Property portfolio strategy
Building a property empire
None of us will have failed to realise that the current economic climate caused by the financial crisis of 2007 have meant some radical changes. We have seen a big change in politics, austerity measures, the euro zone crisis and a squeeze on capital.
Gone are the days of unlimited borrowing. It used to be the case that many consumers could qualify for mortgages up to 120% of the value of the property. Unsurprisingly, this madness has come to an end!
Making money from property - the old way
I talked to a few businessmen who operated property portfolios in those days of madness. It seemed to me that the way to make money from property was as follows:
1. Build a deposit for your first property
2. Move in to your first property using an interest only mortgage extended for as long as possible.
3. When you have built up equity in this property (which used to be the assumption) then release this equity by remortgaging
4. Use the newly released equity to put down a deposit on your first investment property
5. Get an interest only buy-to-let mortgage extended for as long as possible
6. Go back to step 3 to release more property and follow steps 4 and 5 for your second investment property
7. Continue following step 6 to grow your property empire as you gain more and more equity
This property portfolio building model was thought to work for several reasons:
1) it was assumed that property prices would go up over the long term
2) as the mortgage term came to a close you could always remortgage the property or sell it
3) tenants were easy to come by to and so the interest would be serviced
The problem with the old property portfolio model
I am no longer comfortable with this model. I want to build a portfolio of assets, not highly levereged debt! The problem with the old method is that if there is a sudden drop in house prices you are stuck with a lot of assets in negative equity. Furthermore, should the mortgage be up, crystallising losses becomes a reality.
The new property empire building method: the safe way
My new investment method attempts to circumvent the possibility or at least reduces the probability of being stuck in negative equity. Although, more painful on short term cash flow my method aims to pay off mortgages as quickly as possible.
The new method works as follows:
1. Rent/ live at home whilst building up a deposit
2. Once you have a deposit that provides you with one of the best possible mortgage rates go and find a property to buy to live in
3. Only borrow as much money as you can realistically afford to pay off between 5 to 10 years
4. Enjoy the property until the mortgage is paid off in full, whilst building up a new deposit in the meantime
5. Move into your new property using the same ideas as in section 2. Rent out the first property, looking for long term tenants ideally a family paying a 5%-7% yield. The extra income should help you to pay off your new property that you are living in, relatively quickly 5-10 years.
6. Follow sections 4 and 5 again.
7. Repeat sections 2 to 5
8. Now you have one property that you live in and 3 investment properties. You are ready for retirement!
The problems with building a property portfolio
One of the main concerns an investor may have with this technique is that it is inefficient. You don't receive any benefits from leveraging or from tax. But who said building a fortune was going to be easy or quick!? At least this method is safe. Thoughts?
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