Understanding your profit avenues is as crucial as recognizing a prime real estate location in the expansive world of property investing.
Regarding buy-to-let residential property investments, especially within the ever-dynamic UK property market, there are four profit levers to keep in your arsenal.
To ensure a clear understanding, let’s delve into these levers, assuming you’re purchasing with a mortgage, as is the standard procedure in today’s property investment milieu.
PROFIT LEVER 1 – THE ART OF ACQUIRING AT A DISCOUNT
Purchasing your investment property at a discount is an integral strategy, irrespective of how minimal that discount may be. The beauty of this strategy lies in its multiplication effect over your investment’s lifetime, especially when synergized with the third and fourth profit levers.
However, do not let the lure of the discount blind you. Ensure the numbers remain favourable even without it. Relying solely on a potential discount to transform a dubious investment into a lucrative one can be risky.
Conduct comprehensive research on comparable properties to ensure you secure a genuine discount. Remember, an artificially inflated price with an attractive discount merely mirrors a good deal.
PROFIT LEVER 2 – CASH FLOW THROUGH RENTAL INCOME
For a property investor, monthly rental income is your operational lifeline, a generous gift that keeps on giving. It covers your property’s bills, leaving the remaining balance as earnings. Consider this balance your well-deserved paycheck, which can be saved for future investments or used for personal expenses.
As an investor, being well-versed with local market rents is critical. Additionally, ensure that your rents increase annually by about 3-5%, positioning you favourably for future property remortgaging.
PROFIT LEVER 3 – REAPING BENEFITS THROUGH REFINANCING
Every 2-4 years, consider remortgaging your investment properties. This exercise could lead to a sizeable income release from the additional equity generated on your property. Thanks to the steady growth of the UK property market, a property’s value roughly doubles every 8-10 years. Hence, an average annual growth rate of around 8% is achievable, leading to significant equity growth over a few years.
By extracting this equity regularly, you acquire a tax-free sum. This money could be reinvested in other income-generating assets, such as additional properties or diversified investments. Alternatively, you could enjoy the fruits of your smart investment by indulging in some personal treats!
PROFIT LEVER 4 – EXPONENTIAL EQUITY GROWTH
As previously mentioned, the UK property market’s growth can double a residential property’s value in approximately nine years. Thus, even after all your refinancing endeavours, the initial equity of 25% remains intact.
For instance, let’s take a property purchased at £100k. Here, the £25k deposit represents the initial 25% equity. As the property value doubles, this equity also appreciates, roughly doubling in value to £50k. However, remember that this equity can only be liquidated upon the property’s sale and then be subjected to taxation.
Bottom Line
These four profit levers provide diverse avenues to generate wealth from every investment property you purchase. To reap maximum benefits, ensure that your due diligence includes rigorous calculations based on these elements. A comprehensive understanding of these levers will undoubtedly turn you into a savvy player in the exhilarating arena of property investment.
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