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Have money, make money…it’s easy right? Well, maybe it’s not quite that straightforward, but it will certainly open up a different set of opportunities when compared to not having a large sum to invest. Today, we shall consider how we could go about property investing with a starting investment fund of £250,000 or significantly more. I may even talk you out of investing in property altogether…listen in to find out why a property investor on a property podcast might do that…
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Today’s must do’s
If you have a starting investment pot of £250,000 or significantly more, then consider which strategies outlined in today’s show may suit your personal situation the best. If you want to discuss some of the possibilities in more detail, then just get in touch.
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
As you know, we have been running a mini-series that answers the question…I have £xk to invest in property, what should I do?
Today, we shall consider how we could answer that question where X is greater than £250,000…it may even be a 7-digit number.
This may sound like things are going to be easy…but is it as straightforward as: have money, make money?
Let’s find out…
Property Chatter
I am constantly hearing from people looking to make a start or change direction in property. Some of these people have some money behind them already, many do not. Occasionally, I hear from people that have rather a lot of money available to invest in property that have acquired this in a different way.
No, I am not talking about cash in suitcases dirty linen to clean and here…I won’t have any of that kind of thing I can tell you!
Often, people with a reasonable sum of money available and seeking information on how best to invest it have acquired such sums in a variety of very legitimate ways, such as:
- An inheritance, trust or gift of some description
- Business sale or profits
- Disposal of valuable assets, such as other property, shares or if you are very lucky a rare painting found in the attic!
- Bonuses and share options from employment
- Diligent savings and investment in other areas
- And so on…
Many people have seen and heard of the potential to earn reasonable sums of money from an asset that many people at least understand a little bit…property. We do all have to live somewhere and so we are very familiar with property as an asset…as opposed to a commodity derivative, currency trading and spread betting or the vagaries of large company accounting practices…such as Enron or BHS say.
There are some very good reasons why property is appealing as an asset class, such as land being a scarce resource, the ability to leveraging up our purchasing power, the opportunity to enjoy both capital gains and income and of course the long-term benefit of compound growth.
So, it makes sense to at least consider property investing if we have a significant amount of funds available to invest. As to whether we should put it all on black and invest the lot in property…I am not so certain that would be the best thing to do…which may come as a surprise to hear on a property podcast from a property investor!
Personally, not all of my investments are in property, I have some money invested in other assets as well as part of a diversified approach to investment. However, rather than entering into the realms of financial advice…I won’t do that and instead suggest that a conversation with an experienced wealth manager could be a useful thing to do as well.
With the financial advice wealth warning out of the way and assuming I have not instantly talked you our of investing in property…what can we do with a chunky amount of change of the order of £250k, £500k, £1m…or more?
I am going to start by saying exactly what I have said to people with lesser sums of money available to them…start with knowing what you want to achieve (the why and what) before deciding on the strategy (the how).
Knowing what we want and when we want it is crucial to understand before we do anything else.
We should therefore start with goals and purpose and then consider strategy later on.
OK, so having put you off with the threat of speaking to a financial advisor of some description and even stashing at least part of your cash into other investment vehicles and asset classes…let’s have a look at what we could potentially do in property with a starting fund of at least £250,000.
Here are just 8 potential strategy ideas to consider:
1. The safe as houses no debt income-protection model
Yes, this is the buy one property with cash and enjoy the rental income at an annual gross return of 5% to 7% from a single let property typically. Every £250,000 would generate around £15,000 per year in gross income when buying property with cash. If you are looking for a steady income, with a low risk profile, then this may be the perfect plan as I said before with the modest sized pot of around £150,000. You may not really care what happens to house prices and instead just rely on the income, which barring an Armageddon event is likely to be pretty reliable I would suggest. As a side note, in the event of Armageddon, we probably have bigger concerns…like survival to worry about! Any capital growth on top of the income would probably be a bonus to enjoy one day or possibly a legacy to leave behind instead.
If we select a good location with a low maintenance property, it should be fairly worry free to manage too. It’s almost set and forget.
This is a fairly secure way of protecting your capital position whilst enjoying a modest income from day one.
I guess the only problem with this is…when £15k income for every £250k in your investment fund is simply not enough. After all, the average income in the UK is around double this now and this ignores a degree of lifestyle and luxury spend that many of us would welcome and appreciate of course.
2. The steady long-term debt pay-down model
This is a variation on the safe as houses model, only this time we buy several properties with a repayment mortgage and just wait until they are repaid or alternatively throw all of our net rental profits at one property to pay the debt down to more quickly.
This would allow us to leverage the value of our starting fund up to something like £1m for every £250k in cash we begin with and so enjoy the rental income and capital growth on a much larger sized investment fund.
It is a long-term strategy to fully realise the income, but ignoring inflation, once the mortgages are cleared that initial £250k should generate the equivalent of around £60k per year as a gross income, which sounds a lot better than £15k doesn’t it?
The more risk averse can sleep easier by limiting the level of borrowing to a comfortable level.
3. The higher income property investment model
This is a variation on the safe as houses model, only this time we buy properties that lend themselves to higher income returns instead.
Whilst it comes with more management and often relies on understanding a different type of rental model, strategies such as HMOs, serviced accommodation and holiday lets are such examples.
As I mentioned, the top line rental income is often potentially higher, however, the key success criteria in all of these higher-income models is the occupancy rate and as such it starts to change the model away from a standard BTL one, into more of a hotel-type model the further away from a long-term AST we go.
Different rules and regulations come into play, as do other barriers to entry and potential threats, so it is not just a case of listing a property on Airbnb and getting rich 😉
4. Sweat the investment fund to grow income and / or equity by deploying value-adding strategies.
If you have listened in to the previous episodes in this mini-series, you should now be familiar with this idea. In short it is:
- Buy a property
- Add value to it in some way, such as by doing works or changing its use
- Then either sell it on or refinance it to release the profit
- A variation is not to sell it on or refinance it but to enjoy the increased rental income potential and leaving more equity in the property as well
This is a repeatable model, whilst also being a competitive one.
5. Climb up the property food chain
I mentioned this before too and it applies once again here. If we can acquire bigger and more expensive properties, potentially using leverage or a mortgage, then we can look to multiply our cash profits as well.
The thing is…property is a pretty expensive asset to begin with and so to really make this work, we will need a serious amount of money to take us onto a different to many people.
With larger sums in the higher hundreds of thousands or millions, consider buying small blocks of flats, mixed use property or even a small portfolio of existing properties. The economies of scale here may allow a discount on purchase to be negotiated, with lower overall transaction costs as a result of combining the purchase into a single transaction. There is the potential for concentration risk to consider however, so keep an eye on that.
6. The developer model
Once again, we have mentioned this…however as we have larger sums to play with, so too do we have larger projects. There is less competition in the sky when we fly with the eagles after all.
Think multi-unit development or conversion plots and you get the idea. Developer margins are usually higher than standard BTL / doer-upper type margins. Then again…so too are the risks!
Research, research and more research is called for here, unless you either are experienced yourself, or are enlisting the support of others that are.
7. Sell some shovels…
As the saying goes, in a gold rush, it is the people selling shovels that get rich! What I mean here is that if every man and his dog are looking to become property investors and developers there will be lots of people ‘digging for gold’. The proverbial shovel to a property investor and developer is money.
By becoming a provider of funding for other property investors, we can often generate a very decent return on our funds invested without investing directly into property ourselves.
We could invest into other property investor projects in a variety of ways: directly via a loan or joint venture agreement say, or indirectly via a crowd-funding platform, pension say.
Being at arm’s length also means we will be one step removed if I can mix my metaphors here, so once again understand what and who you are planning to invest in as with any type of investment. It is especially important here to understand where you would stand in the security pecking order as well. A first charge holder is with a capped loan to value security is in a much better position to the unsecured mezzanine finance provider to illustrate the point.
It is important to highlight that we are here in the realms of the High Net Worth, Sophisticated or Non-Retail Investor…this means a lack of protection from the financial watchdogs such as the FSA and FCA in many cases. This brings both an opportunity and also a threat…so tread carefully out there!
8. The indirect property investment model
I touched on this a little just now, when I mentioned indirect ways of backing an individual property investor.
We could extend this thinking by being even more macro about the idea. Think about a Real Estate Investment Trust (REIT), or a housebuilder or even a property services company and you get the picture.
A REIT, in theory at least, spreads their investment across a number of different property assets whether in commercial, residential or both. The manager of the REIT is taking the decisions as to where and how to deploy their investments and of course they make a charge for this activity. There are even funds that invest in other property companies to further broaden the investment pool. In both cases, much of the benefit of leverage can still be enjoyed, as many of these investments will still use debt in the underlying investments.
A housebuilder, or other property developer, is generating their profit by carefully acquiring land and building homes on it. Right now in the UK, we have a shortage of housing and Government policy has become attractive to developers of new housing. The high demand, economic incentives and gradually reducing red tape makes for an attractive proposition in some cases. For example, I hold share in Persimmon homes and have seen the share price increase recently. I am not suggesting that you rush out and buy shares in this company…it is just that right now this sector appears to be attractive. A word of warning, however, is that just as in a rising property market, the housebuilders have done well, the opposite is also true in a declining one.
Similarly, to the housebuilders are other businesses related to property. This could include for example, furniture and carpet retailers, property listing businesses such as Rightmove and Zoopla, or direct services to landlords and homeowners such as estate and letting agencies. Once again, beware of the cycles that exist here and I am reminded of one of Warren Buffett’s famous pieces of advice of only investing in what we understand.
Wrap up
There we go then, another list of 8 different alternatives that we COULD adopt if we were fortunate enough to have a starting investment fund of at least £250,000. I could possibly have mentioned a few more, although these could take us more into the direction of the sophisticated investor domain than perhaps is suitable for this particular discussion today.
Having a larger sum of money available to invest certainly does open up more types of opportunity. Of course, many of the other strategies discussed when we considered having less money available could also be considered as well, so it does provide more options to have more money available for sure.
Let’s also not forget the main trade-offs in property: time, knowledge & money. Having more money may mean that we have a deficiency in one of the other ones. Perhaps the easiest one to fix in the context of today’s show is a lack of time, as we can possibly outsource various tasks to other people. A lack of knowledge is of course also common, however, in which case it is important to do our full research before leaping into that tempting Caribbean hotel development and other potentially high-risk ventures.
I guess I cannot complete today’s show without bringing out a cautionary word of warning here. When there is money, there is often someone looking to take advantage of people who have it unfortunately. Watch out for the sharks and charlatans out there…and don’t be the proverbial fool oft parted from their money…will you?
Don’t forget to begin with your goals and purpose – each of the 8 or more different property strategies outlined would suit people in some situations more than others.
There we go then, we have completed our review of how to invest in property with different levels of starting investment funds, today looking at having more than £250,000 at our disposal. I hope that was interesting, useful or just down right motivating instead.
How about you…what options are you considering, are there many more that I failed to mention, or do you have a view on the viability of some of those that I have set out, not only today but over the past few weeks? Drop me a line podcast@thepropertyvoice.net I would love to hear from you.
The show notes, are over at the website www.thepropertyvoice.net
Right now though, I’d just like to say thank you for joining me on the show again today and until next time on The Property Voice Podcast…it’s ciao ciao!