This article aims to educate the reader on the 5 fundamentals of professional property investing specifically focused on the city of Hull in the East Riding of Yorkshire.
The topics discussed
- to take advantage of
- Return of investment
- Rental Demand
- stress tests
- Escape strategy
to take advantage of
When investing in property, you can benefit from borrowing from the bank using the power of leverage. Typically, a buy-to-let mortgage requires you to put down a 25% deposit and the bank will provide the remaining 75% of the purchase price of the property. Where else can you get them to do that? Banks will lend you money to buy property. They are less likely to lend you money to grow your business and they definitely won’t lend you money to buy stocks and shares. They understand that property remains a safe asset despite what the media says. To show you the power of leverage, we’ll show you an illustration. You have 100,000 to spend on an investment property. The following scenarios show how you can spend that money
Scenario 1: Buy 1 property worth $100,000 with all your cash
Buy 1 house without a mortgage. Deposit 100K and buy the property directly. The following year, inflation raises the price of that property by 5%. The property is now worth 105K. You now have a property worth 105K and 5K equity in that property.
Scenario 2: Buy 4 properties each worth 100K with a mortgage on each
You put an initial deposit of 25,000 on each property and a mortgage on the remaining 75,000, spending all of your 100,000 on 4 properties, not just 1 property this time. The following year, inflation raises the prices of that property by 5%, the same as in scenario 1. Each property is now worth 105,000. However, you now have 4 of them, so benefit from the 5K equity in each. So you now have 20K equity instead of the 5K in scenario 1. You have still spent the same amount of money but you have benefited from the leverage of the Bank’s money.
2-3 bedroom properties in Hull can be purchased for between 40-100K. They offer an excellent opportunity to leverage your cash
Return of investment
The return on investment is defined below.
Return on investment = Gain on investment – Cost of investment / Cost of investment
In basic terms, how hard your money is working for you. You can choose to invest in a new business venture, stocks in the stock market, or property. Each channel of wealth creation has its own return on investment along with its associated risk. As a professional investor, you need to weigh your risk appetite against the potential return on your investment. Let’s review the 2 leverage scenarios and examine the return on investment
Scenario 1: Buy 1 property worth $100,000 with all your cash
The return on investment (ROI) is 5%, for example, 5K/100K
Scenario 2: Buy 4 properties each worth 100K with a mortgage
Return on investment (ROI) is 20% eg 20K/100K Hull is a great place to start your real estate investment career due to the great return on investment. The reason is that property prices in Hull are among some of the cheapest in the UK. Therefore, the cost of your investment is lower. This means your money can’t just go further, ie. You could buy more properties, but each of those properties will go up in price, and if you’ve leveraged your investments with mortgages, your return on investment will be even higher.
Hull offers a better return on investment than more expensive UK cities because property prices are lower
Rental Demand
Of course, an investment property only becomes an asset if you can rent it out. If you can’t, that asset quickly becomes a liability. A quick reminder about the definition of assets and liabilities
Active = Puts money in your pocket
Responsibility = Take money out of your pocket
Therefore, to ensure that your investment property remains an asset, you must be sure that it is located in an area of high rental demand. Hull is a hidden gem of a city. It is the gateway to Europe through the ABP and P&O Ferries ports and therefore has a driving export/import industry. Siemens is to locate a large wind turbine manufacturing plant there to cement its status as a center of excellence for renewable energy technology. It is well served by the M62 and has a large manufacturing base. The Deep, the UK’s only submarium, has also established itself as a tourist destination. The University of Hull continues to grow and has a healthy student population of around 25,000. However, due to relatively low wages in the region, the affordability of buying a home is low. Consequently, this has led to a high demand for rental properties.
The following postcodes in Hull are great rental areas. HU5 is closed to the University for students. HU7 and HU9 are ideal for families.
Financing offers
If your goal is to own 10, 20, or 30 properties and supply the deposits for each one, you’ll soon run out of your own cash, so how do the pros do it? Well, the answer is other peoples money (OPM). They buy their properties at the right price. Money on property is earned when you buy the property, NOT when you sell it. Buying at the right price, meaning below market value or BMV as it’s called, allows you to refinance with the mortgage lender at open market value and withdraw most of the cash from your deposit. This allows you to recycle your cash pot to purchase another property. However, in this market, the Mortgage Lenders Council has imposed a 6 month rule that prevents you from remortgaging unless the property has been held for at least 6 months. If you can demonstrate added value, then you have a better chance of achieving the valuation you want. On average, property prices double every 11 years. This means that a 100K property is worth 200K in 11 years. When you sell this property, you pay off the original 100K mortgage and then make a profit of about 100K. This means that if you bought 2 properties, you can sell one and pay the mortgage on the other and still have 1 property with cash flow without a mortgage. Using this principle, it can be expanded to any number of properties you wish to purchase. Getting a mortgage can be difficult in this current economic climate, but it’s not impossible. The money has not disappeared. It’s just in different places. The trick is finding the people with the cash.
buy cash
Some properties in need of renovation in Hull can be bought for as little as 20K. This means you have to buy them in cash, as mortgage providers generally won’t lend below 40K. It also means you can move quickly and not have to involve mortgage lenders and appraisers in the purchase. Once you’ve renovated the property, you can have the property appraised by an appraiser in order to place a mortgage on it and get most, if not all, of your cash back.
Deposit Financing
You can help people with cash earn more than they get at the bank by offering them a higher interest rate for borrowing their money to finance a deposit. You can then return your money after refinancing.
mortgage host
If you can’t get a mortgage, find someone who can and offers to share the cash flow of a property. Get a lawyer to draft an agreement between you and the host. Because property prices are relatively low in Hull, you are more likely to find investors willing to lend you 10-15K for a deposit. The risks are reduced as the amounts borrowed are smaller. Once you have made 1 deal with an investor and made them more money, they will be happy to make another deal with you.
Hull property prices are low, leading to less risk for cash investors when financing a deal.
stress tests
With any of your investments, we recommend that you stress test your investments at higher interest rates. While we enjoy historically low interest rates, it’s tempting to buy into many real estate deals. However, interest rates only have one way to go and that is up. Prove that your investment still produces cash flows at higher interest rates so that it remains an asset and not a liability.
Test your investments at higher interest rates. Hull investment properties maintain positive cash flow at interest rates of 8-9% at current rental values.
Escape strategy
With any investment, it is vital that you know your exit strategies. With an airplane, knowing where the exits are is vital in an emergency. Similarly, with investing, you need to know where your exits are in order to get out of the investment deal in an emergency.
sell your investment
If for any reason you need to get out of an investment, you can sell a property. The properties that will be easiest to sell will be the most popular type in that area. If you own an expensive, executive single-family home in a desirable area, the number of buyers is reduced and limited to residential buyers. However, if you have a cheaper investment property, you can sell it to both investors and residential buyers. This is important when considering your investment.
Know at least 2 exits when entering into an investment deal. There are many investors in Hull and due to low prices they are also affordable for residential buyers.