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How to Build a Property Portfolio with a Single Deposit

InvestorCircle > Investing > How to Build a Property Portfolio with a Single Deposit

How do you like the sound of being able to build a property portfolio with just a single deposit?

Sound too good to be true?

Well this article is going to talk you through exactly how to do that.

Now, it's not as simple as it used to be. The powers that be keep making it more difficult by way of various tax changes which also isn't helped by lenders changing their lending criteria but it's absolutely possible and absolutely happens all the time.

You just have to be a bit savvy.

It's all about recycling the capital you have and using that to generate more capital in a short space of time...ideally, instantly as you purchase.

You need to be able to invest in a property and a little while later you need to be able to pull all of your cash back out yet still own the property.

You'll then have your capital returned and ready for the next investment.

To build a property portfolio you repeat this process indefinitely until you're sitting on an empire...all built from one, measly, little deposit (and I'll even explain how that doesn't even have to be your deposit!)

 

Build a Property Portfolio: Momentum Investing

That's what this process is called.

It's a rather apt name too...as you'll soon see.

The principle behind this strategy is rather simple...

If you buy a property below the market value (BMV) then you can remortgage at a later stage based on the open market value (OMV) and pull most (or all) of your investment back out.

And while that sounds incredibly simple, there's quite a bit to consider which I'm going to discuss.

It goes without saying that the use of lending (in particular mortgages) is absolutely vital to making this strategy work.

There has to be cash tied up in an asset for you to be able to own it...the trick is to try and avoid it being your cash (or as little as possible.)

There has to be cash tied up in an asset for you to be able to own it...the trick is to try and avoid it being your cash (or as little as possible.) Click To Tweet

 

Leverage

Build a property portfolio: Leverage

I've discussed leverage before in depth but it's an incredibly important concept to grasp...particularly in this strategy.

In simple terms, it's when you use external resources (be that time, money or even knowledge) to your advantage.

Getting a mortgage is a perfect example of leverage.

You'll put in a deposit on a property, typically 25% of the value and the lender will put in the remaining 75%.

For every pound you are investing, the bank is putting in three...but you still own 100% of the property and consequently 100% of the capital growth.

The lender doesn't do this for free, of course, and takes a portion of your rental income as interest for the privilege but as long as it's profitable and stacks up as a good investment it's great.

It allows you to significantly improve your return on investment (ROI) which is the best indicator as to how well your money is working for you.

Other forms of lending could include...

  • Bridging Finance - This is another form of lending that can be incredibly useful if you need to move fast. The interest rates are typically higher than a mortgage but you can operate in less strict lending conditions as well as being able to act swiftly. It adds a degree of flexibility to your projects. As with any lending, if the numbers work for you then it can come in very handy. You only want to keep this short-term though as it can be pricey, perhaps moving on to a cheaper product, such as a mortgage, if you're needing it longer-term.
  • Private Investment - There is currently a hell of a lot of money sat in savings accounts right now earning pathetic returns. As such, there are a lot of people out there looking for better returns on their money. There is far more money out there than there are good deals and investments which makes knowing how to find great investments an incredibly valuable skill to have. If you find a profitable project that needs funding and you don't have funds of your own at that moment in time, do you think you could borrow that money from somebody in exchange for a share of the profits...resulting in both of you getting great returns? Absolutely. It all hinges on having good deals...but the caveat there is that you have to know what you're doing. You have to be thorough in your due diligence and the lender should be thorough in their due diligence on both you and the deal itself. There are ways you can add security to arrangements like that but it's a fantastic way to fund projects.

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There are many creative ways to fund projects - especially if it's a profitable one. Good deals tend to fund themselves, so to speak, as there's plenty of profit to go round...everyone wins.

There are many creative ways to fund projects - especially if it's a profitable one. Good deals tend to fund themselves, so to speak. Click To Tweet

 

Over-Exposure vs. Creating Equity

As I mentioned above, in order for this strategy to work, you need to be able to pull all of your original investment out.

I just want to flag something that's important to bear in mind.

When you get a mortgage, you'll typically get a loan for 75% loan-to-value (or LTV.)

Bear in mind that the 75% LTV can vary by lender and will also vary based on your own circumstances...but it's a pretty standard LTV so I'm going to use it for these examples.

Those words may say "loan-to-value", but in reality, you'll actually get a loan of 75% which is based on either the purchase price or the OMV...whichever is lowest.

The reason they will only lend up to 75% is to prevent you being over-exposed...which is largely to allow for fluctuations in the market.

If they lent you 100% of the purchase price and the market dropped, if you wanted to sell you would owe more than your property was worth. This is called negative equity and if you found yourself in a position where you wanted to (or had to) sell, you'd have to find that money from somewhere...or possibly end up getting repossessed.

You may remember this happening during the 2008 crash - in fact, prior to that crash some lenders were lending more than 100% LTV and often on 'self-certified' mortgages. Utter madness.

I talk a lot about building in protocols to help manage risks like this but the enforced LTV by lenders is their own version of risk management.

It's a very important point...

If you're pulling all of your cash back out of an investment, does this not mean that you're going to be 100%+ exposed?

Well, no.

Not the way we're going to be doing it.

If you're simply purchasing a property for the OMV using a 75% mortgage and a 25% deposit (borrowed from somebody privately) then you're going to be 100% exposed...and you're also not going to be able to remortgage or pull any of the cash out until the property price increases in value enough to be able to do so.

The difference with what we're going to be doing is that we're going to be creating equity.

This is a key distinction and very important...not to mention profitable.

Equity, in terms of property, is defined as:

The value of a mortgaged property after deduction of charges against it.

If you owned the property out-right, with absolutely no lending...you would have 100% equity. It's all yours...but you'll have an unnecessary amount of cash tied up in it.

 

The Figures - Standard Purchase (With Mortgage)

I'm going to run you through some basic figures to demonstrate how this strategy works.

These are the numbers for an example property, all totally hypothetical...

  • Open Market Value: £200,000
  • Purchase Price: £200,000
    • Mortgage (75%): £150,000
    • Deposit (25%): £50,000
  • Stamp Duty: £7,500
  • Additional Purchasing Costs: £2,000
  • Rental Income: £1,200/month
  • Gross Yield: 7.2%
  • Mortgage Payment @ 6% pa: £750/month
  • Costs: £200/month
  • Profit: £250/month, £3,000/year
  • Total Cash Invested: £59,500
  • Return On Investment: 5.04%

If you're unsure how any of these figures have been arrived at, make sure you read this article which shows you how to quickly weigh up an investment opportunity.

Notice on the mortgage payment above, that figure is using an interest-only mortgage. If you use a repayment mortgage, you'll gradually put money back into the property...and while that may be beneficial in some circumstances, in this instance we're aiming to keep as much of our cash out of the deal.

Notice I've also opted for a 6% mortgage rate. It's likely you can get cheaper than this but it's best to err on the side of caution. If it stacks up at the higher rate, that's great. Interest rates are only going to go in one direction from where they are currently...and that's up.

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So, let's compare these figures to the same property had we managed to acquire it 25% BMV...

 

The Figures - BMV Purchase

  • Open Market Value: £200,000
  • Purchase Price: £150,000
    • Mortgage (75%): £112,500
    • Deposit (25%): £37,500
  • Stamp Duty: £5,000
  • Additional Purchasing Costs: £2,000
  • Rental Income: £1,200/month
  • Gross Yield: 9.6%
  • Mortgage Payment @ 6% pa: £562.5/month
  • Costs: £200/month
  • Profit: £437.5/month, £5,250/year
  • Total Cash Invested: £44,500
  • Return On Investment: 11.8%

Immediately you'll notice an improvement in the returns.

It's not surprising, as you're getting the same property for a cheaper price, you're getting the same rental income with less invested and lower mortgage costs.

It's a winner all round.

But here's where it gets really interesting...

All of the above figures are based on the rental income alone. I explain in this article why your figures should be carried out in this way...but to give you the gist, you can't predict the market so don't guess what the market might do in your figures. It's pointless. Stick with what can be relatively accurately predicted based on research.

Anyway, not only will you be getting an 11.8% ROI, due to the fact that you've just bought a £200,000 property for £50,000 below the market value, as soon as that property completes you will have instantly created £50,000 in equity.

Great, right?

It's this equity that's just been created that we're going to use to be able to pull out as much of your initial investment as possible.

As the property has an OMV of £200,000...which means that, in the not-so-distant future, you'll be able to remortgage based on a 75% LTV of what it's actually worth...which is £200,000.

So, let me quickly run through the figures after the remortgage...

  • Open Market Value: £200,000
    • Remortgage (75%): £150,000
    • Original Mortgage: Paid off (-£112,500)
  • Additional Cash Withdrawn: £37,500
  • Cash Originally Invested: £44,500
  • Net Cash Remaining In Deal: £7,000
  • Rental Income: £1,200/month
  • Mortgage Payment @ 6% pa: £750/month
  • Costs: £200/month
  • Profit: £250/month, £3,000/year
  • Return On Investment: 42.86%
  • Return On Capital Employed: 6%

See the difference there? You've pulled out all of your original investment less the initial stamp duty and buying costs...which came to £7,000.

This is essentially buying a £200,000 property for £7,000.

As such, because you're earning £3,000 profit a year on a £7,000 investment, that's a whopping ROI of 42.86%!

Notice I've also included Return On Capital Employed (ROCE) which is just an indicator to show you how profitable the equity (now £50,000) tied up in the property is. You may decide that it could be better utilised elsewhere, so it's good to have an idea of this figure.

While leaving a small amount of cash in a property and pulling most out can still give you fantastic returns, as you can see above...it's still not what I promised in the title.

We want to build a property portfolio with a single deposit...which means it needs to all come out.

There are multiple ways of doing this...you could, of course, try and get a discount larger than 25%...which is possible but not always achievable.

Alternatively, or additionally, you could get a mortgage with a higher LTV. This would allow you to remortgage for a higher amount...which is another great way to do it.

Imagine if you got an LTV of 85% - there are currently lenders out there doing these products. On the above property that would be a remortgage of £170,000 which would pull all of your initial investment out...and then some...although this does increase your exposure.

As you'd be receiving an annual profit on zero invested, that's an infinite ROI. You've essentially got the property for free...and you're also ready to go for the next one.

A combination of the above works well, as does manually adding value.

If you increase the OMV of the property when you come to remortgage it will be valued higher and you can consequently secure lending at a higher amount.

This is done in a number of ways, most commonly being through works done to the property which will improve it...think refurbishments and extensions.

 

The Figures - BMV & Adding Value

It's important to work out your BMV discount based on the property in its current condition.

I've seen people trying to sell a property for about £20,000 "BMV" that needs about £20,000 of work doing to it. This isn't BMV at all...this just means that the property is about £20,000 below the average market value in its current condition. You'd actually be paying the market value for it as it's £20,000 below the average value for that kind of property.

There isn't much point buying a property for a £20,000 discount if you then need to spend £20,000 doing it up. You may as well just buy an already done-up one.

You want to be making a profit on the works you do, otherwise it isn't worth your time or energy...and it's these profits that help to offset the costs of purchase (and any other concomitant costs throughout the process).

So you want to find a property that not only is legitimately BMV, but one that also has the potential to add value and make some extra profit.

Let's look at the same property as above...

  • Open Market Value: £200,000
  • Purchase Price: £150,000
    • Mortgage (75%): £112,500
    • Deposit (25%): £37,500
  • Stamp Duty: £5,000
  • Additional Purchasing Costs: £2,000
  • Rental Income: £1,200/month
  • Gross Yield: 9.6%
  • Mortgage Payment @ 6% pa: £562.5/month
  • Costs: £200/month
  • Profit: £437.5/month, £5,250/year
  • Total Cash Invested: £44,500
  • Return On Investment: 11.8%

For this example, let's say that you've done a bit of research and you can see that if you put in a new kitchen and give the property an extension to add a new bedroom, you'll add £55,000 value to the property as well as an extra £200/month in rent.

You've had a builder look at the place and he's quoted you £29,000 for the works. He also says it'll take 6 months to complete.

All of these figures are purely hypothetical, of course.

Once the works are complete you then remortgage based on the following numbers:

  • Open Market Value: £255,000
    • Remortgage (75%): £191,250
    • Original Mortgage: Paid off (-£112,500)
  • Additional Cash Withdrawn: £78,750
  • Cash Originally Invested: £44,500
  • Building Works: £29,000
  • Holding Costs During Works: £4,575
  • Net Cash Remaining In Deal: £0...£675 additionally withdrawn.
  • Rental Income: £1,400/month
  • Mortgage Payment @ 6% pa: £956.25/month
  • Costs: £200/month
  • Profit: £243.75/month, £2925/year
  • Return On Investment: Infinite
  • Return On Capital Employed: 4.59%

You get an asset for free, essentially, with a freshly created and incredibly impressive £63,750 of your precious equity sitting in it earning you just shy of £3,000 per year...forever (plus capital growth over time.)

It's an infinite return on investment...which means it's free money!

It's an infinite return on investment...which means it's free money! Click To Tweet

Moreover, the entirety of your initial investment has been returned which means you can go on to the next one and continue to build a property portfolio.

Fantastic, isn't it?

Personally, I'd probably sell that property to release and reinvest the equity as the ROCE is on the low side but you need to remember to factor in things like capital gains tax when disposing of the asset to see whether it's absolutely worth it.

It's important to remember that I'm just keeping the figures involved here simple for the sake of brevity. You need to ensure that you always do your numbers thoroughly as well as your due diligence. Speak with a good mortgage adviser to confirm your exit strategies are viable...and always have multiple backup plans.

 

Remortgaging Limitations

Prior to the credit crunch it used to be possible to purchase below market value and remortgage based on the open market value...on the same day.

Imagine that.

It's safe to say that that didn't last too long but a lot of people made a lot of money from that very quickly.

Nowadays, lenders build in time periods after purchasing before you can remortgage.

You may have heard of the "6 month rule".

This is the generally accepted rule that you have to wait 6 months before being able to remortgage.

While this rule isn't strictly true, it does vary by lender, but it's not too far wrong.

This will slow you down somewhat but if you're refurbishing in the mean time, you won't notice it massively. You just need to make sure that you're factoring holding costs into your figures.

Even if you aren't refurbishing, the property should still be making you a monthly profit...it just means that your cash is tied up for a bit longer...

But that also doesn't mean you have to stop...remember, you can potentially borrow the money you need privately. Just factor the interest on those funds into the figures for the duration too.

As you build a property portfolio in this way, over time the value of all of these properties will continue to grow.

This will enable you to continue to remortgage again and again to enable you to keep purchasing more...which will also eventually grow and you can continue to repeat the process. A virtuous cycle of exponential growth...but remember, if you only have interest-only mortgages you'll have to pay them off one day when they expire...so make sure you know how you're going to that. Creating the equity in the way that we are will help to make this a lot easier though.

That's how you build a property portfolio.

Remember, you don't HAVE to use a mortgage to buy initially...you can utilise cash. Often that's required if you need to move quickly on a deal. It just means you'll have to tie up more cash in the deal temporarily but it's usually worth it to secure a great deal.

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Finding Below Market Value Properties

Everything I've said above is fantastic in concept...but finding BMV properties is easier said than done.

This is where the real skill lies...being able to find the best investments.

You can't just walk into an estate agent and ask for a heavily discounted property, you'll get laughed out of the door and your business card will get safely filed in the waste paper basket with all the other wishful thinkers'.

The secret is to find the right seller rather than the right property.

The secret is to find the right seller rather than the right property. Click To Tweet

You need to find people that are happy to sell their property for a discount...and this is typically people who want to sell quickly.

In sales, time and value are inversely proportionate.

If you want to sell anything quickly, you put it on sale...the same applies to property. If you are happy to wait long enough, you'll naturally get the most for it.

Selling a property the standard way isn't a quick process.

You have to get the property in a saleable condition, approach agents and then start marketing it.

It could take months before a sale is agreed and then it's normally another couple of months on top of that to actually complete...provided it doesn't fall through.

Some people just prefer the speed and certainty of selling off-market. They appreciate that they won't get the best price for it but they're happy to do so because it's swift and guaranteed.

You will have seen those "sell your house fast" companies.

This isn't just a ticket to start exploiting people by the way. The goal is to work with people to find a win-win solution that works for everybody by utilising what you know about property.

You've taken the time to read articles like this to educate yourself.

This is why I always advocate knowledge first.

You can genuinely help people out who have got themselves into sticky situations.

I recently acquired a property from a lovely lady who had been sitting on a property for a while which had grown considerably in price. She needed to raise £85,000 to purchase a business in the space of a couple of weeks and was set on selling her property but she didn't have time to sell it on the open market.

She said as long as I pay off her mortgage, give her the money for the business and pay off her debts, anything above that I could have. It worked for her and it worked for me...I got a nice discount and it's turned out to be a fantastic deal for everyone. A true win-win.

As she'd been going through a bit of a tough time recently we even agreed to include a bit of extra on top for a holiday.

It's all about sitting down and understanding what's really required and coming up with a creative solution that works for all parties.

There are countless reasons that somebody could want to sell quickly, I hear all sorts:

  • Threat of repossession.
  • Debt.
  • Inherited property empty and costing them money.
  • Relocating.
  • Want to buy a business.
  • Divorce.
  • Haunted (seriously).

I could keep going.

There's usually a problem that needs solving...you'll just need to get your creative hat on.

So, how do you find these sellers?

The short answer: marketing or sourcers.

The long answer...well that's a job for another blog post, which you can read here.

Alternatively, you can just let somebody else do all of the work for you and just reap the rewards...click here to find out more.

About the author

Founder, InvestorCircle.

Having the freedom to take entrepreneurial chances safe in the knowledge that you are getting paid by your assets engenders a unique atmosphere and a boom in creativity. A growth in entrepreneurship leads to innovation and ultimately prosperity across the board.

Our ultimate purpose is to remove as many barriers as possible to enable this to happen.

8 Responses
  1. Andrew Simcock

    Hi Adam,
    Sounds easy, but I have a feeling I may have left it too late.
    I have a high mortgage, £20,000 savings, little pension,retirement looming , is it too late to change my fortunes?

    1. Hi Andrew,

      It may not be easy but it's never too late! Colonel Sanders founded KFC well into his 60s...with the right knowledge and mindset, everything I've explained above is possible and so is much, much more.

      Your own money isn't a pre-requisite in achieving this. Generally you need three things to successfully invest in property...knowledge, time and funds. Not all of them have to come from you...that's leverage. You could have the right knowledge and time needed to find great investments and share the profits with those who have funds but lack the time or knowledge. That's exactly what we do because everyone wins in that situation. There are a lot of people out there looking for better returns because the banks offer such poor interest rates.

      Alternatively, there has never been a better time than now to start your own business. The sheer amount of educational resources online and, in fact, the ability to leverage the internet itself for your business makes life very easy...not to mention the relative ease of raising funds for a good business idea.

      As I said, the right knowledge and mindset can take you a very, very long way.

      If you accept that something needs to change then there's only one person who can make that happen for you! It just takes a conscious choice and an action plan!

  2. Nadeem Yaseen

    Hi, Very Interesting article. Can you possibly expand on the ROCE. How is it calculated and what would be a good ROCE and a Low ROCE?

    1. ROCE is return on capital employed. It's a bit different to Return On Investment (ROI).

      If you've added equity and remortgaged, your original investment left in the deal might be quite low as you will likely have pulled a lot of it out. That is your ROI. Your return on the original funds you invested in this case would potentially be quite high if you've pulled most of it back out. But it's not necessarily a clear indication of the effectiveness of your available capital.

      The point to note here is that if you get a 75% mortgage on the new value then there is 25% equity left in the deal. Some of that remaining equity may be part of your original investment but there's likely still a good chunk of the newly created equity in there too...so ROCE is the return on the total employed capital/equity and will likely be different to your ROI if you've added equity and remortgaged. It's a good way to weigh up whether the equity is being utilised effectively. You may have a really high ROI because your initial investment is almost entirely returned to you but the 25% equity sitting in the property may only be earning you, perhaps, a 4% ROCE so you might make the decision to sell that asset to reinvest that capital elsewhere to maximise returns.

      As with any ROI or ROCE, it's down to your own personal preferences for desired returns.

      Hope that helps.

  3. Sam Cameron

    Hi Adam,

    Thank you for writing this article and the others that I have read, I find them very informative and inspirational!

    I am looking to create a buy to let portfolio but am unfortunately lacking in major funds. What I would like to do is save up enough for a deposit and buy up North (Leeds / Bradford area) BMV. I plan to get a mortgage on the balance and then increase equity by refurb. I would then look to take the equity back out and reinvest in the next one. My question is, can you take equity out of a buy to let mortgage?

    1. Hi Sam,

      Thank you for your lovely comment! Glad to hear you find them useful.

      That is absolutely what I recommend above, and it's a great strategy. Buy low with mortgage, securing instant equity, then add even more equity through development and refinance based on the new value to pull out as much as you can to reinvest in the next one!

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