500 of your capital (based on 75% leverage, which is typical).

So what does this mean? Well, it means that you can buy 4 properties with your £90,000 (excluding fees for demonstration purposes) which in turn helps you accrue your capital quicker, enabling you to buy more properties at a much faster rate.

Now, taking the same conservative approach as above, you could buy another property in approximately 2 years NOT 17. Furthermore, because of this extra revenue, this now gets slightly faster until the growth eventually becomes exponential. SEE THE DIFFERENCE?

Following Us? ...

No problem if you’re not fully following this, we will demonstrate the figures showing your ROI at the same time.

All based on a purchase price of £90,000 using 25% contribution and therefore a massive 75% leverage. Again we will exclude all fees for the ease of demonstration.

We are using an interest-only mortgage product which is generally the case with modern-day investing.

Cash Purchase Example

CASH PURCHASE EXAMPLE

NOT USING LEVERAGE

Your Outlay £90,000

Leveraged £0
Typical Rent Per Annum £6,000
Yearly Profit Minus Contingency @ 15% £5100
Years To Accrue Repeat Capital £90,000 / £5100 = 17.64 Years... EEEK!
ROI (Annual rent / capital x 100) = 6.6%

Leveraged Purchase Example

LEVERAGE PURCHASE

USING THE MAGIC OF LEVERAGE

Your Outlay £22,500

Leveraged £67,500
Typical Rent Per Annum £6,000
Yearly Profit Minus Contingency @ 15% £5100
Yearly Profit Minus Mortgage Payments £2796 (Circa 3.414%)
Yearly Profit On 4 Purchases £11.184
Years To Accrue Repeat Capital £22,500 / £11,184 = 2.01 YEARS!
ROI (Annual rent / capital x 100) = 16.42 %

So, there are a few things to note here:

Interest Only Mortgages: Is this not the maverick approach?

If you want growth within your portfolio or you want your money to go further than this is just the modern way of investing.

The maverick approach? No not at all, yes it is slightly riskier than opting for a repayment product, in the same way opting for repayment is riskier than purchasing for cash.

If you want growth within your portfolio or you want your money to go further than this is just the modern way of investing. This industry moves swiftly and has changed so much in recent times; this method is simply the smart way to invest. It’s not a fad; it’s not the maverick way, it’s not what the ‘risk-takers’ do, and as I will explain, it’s nowhere near as risky as you think is.

We have explained the property cycle, and we all know that there is a better than average chance that the price of the property is going to increase significantly over the term of a mortgage, usually 25 years. So couple the growth of the property with inflation and we have our comfort zone.

  • £90,000 property in 25 years, even if this only increases by 20%, which would be really hard to believe, then the property would be worth £108,000.
  • Remember we don’t owe £90,000 but rather £67,500.
  • With inflation, how much do you think £67,500 will be in 25 years?
  • Yes, ok, still £67,500 but what would its worth be?
  • Put it this way, with inflation £67,500 in 1993 (25 years ago at the time of writing) would be £133,000 today, almost double!!
  • A £90,000 property in today’s market 25 years ago in my local area was worth £24,000 as an equivalent which would mean if you purchased this at a 75% loan to value back then you would owe £18,000 now. Meaning for every one house that you sell you can pay off five others at the same value and think of the cash you’ve had out of this house over the 25 years

According to the Nationwide the average purchase price of a property in 2017 was £212,000 in 1992 (25 years ago) it was £50,500.

Here it comes….WAIT…. £50,500 at 75% LTV 25 years ago is £37,875 today, meaning that the sale of two properties would pay off 11 others at that value. Leaving you with all that cash flow on the remaining properties.

AND NO MORTGAGE – FOR LIFE.

Do we really need to continue?

We are not even going to mention re-mortgaging to release capital after growth in order to fund further purchases, all adding to the pot. Well not really, we kind of just did.

Ok, that’s enough on mortgages, if you really need further convincing to leverage and to leverage smart then get in touch with us.

Lesson Summary

Here's a summary of this lesson and your next steps to take ACTION!

You must take action right now. Go! Go! Go!

Leverage is what makes the property investment business accessible to all. By using leverage, we are able to scale our businesses faster.

It means that you can buy multiple properties with your initial cash outlay which in turn helps you accrue your capital quicker, enabling you to buy more properties at a much faster rate.

If you want growth within your portfolio or you want your money to go further than interest only mortgages is simply a smart optional way to invest. It’s not a fad; it’s not the maverick way, it’s not what the ‘risk-takers’ do, it’s nowhere near as risky as you think is.

  • Using leverage is a surefire way to grow your business bigger, faster.

  • Interest only mortgages are an optional way to invest capital to grow within your portfolio. And who knows what you can do when you free up some spare capital.

  • With property development, you firstly benefit from capital appreciation – the value of your property holdings rising over time.

  • Secondly, if you choose to hold onto a property after you’ve made improvements, and rent it out, you benefit from a regular income from tenants.

1.) Do some research and run the numbers on how you can best leverage your finance capital compare this with interest-only mortgages. See which better suits your situation.

2.) Write out a list of who you could approach to leverage funds and set a time to contact them and work through some options.

"Money is a tool. Used properly it makes something beautiful; Used wrong, it makes a mess!"

5/5

- Bradley Vinson

About David

If you’re a property investor, you’ve likely heard of David Tarn (WiseOwl Property). His list of credentials is lengthy, and if he really wanted to, he could go on and on and on about his accomplishments.
But when people list out all their accomplishments in their bios, they risk sounding a little egotistical. This isn’t Davids style. Sure, you might impress a handful of people with all those laurels, but many people who read the bio will end up feeling either intimidated or annoyed. Think about it, why do you want to read about how great someone else is, don’t you see enough of that on Facebook?
To minimize the egoism that comes with talking about yourself, here are David’s accomplishments without sounding like bragging. David has been investing for almost 15-years and has built a hugely profitable portfolio. He owns a self-start lettings agency, mentors, trains and coaches very well and rides an enduro mountain bike like a pro. He is 1 part executive, 1 part entrepreneur, 1 part mentor and 4 parts proud dad. Too many parts, maybe that’s the maverick in him?

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