Estimated Read Time: 25 minutes
Editor: Shaun Callacher
How to Start Your Property Portfolio with Small Funds & No Mortgage
The nation is fascinated with real estate. After all, we live on a land that isn’t getting any bigger, but the human population is increasing rapidly. - What this means is over time, values and rents of accommodation are going to go up. All you have to do is scroll down the Financial Times Rich List and see just how many of them are there due to property. Whether they started off in property for their first business, or whether they invested after they made a few quid, they no doubt did so because it is so profitable and is considered the safest asset class.
NOTE: This is an abstract from the book 'How to start your property portfolio with no mortgage & small funds' to download the full version and free copy put your email above to subscribe.
My name is Shaun Callacher, a couple of years ago I made a consious decision to start investing in property. In that time I have acquired over 4 million pounds’ worth of property and have created a high monthly cash flow every month. I started off with no money, no credit and no knowledge, but now, after many mistakes and lots of hard work, I believe I have a good understanding of what makes a good investment and what doesn’t.
It all began after being inspired by Tim Ferriss’s book, The 4 Hour Work Week. I liked the idea of creating a business that took very minimal time and could be managed anywhere in the world. However, unlike Tim suggests in his 4HWW principles, I felt creating an online product is quite volatile due to other copy cats that could replicate your product and put you out of business:- plus, you are always dependent on how many sales you make that month.
I thought it would be nice to have a little more security, and that's why, after a lot of research, I made property investing my vehicle that was going to create my goal/freedom.
I won’t go into too much detail as to how I systemized my property portfolio (Tim Ferriss style!) to be truly passive in this post - I will leave that until another day. Instead, I will share with you the main property strategy I used to make my income.
Hopefully with this knowledge you can then go out and achieve the income you desire.
However, before we start - just a warning! With knowledge of how to help people move on from their property problem comes great responsibility. If you do choose to act on what I have shared, please be ethical. Unfortunately, the press every so often come across a vogue investor who rips everybody off. This then puts a bad name out for all property investors. We are here to help people and come up with win-win solutions, not to con anybody!
Okay, so enough warnings for now - how did I do it?
Let me share with you a quote:
'Own nothing but control everything' -. J. D. Rockefeller
J.D. Rockefeller was the first ever billionaire to come out of America. He lived until the ripe old age of 98 years. If he was still alive today, he would be worth approximately £116 billion!
Rockefeller didn't make his first million through real estate though:- Instead, he made it through petroleum, before moving onto real estate. He would pay farmers money to use their land to dig and look for oil. If he found oil, the farmer would get a bonus - and eventually his land back - and Rockefeller would get his fortune from the oil. He profited from other people's land by using something called ‘property options’.
- A ‘property option’ is a way of controlling a property or land without actually owning it. If you know what you are doing, you can then profit from the property or land.
Options can be so profitable, and there are so many different strategies you can implement when using options, depending on what your goal is. In this post I would like to share with you two strategies I use heavily in today’s market: leases and purchase lease options. The reason I chose leases and purchase lease options is because in the situation I was in, with no money to invest and no credit for a mortgage, I realised the most important thing for me was to have a passive income (income you achieve without doing any more work). Leases and lease options fit perfectly - you don’t need to be mortgage-able or have any of your own money, and you can achieve thousands of pounds per month on one deal using this strategy. All you need is will power and to take lots of action.
What Is a Lease/Purchase Lease Option?
The best way to explain a lease or a purchase lease option is to split it into two, the first half being a lease and the second half being the option. Lease - a lease is a legal agreement which gives you control of an asset (property) without actually owning it.
Option – an option is the right to purchase but no obligation to do so.
An easy way to get your head around this is to think about renting a car with a right to buy it.
There are then a few things you would have to agree upon with the owner to make a purchase lease option. You normally outline all these points using something called a heads of terms which you then pass on to your solicitor. Your solicitor will then draw up the legal terminology so you don’t have to worry about it. Here is an example of the main points on a heads of terms below:
- Both parties’ contact details, name & address
- Monthly fee
- Purchase price
- Length of agreement
Now here is the great part. Imagine as an added bonus you can rent out the property, sell the property, build on the property and do whatever you would do if the property was your own. It's all the benefits you can get from a traditional house purchase.
So Why Choose Purchase Lease Options over Purchasing Traditionally?
Small Money In
Let’s take as an example house you wanted to buy then rent out, worth £100k. If you were to buy this house traditionally in today's market using a buy to let mortgage, you could on average get a 75% loan to value - in other words, a £75k mortgage. You would have to put the deposit of £25k into the deal. You would also have to pay for legal fees, survey fees, and of course, pay for any work needed on the property. The sum could be quite large. Now let’s take the same property, but this time we take it on a purchase lease option. We agree with the vendor we will pay them a deposit of £1 (this makes the contract legal) plus £500 per month. Plus, we have agreed we can buy it at £100k anytime in the next 5 years. The first benefit of the option is you don't need a big deposit. All you need is legal fees to get a contract between you and the vendor - this could be about £500 (I will even show you how to get that £500 but let’s just leave that until later if you don't have it yourself). £500 compared to £25k+ - which one would you rather put in?
A second benefit of using a lease option is you don't need a mortgage so therefore you don't need clean credit. Because you’re not looking on getting a bank loan even if for whatever reason you have poor credit, it doesn't matter.
No Down Valuation
A third benefit is once again because you’re not using a mortgage, you won't get down valued – therefore, you don't have to worry about surveys and coming up with shortfall cash.
Quick and Simple
Finally, and this one is a major benefit, it is a lot quicker to complete on an option as opposed to a traditional purchase. When I first started, I needed to add to my income fast. When buying traditionally, it can take months to complete due to waiting on mortgage lenders! Using options with the right solicitors you can complete within days.
Let me share with you an example of a lease property I have in my portfolio.
You will notice this is just a lease and I don't have the option to purchase it. Some people call this strategy a rent-rent or a rent-sublet. In other words, I rent off the landlord and then rent it out for more. In this case, I have permission to rent out the rooms individually, so therefore I can produce more cash flow and get to keep the residual after voids and maintenance. It works for the vendor because he gets guaranteed rent every single month. He doesn't have to worry about any hassle from the property at all!
Case Study 1
Lease Term: 4 years
Funds In: £2000
Rental Income: £2350
Lease Agreement: £1000 pcm
Total Cash Flow: £1000
Now let’s add the option part to the equation. You will notice with Case Study 2 we do have the option to purchase within a 5 year period, so it is a purchase lease option.
Case Study 2
Lease Option Term: 5 years
Funds In: £5000
Rental Income: £2035
Lease Agreement: £900 pcm
Total Cash Flow: £1135 pcm
Agreed Purchase Price: £85k
This property has an interesting back story to it. It came about through an estate agent. We called the agent on the day the place had been raided by the police, who were looking for a gun (they obviously didn’t find it because I have it and use it for my negotiating!). My business partner and I could see the problem was that the landlord and the agent were putting people in under the age of 25 yrs old who were on housing benefits. Unfortunately, a lot of the people who are in this situation don’t care about who they screw over, just as long as they can have parties every night and feed their drug habits. We realised instantly that the problem could be solved if we only put tenants in who were over 35 and a little more settled down. The plan worked perfectly.
In both case studies the landlord and landlady were so grateful to us for helping them overcome a problem. In the first case study the owner wished to move abroad, but couldn’t find a good enough management agent to manage the property for him. He could see the benefit of working with us. In the second case study, the landlady didn’t live locally and had bought the property a few years prior. After trying to self - manage for a while, raids from the police and phone calls every weekend from the police, she realised it just wasn’t for her. She was so disheartened by the ordeal of her old tenants that she couldn’t even bear coming up to the property to pass on the keys and sign the paper - work. Instead, we agreed to a deal on Skype, signed the contract electronically and asked the local agent to hand us the keys they already had a copy of. This is the great thing about leases and lease options: it is a quick way to come up with a win-win solution for all involved.
Word on Funds
You’re probably wondering - how did I cover the cost for each deal?
- I raised it with an investor who in return got a great return of 12% per year (triple what the majority of banks offer) on his money. I then paid the money and interest back from the rental profit. The reason the input cost was £3k and £5k was because we paid each estate agent who we worked with to find the deal a fee, as well as paying for a small cost to get the place ready to be tenanted.
I’m sure you’re sitting there thinking - is this legal? That’s exactly what I thought when I first started. The answer is YES, absolutely, so long as you explain to the owner what you plan on doing with the property. At first you may not fully understand why home - owners would lease the property to you if they could just do it themselves. There are a lot of accidental landlords out there, or people who just don’t have time to worry about a property. These types of people are willing to lease their property, as they know the benefits of working with somebody who will take all the hassle away from them as well as give them a guaranteed rent.
I hope you have found value from this post. If you have any feedback, good or bad, please leave your comments below.
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