What are you investing in at the moment?
The answer doesn’t need to be a type of property, a method, or even an area, it’s more likely these days to be a cash-flow return.
If you’re looking at a deal how are you deciding whether to invest or not?
Do you check the location? Perhaps you want to invest close to home!
Do you divide your cashpot and diversify to make sure you’ve covered all eventualities?
Do you look for cash-flow to give you financial freedom, or to give you a few more luxuries in life?
OR are you looking for the deal that ticks all 4 boxes?
Investing through others
What is going to persuade you to part with your hard earned cash?
Rather than thinking of the return you need for £50,000, start with £5,000.
If you could put £5,000 into the bank you would get about 3% (Aug 2011) or slightly more if you’re prepared to leave it in for 3 to 5 years.
Let’s be generous and allow 5%.
£5,000 invested at 5% for 3 yrs = £250 p.a. or £750 over the 3 year term.
If you lend it to another investor to purchase property and get a restriction (RXI) or some form of security against a property, and a loan agreement you might attract 10% to 12% interest rate.
£5,000 invested at 10% for 3 years = £500 p.a. or £1,500 over the 3 year term.
But let’s face it, how often are you going to be given the opportunity to invest such a small amount with an investor? They are usually looking for £20,000 to £50,000 and often more.
So, if you invest £20,000 at 10% for 3 years = £2,000 p.a. or £6,000 over the 3 year term.
£2,000 p.a. = £166.67 per calendar month (pcm).
Incidentally £50,000 invested at 10% for 3 years = £5,000 p.a. = £416.67 pcm.
Do it yourself
Let’s compare this to investing for yourself, choosing the property and having it managed for the same period.
First of all, the amount you will have to invest starts higher.
e.g. £80,000 property purchase price with 75% LTV (loan to value) lending means you have to invest:
£80 insurance (£1:£1,000)
Plus other expenses
You might be able to attract £100 to £200 per month from a single rented property.
£200 per month = £2,400 p.a.
over 3 years this would be £7,200, although it would be unusual to hold a property for just 3 years.
£7,200 of course is not Net so you still have to take off expenses such as maintenance or tenant find expenses.
The bonus is that if you hold for the long-term and there should be a capital growth on the property.
Any capital growth is IRRELEVANT . Yes that’s right, irrelevant unless you
a) Sell the property and lose the cash-flow
b) Re-finance, increase the lending and reduce the cash-flow.
You would need to make sure that any lump sum recaptured from the sale or re-financing replaced (as a minimum) the cash you have released.
So if you are expecting to
- invest £20,000,
- and get enough cash-flow for financial freedom;
- double in a short space of time because of capital growth;
- draw the £20,000 back out within a short period (1-2 years); without much investment on refurbishment of the property or a high interest rate capital growth market,
You ARE looking for the Holy Grail.
What is realistic then?
Are you swayed by how much you NEED each month to replace your income?
- How much do you need each £10,000 to earn for you?
- How long will it take you to save each £10,000?
- How much will it cost you to borrow £10,000?
Make sure you know the answers to these questions as they will mean you don’t need to look for the Holy Grail because you’ll know which investments tick the boxes for you.
It will mean the difference between whether you wait for that PERFECT deal, or you JUST DO IT!
If you want to find out more then request my free special report on refurbishment with less stress, in less time and within budget – you’ll need to know this strategy for high cash-flow investing in the current market.
email Yvonne.Emery@JustDoProperty.co.uk for your copy.
Article provided by Yvonne Emery.