How to buy an investment property

Building a property empire

Having an investment property alongside the property that you live in provides an additional stable income. Remember that we're always looking to increase our income especially from sources other than our job:

One of my ambitions in life is that my partner and I will own a second property by the time that I am 32 (5 years time) and here is how we're going to do it...

Current investment property situation

We currently own a flat in London which we purchased earlier this year. We both had decent paying jobs that pays a bonus each July dependent on performance. Furthermore, we are tied into a fixed rate mortgage for the next five years and cannot look to move without incurring additional banking charges. As such, we are likely to look to buy another home after five years are completed.

Second home strategy: between now and the purchase

The plan over the next five years is to save 20% of our net income each month and put it into various premium bonds, crowdfunding platforms, and some equities. In addition we are both in receipt of performance bonuses each summer. The intention is to put 70% of this bonus amount directly into savings.

Making some reasonable assumptions for income growth and bonuses over the next five years I have estimated that we can probably save roughly £100,000 over that time period assuming we are able to achieve a reasonable return in this time from our savings.

In addition, I have estimated that during this time we will have paid off roughly £30,000 of the mortgage and we will have gained roughly £220,000 in paper money in the value of our property. This will equate to us owning 56% of the property mainly due to the growth in prices that we have benefited from.

Furthermore the increases in our salary over the time period are likely to result in a combined salary as of 2021 of £120,000. This combined salary would allow us to borrow (assuming a 5 times multiple from the bank) up to £600,000 for a mortgage on our next property assuming we no longer have any other mortgage debt.

Buying an investment property

The next stage is broken down into several parts. Instead of looking to sell the current flat we would call up out current mortgage provider and as them to convert it into a buy to let mortgage and hence rent it out. When remortgaging this property I would take out some of the price increases as cash. I would remortgage this property up until the point that I owned 40% equity in the property. 40% is the magic number - above this threshold we would be able to gain a better mortgage rate. As such, remortgaging as a buy to let property would release about £120,000 in equity.

Finally, we would use the released equity from the current property (£120,000) plus the money that we've saved over the last five years (£100,000) in order to put a deposit of £220,000 on a new place. 

In addition we would need to take out the full mortgage of £600,000. The reason why we are still able to take out the full mortgage on our new home is because the other mortgage is a buy to let mortgage and as a result household income is not taken into account. Buy to let mortgages assess the rental income from the property only and do not look at household income. As long as the rental income is 125% the mortgage income then you should be awarded buy to let mortgage.

If all goes to plan we should be living in a property worth c.£800,000 and have an investment property! Gosh I hope this works!

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