Estimated Read Time: 20 minutes
Editor: Shaun Callacher
My No1 Tip To Become Wealthy From Property
'One day I asked my rich dad, "Do you think real estate is a good investment?" His reply was, "I don't know, are you a good investor?" I then asked, "What advice do you have for an average investor?" His reply, "don't be average; average investors make smart investors rich". - Robert Kiyosaki, bestselling author, multi-millionaire and entrepreneur.
Robert Kiyosaki’s rich dad has a good point. In the property industry times change, and in order to constantly strive to success you must adapt with the times. Banks change their lending criteria constantly, their rates change with inflation and the amount they lend out is always fluctuating! Tenant demand drops or rises and property prices go up or down and if you're an average investor and not prepared for the tough times, you can lose out.
The good news is that by surrounding yourself with the right people and experts in the field, when the times do change, it doesn't feel so tough.
In this post I am going to share a deal myself and my business partner completed back in 2011. At this time we were slowly coming out of a recession meaning bank lending was low, bank criteria was high, their loan to value rate was low and the economy was in a bad state. I feel it is a good demonstration of what is possible with the right knowledge and if you have a network of people who can help you along the way.
For those of you who have read my previous post, you will know when I first started I was unmortgagable and didn't have any of my own money to invest. This case study is no exception hence regardless of your situation you can still invest in property. I will explain how we did the deal step by step.
Here is the deal
Market Value (estimated from comparables & similar properties in the area): 70k
Purchase price: ￡45k
Building Work: ￡5k
At the time banks would lend a maximum 75% loan to value of the purchase price and 6 months later allow you to re-mortgage at 75% of the market value if you wish to do so. In this case we could borrow (￡45k x 0.75 %) ￡33.75k on purchasing and borrow (￡70k x 0.75%) ￡52.5k on re-mortgaging from the bank. This meant we could pull out the majority of any initial funds we had (or the investor) from the deal, providing we could get a buy to let mortgage of course and the property is suitable for a remortgage.
Step 1: How We Found The Deal.
In slow economies I actually believe great deals are easier to find due to less people being able to raise the funds to buy and more people having to sell due to bad debts. Basic economics says supply goes up but demand goes down. With this in mind we upped our search rather than stop looking. After a few dummy adverts and searches we knew the best places to look and the areas with strongest rental demand. We targeted these areas by calling up local agents and dropping leaflets. Within a few weeks we had filtered through about 100 properties. Some were not right and some didn't accept our offer. Eventually the owner of the above property accepted our offer. We originally offered a lease option and although he liked the idea, we both decided it would be best to do a straight purchase as he needed a lot of upfront cash for personal reasons. (To learn more about lease options read: Small Funds? No Mortgage? No Problem!)
Step 2: How Did We Get The Mortgage If We Were Unmortgagable?
Banks look at people's credit to see whether they are worthy borrowers or not. Back prior to 2007/8 banks would lend to almost anyone providing they had a pulse! Hence this is part of the reason a lot of people are stuck with debt they originally couldn't afford. Fortunately or unfortunately (however you want to look at it) banks have tightened up their criteria. What this means is that even for a buy to let mortgage (a mortgage you will purchase a rental house with), people who wish to invest need to have a high credit score or come up with an alternative solution to investing. If you have a low credit score you're not alone, a high percentage of adults in the UK have bad credit. A good website to check is www.experian.com. This could be due to outstanding debts, lack of proof of income (self-employed) or age.
Whatever your reason, I would suggest always look to improve your score and in the meantime use an alternative. Our alternative in this case was to use a mortgage host. A mortgage host is a person who has high credit, a steady income and knows they are very likely to get a mortgage. In return for signing the mortgage and property in their name we would offer either an upfront fee or a monthly recurring fee. In this case we pay the mortgage host who is a 35 year old male in full time work earning ￡80k+ each year, ￡80 every single month regardless of our voids and bad debts. He gets a steady income for just signing a few papers and we get our property. This is all tied up legally so we have full control and say of what happens to the property and both parties are protected legally.
Step 3: Raising The Funds.
When a good deal comes along you may not always have the money yourself regardless of how rich you are. This could be because you have put money into another opportunity or you just haven't saved enough. What is the solution? Work with other people who have the money available at that time. Raising money from others is a skill almost every successful investor, entrepreneur, business man/women has had to learn. Take Richard Branson the owner of Virgin for example; in his early days he borrowed funds from his auntie which allowed him to grow his business. Just like Richard Branson it is important you always have an exit strategy to be able to pay them back!
For this deal we borrowed the deposit and cost of work from a close friend. In return they got 1% for each month we had it for. In total we borrowed ￡15k (deposit, cost of legal’s and works) for 6 months. At this point we re-mortgaged using our host and paid back our investor using the bank’s money making the deal a no money left in deal and ultimately a infinite return in investment.
Step 4: Putting It All Together.
In order to complete this deal and to make it go through relatively hassle free, there were more people than the mortgage host and the investor involved in our team. Here is the list of a few people that helped us complete on this deal:
- solicitor (for legal’s)
- mortgage advisor (to find right mortgage product)
- builder (to carry out work needed)
- estate agent (to help find the deal)
- letting agent (to find tenants)
You see, all of the above had the same goal in common, to complete on our deal and get it tenanted. Why? Because then they get paid.
The end result:
After a few weeks of communicating with the whole team to ensure all paper work was in order, here is the end result:
Mortgage: ￡52.5k (in mortgage host name)
Total own/investors money left in deal: nil
Monthly mortgage payments @ 3% interest only: ￡1575 per year (￡131.25 per month)
Total rental income: ￡6,300 per year (￡525 per month)
Maintenance,voids & insurance per year: 10% of total rental income = ￡630 per year (￡63 per month)
Mortgage host payment: ￡960 per year/￡80 per month
Total net profit: ￡3135 per year/￡261.25 per month (total rental - interest, maintenance & mortgage host payment.)
As you can see we have a property in a mortgage host name (tied up legally) with a ￡52.5k mortgage (zero of our own money left in). After mortgage payments and other out goings each month, we make a profit of ￡261.25 per calendar month. Not bad is it considering we couldn't get a mortgage and didn't have funds?
Finer Points And How You Can Do It:
I share this property case study with you to show you what is possible and hopefully to give you ideas for your next property opportunity. This deal was done in 2011 and bank lending and laws change constantly. If you are unaware of the laws today, the answer like every other step in this example is to find somebody who can help you. Find somebody who knows what the laws are and knows how to carry out deals similar to this in your area.
My No1 Tip To Beat Any Economy:
So my number one tip in investing, if you haven’t already guessed is…… to grow your network! Your network truly is your net-worth. Just like this example proves, with the right people behind you, you really can overcome anything and ultimately become a smart investor.
To give you food for thought he is a list of ideas to start growing your network:
- Attend network meetings (particularly property specific)
- Attend entrepreneurial courses and seminars..
- Use the internet i.e. property forums.
- Tell everybody what you do and what you are looking for i.e. solicitor, mortgage host etc. (creating business card maybe a good way of doing this, you can buy cheap business cards from vistaprint.co.uk)
- Ask a mentor for recommendations.
I hope you have found this post useful and Good luck with your investing.
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