How to grow a portfolio of buy-to-let properties with just one deposit.
If you have big aspirations to build a property portfolio but are starting with a small amount in savings read on to see how you can hack your way to a property empire.
To purchase a buy-to-let investment property with a mortgage you need a deposit of 25% so for instance if you are buying a property at a purchase price of £200,000 you would need a deposit of £50,000. For many people, saving this amount of money multiple times over to grow a portfolio isn't going to be possible.
If you can save up enough for one deposit to buy your first property it may
be possible to purchase your next property using the equity in the first. There are two ways this can be achieved.
Firstly, you could look to do what is referred to as buy-refurb-refinance. This is where you buy a property that would benefit from work, complete the work, and then re-mortgage at the new value to pay off the old mortgage and provide a deposit for the next property. For example, you buy a property at £140,000 with a mortgage, borrowing £105,000 an putting down a £35,000 deposit. You then spend £15,000 refurbishing the property which once complete has made it worth £200,000 creating £50,000 in equity. You could then re-mortgage the borrowing £150,000 and leaving £50,000 in as a deposit, use this money to pay off the first mortgage of £105,000 leaving £45,000 to use as a deposit for your next purchase.
This option is great if you have trade experience and can do the work yourself to keep the costs down. It's essential to be aware of the cost of work from the outset as well as the resale price to ensure you are buying the property at the correct price to allow this strategy to work.
The second option usually involves a bit more patience but can be better suited to somebody put off by the idea of doing a refurbishment. For this option you would buy a property that is in an immediately lettable state, let it out and sit on it. Over time the property market has consistently risen, consistently beating inflation. Once the property value has gone up enough that you have the correct amount in equity to refinance and buy another property you are ready to expand. For example, you buy a property for £150,000 with a mortgage, borrowing £113,500 with an initial deposit of £37,500. The market increases by an average of 7% a year, in 5 years the property would be worth £210,000. At this point, you could re-mortgage leaving £52,500 in as a deposit and borrowing £147,500. You could use this new mortgage to clear the old one leaving a profit of £34,000 to be used for the next purchase.
Recycling your money like this from equity gets easier when you have multiple properties that are all increasing in value at which point this property can snowball.
If you'd like to discuss your investment plans in more detail with someone who’s worked with hundreds of investors over the last 8 years please get in touch I'd love to hear about what you want to achieve from property and what strategies might work well.