I received this question from one of my clients. It is actually one of those questions that most people ask at some point especially as they build their portfolio and are waiting for the market to turn:

'I have a question which you could use as a blog as it is something I have been thinking about. As you are building your portfolio by using the increasing/built capital in your portfolio to fund more purchases and/or free up 2 years cashflow for your existing portfolio - how are you going to make any real money/become rich? Aren't you forever dipping into your capital by remortgaging and therefore increasing your mortgage amounts and reducing your capital (profit)?'

Cheers Sav

It's a great question and one that you have to ask if you are really serious about becoming an investor. After all most of the properties you are likely to buy through a property club will be cashflow negative. This normally shocks most people as they thought the banks require 125% coverage and therefore it should cover everything and make you 25%. This is not the case.

The UK market is constantly changing and possibly the biggest thing that I have seen happen recently is the rentals received remaining stagnant or in fact decreasing while property prices increased. Don't worry too much as this is the exact environment that Australia, New Zealand and the US have experienced. It shows a maturing market.

Negative cashflow is here to stay with us (short of some drastic changes from the government - I said changes not back-pedals and u-turns which seem to characterize the current politicians.)

So back to the question at hand - how do we become rich?

Consider this example - You purchase 3 flats all worth £100,000 and they require £100 per month or £1200 per year. So you need to subsidise the portfolio by £3600 per year. Let's assume that rents and mortgage payments all stay the same over the period so that all you have to subsidise is the £100 per month on each property.

Now the biggest assumption that we make in property is that it will double every 7-10 years. So let's assume that it takes 10 years this time. That means that you have funded the properties to the tune of £36,000 over the 10 years. Now the properties should have gone up by £300,000 (3 properties x £100,000) making you a profit of £264,000 pounds right?

Well, not exactly - and this is were most people lose the plot initially. Yes you have made that money (let's forget taxes, etc right now and focus on strategy). It is highly unlikely that you are going to sit on the 3 properties for 10 years. This is where the real power of leverage and compounding takes effect.

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Assume that you kept the properties for 2 years and funded the £7,200 (2 years x £3600) required to hold the properties. You have properties worth £300,000. Let's say over the period they go up by 5% per year. So they are worth £315,000 at the end of the first year and £330,750 by the end of the second year.

Assuming you re-mortgaged now you could take up to £281,137 (£330,750 X 85%) minus the previous mortgage £255,000 (£300,000 x 85%) So you are left with a net total of £26,137 then you need to subtract the £7,200 you have invested so far and I also suggest you take the £7,200 for the next 2 years. This leaves you with £11,737.

Now this is the decision time - Do you take the money and run? or Do you reinvest the money into another property?

Only you can answer this question (with the help of your Portfolio Manager).

If you spend it well then you have another 2 years to wait until you can potentially re-mortgage again.

If you reinvest it, well, now you have another property worth £100,000 and your portfolio is worth £430,000. Assuming it goes up 5% again for the 2 years then you will have a portfolio worth £474,000 and a mortgage of £366,137. So let's re-mortgage again and you can take out £402,900 leaving you £36,763 minus £2,400 you required to hold the property (remember you allowed the cashflow for the 3 already so you only need to allow for the extra property) and the £9,600 for the following two years (4 properties x 2 years x £100 per month). This leaves you around £25,000.

Again your decision is spend it or invest it?

So let's say you decide to do a bit of both. You spend £10,000 and reinvest £10,000 and the other £5,000 you just put aside for a rainy day.

So you purchase another £100,000 property and the cycle repeats, and repeats and repeats. Over time you begin to be able to take more and more money out in the form of re-mortgages (and sales), you could even allow the mortgages to stick where they are and allow the rent to increase to create some cashflow for you.

Now the only caution that I will tell you is that if you keep re-mortgaging over and over you will eventually be in a situation once you do sell the property that the Capital Gains will be more than the equity you have in the property. This is something that a qualified Portfolio Manager will be able to explain to you.

Now a couple of important things to consider:

1. If property doubles every 10 years it must grow at a rate above 9% per year. It doesn't do this every year but rather cycles, so some years it will stagnate, other years it will grow at 15%.


2. As you invest in more property you will begin to have more large sums of cash available. This can be used to fund the cashflow on the property (during the stagnate times) or it can be used to fund your growing lifestyle.


3. I am a big believer in never ever selling so after 10 years you ideally renew the property or if you must sell it, replace it with a new property. "Never" selling means that the capital gains never becomes an issue for you.


4. As your portfolio grows you will realise that the more and more you grow your portfolio the less and less importance you put on individual properties in your portfolio and the more and more you put on the value of the portfolio as a whole.

So let me answer the question about being rich. The true question is how many properties you require and how much your portfolio needs to be worth in order to fund your rich lifestyle.

If £10,000 per year is enough then perhaps 3 properties is enough but if you want £100,000 per year then perhaps you will need 10 or more. In this case give our team a call. We can help support you in the right direction to achieve this.

Live with passion,

Brett :)

PS. Sav is one of my investors that got off to a shaky start with his first 3 deals falling over for various reasons. 12 months on and he now has exchanged or completed on 4 properties and the portfolio value is over £500,000. Imagine in 7-10 years. That portfolio will have made him over £500,000. Congrats Sav and looking forward to many more.