Whenever you buy to let a residential property for investment purposes, there are only four areas in which you can make money which are commonly known as profit levers. This article assumes that you are buying with a mortgage like most real estate investors are these days.
PROFIT LEVERAGE 1 – DISCOUNT
Whenever you buy an investment property, you should always try to buy at a discount, no matter how small, as this will be multiplied several times over the term of your purchase when combined with profit levers 3 and 4 below.
But it’s important that when you do your research on your potential purchase, the numbers add up even without the discount, because you shouldn’t rely on the discount you could achieve to move the purchase into a positive position.
In addition, you should do your own due diligence on comparable properties to ensure that any discounts achieved are real and not because the price was artificially inflated to allow for the discount.
BENEFITS LEVER 2 – RENTAL INCOME
Monthly rental income is the bread and butter of every real estate investor and it’s the gift that keeps on giving. This is the money that pays all the bills for the property and the balance, after paying the bills and putting your contingency in a separate account for emergency problems, is your profit and can be used as salary for yourself or saved for future investments.
With rental income, it’s important to make sure you’re aware of local market rents and make sure you increase your rent by 3-5% each year to stay in a position to re-mortgage the property in the future.
LEVERAGING PROFITS 3 – REFINANCING
Every 2-4 years, you should look to remortgage your investment properties in order to unlock a global income from the additional equity generated in your property.
This is achieved as the UK property market grows steadily and the value of a property doubles, on average, every 8 to 10 years, so you see a year on year increase of around 8%, so that after a few years, you can see significant growth in the equity of your property.
By withdrawing this principal on a regular basis, you receive a tax-free sum that can be used for other income-producing assets, like more homes and investments, or to use some or all of them for yourself.
PROFIT LEVER 4 – EQUITY GROWTH
As mentioned above, with the growth in the UK property market, a typical residential property will double in value, thanks to capitalisation, in around nine years. The 25% interest that was initially held in the property is maintained even with the refinancing activities that will have been carried out.
For a property initially purchased at say £100k there will be a deposit of £25k as seed money equal to 25% of the purchase price remaining in the deal, so with growth in property value this 25% The initial money will still remain as the capital portion of the growth, but it will also have doubled in value to £50k, although this money can only be recovered on the sale of the property and would be taxable.
So, these are the four areas where profit can be made on any and all investment property you buy, so when doing your due diligence, always do your calculations based on these profit areas.
Remember: you make money when you BUY property, not sell it!