Whenever you purchase a buy to let residential property for investment purposes, there are only four areas where you can make money which are commonly known as the profit levers. This article assumes that you are buying with a mortgage as most property investors do these days.
PROFIT LEVER 1 – DISCOUNT
Whenever you buy an investment property you should always aim to buy with a discount no matter how small as this will multiply many-fold over the term of your purchase when in conjunction with profit levers 3 and 4 below.
But it is important that when you do your research on your potential purchase, the numbers stack up even without the discount as you should not rely on the discount you might achieve to bring the purchase into a positive position.
Also, you should do your own diligence on comparable properties to ensure that any discount achieved is real and is no due to the price being inflated artificially to enable discount.
PROFIT LEVER 2 – RENTAL INCOME
The monthly rental income is the bread and butter of every property investor and is the gift that keeps giving. This is the money that pays all the bills for the property and the balance, after meeting the bills and putting your contingency into a separate account for rainy day issues, is your profit and can be used as wages for you or saved for future investments.
With rental income, it is important to ensure that you are knowledgeable about the local market rents and to ensure that each year you raise the rent by between 3-5% to keep you in a position to enable future remortgaging of the property
PROFIT LEVER 3 – REFINANCING
Every 2-4 years, you need to look to remortgage your investment properties with a view to releasing a lump sum income from the additional equity generated on your property.
This is achieved as the UK property market grows steadily and the value of a property doubles, on average, every 8-10 years so you are looking at an annual year on year rise of around 8% so after a few years, you can see a significant growth in your property equity.
By drawing out this equity on a regular basis, you receive a tax-free sum which can be used to but other income producing assets like more houses and investments or to use some, or all, of it to treat yourself!
PROFIT LEVER 4 – EQUITY GROWTH
As mentioned above, with the growth in the UK property market, a typical residential property will double in value, thanks to compounding, in around nine years. The equity of 25% that was held initially in the property is retained even with the refinancing activities that will have been carried out.
For a property initially purchased at, say, £100k, there will have been £25k deposit as initial equity equivalent to 25% of the purchase price left in the deal so with the growth in value of the property, this initial 25% will still remain as the equity portion of the growth, but will have also doubled in value to £50k although this money can only be recovered on the sale of the property and would be subject to taxation.
These are therefore the four areas where profit can be achieved on each and every investment property you buy so when you are doing your due diligence, always do your calculations based on these areas of profit.