I've heard from a few people recently who've built up some savings, or have a small amount of equity they can tap in their own home. They want to know if they've got enough to start investing in property – and if so, how they should go about it.
So for this article I've chosen a fairly arbitrary £25,000: a not-easy-but-achievable amount to save up in cash, or the kind of money many people could pull out of their own home.
Is £25,000 enough to get started? And if it is, how should you go about getting the most out of it?
Let's take a look at a few options.
£25,000 will buy you a 2-bedroom flat in Liverpool, a 3-bed fixer-upper in Grimsby, or a 1-bed flat in Rhyl. Save the bother of a mortgage, and with no repayments, pocket a decent monthly profit.
A good idea? Probably not. For a start, there will be conveyancing fees and some amount of refurb and furnishing to pay for – taking a good few thousand off your initial £25,000 pot, and meaning even a houseboat in Norfolk might be outside your budget.
There's also the problem that a property of such a low value will never be mortgageable. That means it might be hard to sell to anyone other than an investor when you want to offload it, and in the meantime your money will be stuck: there's no prospect of releasing any of the funds you've put in.
Also, properties that cheap often won't attract the most premium of tenants – or maybe any tenants at all. As a first-time landlord, you might not get the easiest of rides.
Taking out a typical 75% LTV buy-to-let mortgage boosts your buying power to £100,000 (minus legals and other fees). Most of the South East will still be out of reach, but it opens up much of the rest of the UK.
As well as greater choice, you'll benefit from leverage: a £100,000 property with a net yield of 5% and a 75% LTV mortgage will give you a 20% return on investment – or (in some areas) you could choose to spread your risk by buying two properties worth £50,000 each.
Leverage is important because at this point, you want to be growing the size of your investing “snowball” as quickly as possible by maximising your rental income and saving it up to reinvest in more properties. And, if the value of the property increases with time, you'll be able to refinance and pull out more money to add to your investment funds.
Of course, if you're going down this route, you'll need to make sure you can obtain a mortgage. That means making sure there's nothing about the property that could put a lender off (such as being above a shop, or of non-standard construction), but also that your personal circumstances will be acceptable to lenders.
To really scale your portfolio quickly, you'll want to get your money straight back out to use on your next deal.
It might be a bit advanced for a first-timer, but there are legitimate ways to pull your deposit back out in a matter of months – rather than waiting for the possibility of a rising market lifting the value of the property.
It involves using a specialist finance product like bridging, a light refurb mortgage, or a bridge-to-let loan. You'll have to find a way of adding significant value to the property, and prove it to the mortgage company's surveyor – and your £25,000 will have to cover your deposit and the refurb costs.
Read my post on “recycling your cash” here
Using a similar strategy, you can sell the property after adding value with a refurb, rather than taking your cash out and renting the property out.
It's a risky approach because you need to complete the refurb on time and on budget, and find a buyer who's willing and able to pay the price you need to secure. But if you pull it off, it leaves you with a larger amount of money to take forward into your next deal – whether that be buy-to-let or another buy-to-sell.
This is probably the riskiest move of all, but possible if you've got the skills to be sure of pulling it off successfully.
Much as it's great to start the learning process by investing as soon as you can, there's no rule that says you have to start investing when you build up a certain level of savings: having cash in the bank is no bad thing.
The important thing is not to stretch yourself too far. £25,000 isn't much when you consider that you'll have to deduct purchase fees and possibly some degree of refurbishment. Also, you'll want to keep aside an emergency fund: if the boiler blows up after three months, or the tenant stops paying rent, you need to have cash on hand to make sure you can pay for the repair or keep paying the mortgage.