The Power of Refinancing
In ‘the real world’ the chances are that an investor won’t split their cash between 4 properties and then just sit back for the next 20 or 30 years. Of course, if they wish to, they can, but most won’t.
The chances are that, as they see the value of their properties increase, they will periodically remortgage and will draw out as much equity as they can. This equity can then be used to finance the deposits on other properties and so they will build their portfolios.
After a number of years they will have multiple properties. If the value of these extra properties increases then the investor can continue to pull out equity from across the whole portfolio and buy even more properties. The affect of compounding will be phenomenal.
This is a process which will take many years to become established.
If we assume that each investor gears-up to buy 4 properties initially then we can calculate that investors No 1 & 2 can both buy another property at the end of year 2, whereas investor No 3, who is enjoying capital growth at a higher rate can buy another property after year1.
Let’s look at the maths, using investor No 1 as an example.
At the beginning of year 1, he or she has 4 properties each worth £100,000.
If the values increase at 5% per annum the total value of each property after 2 years will be £110,250.
The purpose of the exercise is to draw out enough equity to finance another property.
If similar properties are worth £110,250, and the investor can obtain a mortgage with an LTV of 75%, they need to draw out £27,562, being 25% of £110,250.
Collectively the 4 properties are now worth £441,000.
The investor can borrow 75%, meaning they can now remortgage to £330,750.
They already have a mortgage of £300,000, so when this is deducted, the extra ‘over and above’ is £30,750.
This gives them enough to buy the extra property, using £27,652 for the 25% deposit on the new property. The extra cash can go towards fees or used as a cash-back or perhaps a bit of both.
Following this process, the investors now have 5 properties, all of which will gain value and all of which can then be remortgaged periodically to release more cash to use as deposits on new properties.
By regularly remortgaging all the properties in their ownership, using the released funds to increase the portfolio, and then repeating the process as often as values allow, the growth of the investor’s portfolio can be exponential.
Over a number of years the investor can go from 4 properties to multiples.
If borrowing were not a problem, then the investors could have aspirations to have a portfolio of several hundred properties by year 20.
As their portfolio grows, so will their equity. Don’t forget that each “25% deposit” they draw down doesn’t disappear, even though it’s spent on a new property or properties. It’s merely a case of transferring equity from one property to another. So the overall amount of equity in the portfolio doesn’t diminish, it keeps on growing.
Does this sound fanciful? It might do, but it isn’t. In the run-up to the credit crunch many investors followed ‘this plan’ and built portfolios of 100, or 200 properties or more in a much shorter time frame than 20 years.
This is how property investing can make investors multi-millionaires in a relatively short time.
|£ Equity after 20 years|
|Investor No 1||Investor No 2||Investor No 3|
|With gearing & BMV||1,100.000||2,200,000||4,870,000|
|With Gearing, BMV, and Renovation||1,325,000||2,725,000||6,225,000|
|With Gearing, BMV, Renovation & Re-mortgaging||Millions||More millions||Even more millions|
We can summarise this all as follows:
Carefully select a good property which is likely to enjoy at least average, or better still, above average capital growth in the future, buy it at a bargain price, buy it using finance, renovate and hold for the long-term, remortgage periodically and use the withdrawn equity to buy similar properties and build your portfolio….
This sounds a bit like a recipe – if it is then it is a recipe for success in property.
Here’s to successful property investing
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
PS. By the way, I’ve rewritten and updated my best selling ebook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to: