What is it that attracts the everyday investor to property investment? Is it that they have watched one of numerous property investment shows on television and think, “Wow, these people just made $60k in the 30 mins it took me to watch this show!!!”, have a friend who currently makes good money in property, or even that they have worked out the profit on their own property and realise the money to be made in property.
Whichever it is that has directed them this way, the driving force is always financial freedom and having a better life with more time for themselves without having to run a business or work. These investors are right to make this leap of faith, but it’s not as simple as seen on TV.
Investing in property is a great way to make money, but it also is work and it is most definitely a business which needs to be ran accordingly. Researching the correct location, getting the right price, working out the soft costs (financial costs, legal costs, etc.) – these are all very important aspects of protecting your investment. You must also understand the right way to sell a property so that it doesn’t sit on the market for too long, eating into your profit. If you are utilizing the property as a rental you must find the right tenant who will actually pay the rent.
Over the many sites I have been involved in I can tell you that as a property investor you will come across at least one of these issues at one point or another. If you are lucky you will come through these relatively unscathed, learning from these experiences to put procedures in place so that they don’t happen again – or you’re better prepared if they do.
These lessons can be costly and mean months of eating into profit to live, and in some cases, eating into your capital to live. This can have devastating affects over time – if you have a run of lessons it can mean an uphill battle to get back into profit.
In my years as a property investment adviser I’ve spent a lot of time with property developers and landlords to offer them advice on how to overcome these issues, and in some cases, showed them how to stop these things from happening in the first place. I’ve developed a comprehensive formula to show these property investors the difference between their Yield and their ROI (Return on Investment), their LTV (loan to value) and LTC (loan to cost).
What I found for many of them was that they had too much money tied up in one type of property or area. The clever ones took my advice to diversify their portfolio and mix up the types of investments, types of properties, and locations. Some simply did not.
The investors who did not heed my advice found it much more difficult to overcome the economic crash of 2008 and it was harder for these clients to weather the storm and come through relatively unscathed. A lot of this was due to inherited values of lending verses owning in full and these investors not knowing where they were on the investment road. So much so that I started offering webinars to advise investors about how they should be approaching property investments to not get caught up in these outdated beliefs. This is one of the webinars that I still find incredibly valuable today.
A diverse portfolio and investing loaned capital over your own personal dollars is key. As long as the interest you are earning on this funding is more than the lending interest then you are effectively making money on other people’s money. Use your own assets as collateral so everyone is happy.
For instance, if I have a client who has six properties currently worth $2M U.S. total, and these properties are currently let at a gross amount of $180,000 per year (9% gross), after all costs (rental agent costs, property taxes, etc.) the net may be more like $120,000 (6% net). This investor has six properties to deal with, six tenants, and six lots full of issues, and earns $120,000 per annum for this. On top of this they will have to contend with unplanned maintenance costs, which come with these properties.
Now let’s say that investor does not believe in lending, so has worked the portfolio’s lending down to 50% Loan to Value. So now, on their $2M of property value they have lending of $1M, which means the investor’s capital is just $1M in total. If this lending is costing them as little as 3%, they are paying $30,000 per year. So the net profit after lending is now $90,000 per year, which is a return on investment of 9%. This is a case where they are trying to reduce their lending to reduce their interest rate, as they believe that this saves them money.
In this situation I would suggest the following – let’s increase the borrowing from $1M to $1.5M, which may increase the interest rate from 3% to 3.5%. Now their whole portfolio lending is costing $52,500, which means on the six properties they are only making an annual profit of $67,500. However, they now have $500,000 in the bank, which can be invested in alternative diversified funds or REITs (Real Estate Investment Trusts). Of course you must conduct your due diligence and look for companies with good asset backed investments and a positive track record, but these are a great addition to a portfolio. They do not require self-management or additional maintenance.
If you invest in these alternative property funds you can have the whole of this $500,000 be making you additional money with no additional work. You still have the six properties to deal with but now you could be making as much as an additional 17% (last five years’ average return on an investment fund I am involved in) on this $500,000. That’s an additional $85,000 added to your annual income and your work load has not increased, resulting in a net profit over the whole of your $1M capital of $152,500. That’s an increase of the return on investment from 9% to 15.25% per annum. This also provides a buffer if there are issues with any of your portfolio so that you don’t eat into your profit or indeed your capital.
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