There are two principles that I am trying to get across, both of which are crucial for any property investor.
The first is that a key tool you can use to accelerate the growth of your business is the efficient, but I stress considered, use of gearing. The reason why many investors have been able to build large, profitable property businesses is by realising that any equity they have is an asset to be used, and that if it’s not used, it’s a waste.
This is something I have always agreed with in principle but in practice I have sometimes been a bit tardy in withdrawing equity. In my own mind I had set a minimum level of equity in a property before I felt it was worthwhile filling in the application form, paying the lender an administration charge, paying a valuation fee and then making arrangements with the tenants to let the valuer in to inspect. Unless there was at least £20,000 to withdraw from a property I didn’t bother.
When I was discussing this with my mortgage broker one day I realised that some investors were taking this very much more seriously than I was. Other clients of his were prepared to pay administration charges and valuers fees that must have been around £600, based on what I have to pay my lender, in order to release equity of as little as £5,000 per property.
Don’t get me wrong, I’m not trying to give the impression that I think £5,000 is a small amount of money but it is quite possible that a valuer could down value even a cheap property by £5,000 and still be within a reasonable margin of error. So what I’m saying is that it seems like a relatively small amount of money to be chasing after. However, if you have a portfolio of fifty properties and you can withdraw equity of £5,000 from each, that’s £250,000. If that were used for the “deposits” on new purchases it releases purchasing power of over £1m. So across a portfolio all the little “bits and pieces” add up and are very significant.
Even if you do not have your own home now, one day you will. Similarly, you might not have bought any investment properties but one day you will. Or you might already have investment properties but haven’t fully considered the gold mine you are sitting on in the form of unused equity.
Whichever applies to you now, you should be aware of how powerful taking that equity out and then gearing up is, and include its use within your planning.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor