Does that sound a bit harsh?
Perhaps, but the reality is that for most of us, if we want to advance our property goals and build our portfolio or our property business, we will need to take on debt.
And, in the scheme of things, a lot of it.
Unless we have massive cash reserves of our own saved away.
But I’m guessing most of us don’t.
Even a “cheap” property is expensive, in absolute terms – it’s all well and good saying that a typical property that I purchase in the North East for about £60,000 is “cheap” compared to properties in London (and it is), but if asked you stump up £60,000 cash to buy one for yourself, could you?
And even if you could, could you afford the second or the third or the fourth? Surely we’d all run out of money at some point, and most of us quite quickly.
That’s why understanding debt, and how to use it, is so important in property.
But it even goes deeper than that.
Even IF you COULD afford to buy properties for cash, the question is, “should you?”
And as far as I’m concerned, the answer has to be a resounding NO!
Why do I feel so strongly about it? Because if you do the maths, the effects of gearing (for my purposes gearing can be defined as topping up your own [usually limited] cash with borrowed funds) means that the returns you receive on your own money invested are increased significantly.
I haven’t got time to go into it all now but just try doing the figures and seeing the difference – as an example use a property purchased for £100k using all cash and yielding 8%, and then compare it with a £100k property yielding a gross 8% but purchased using a typical 75% LTV buy to let mortgage … and work out the return on the £25k the investor has to put in.
It’s going to be a lot more than 8%. (By the way, if you missed last week’s video about the power of gearing, you can get it here
So there’s two good reasons why we need to accept debt as being a fact of life if we want to be in property.
In this week’s video above I talk about OPM – so please click the thumbnail and have a look.
Here’s to successful property investing.
Peter Jones
(ex) Chartered Surveyor, author and property investor
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:
The Successful Property Investor’s Strategy Workshop