CategoriesInvestor Advice

In our latest podcast, Track Capital’s directors, Nick and Tobi, discuss how to invest £50,000 in property. You’ll learn about the best way to turn £50,000 into a growing property portfolio, with clear and comprehensive explanations of the strategy to employ, factors to consider, and potential financial gains.

Spotify users can listen to the podcast using the audio below, or alternatively check out the episode listing on our Anchor page to find links for other streaming platforms. For users who prefer to read, rather than listen, we have a full transcript available below.

Transcript

[Tobi]
Welcome to the Pure Property podcast where we talk about all things property and property investment.

The aim of the podcast is to provide bitesize chunks of our industry insight and knowledge to help you invest intelligently.

So, it’s the first podcast of the new year. It’s a little bit different, usually Nick and I are in the office facing one another but today, due to lockdown, we’re actually doing this remotely!

[Nick]
Yes, a bit of a change for us but hopefully all the technical issues work out well. It’s good to be back doing a podcast for 2021 and hopefully there are plenty more to come this year.

[Tobi]
It’s a good one to kick off this week as well. We’ve had some promising news despite being in lockdown, with the covid-19 vaccine being rolled out and the Brexit deal announced. So hopefully we’ll be back to some form of normality sometime soon.

[Nick]
Certainly, a lot of people will be coming back to the property market now. The Brexit trade deal was a big confidence boost, creating a bit of certainty and a pathway for how the UK’s relationship with the EU will unfold. And of course, you’ve got the vaccine roll-out as well.

So whilst not every investor will be diving back into the property market, we’ve certainly seen an uptick in enquiries – especially from overseas. Looking forward, hopefully that will continue.

A lot of investors will be thinking, “I’ve got this capital set aside, I’ve got a deposit, I’ve got £50,000 to invest – now how do I actually go about that?”.

And that’s what we’re going to discuss today: how to invest £50,000 in property and get the most from your funds.

[Tobi]
We looked at the average pot of money most investors have and that’s roughly around the £50,000 mark. So if you’ve got a similar budget, you’ll learn how we’d invest it.

Let’s start with why you should invest your £50k in property because there are plenty of things you could invest your hard-earned cash into.

There are a few reasons we advocate investing in property above all else.

First, you can leverage using a mortgage, which minimises the risk and means you can put in less of the money needed. For example, if there’s a property worth £100,000, with a mortgage you’d only need to put in £25,000 as a deposit to purchase the property. So you don’t have to stump up the full £100,000. Of course though, that does mean you’ll have a mortgage on the property, so you need to bear that in mind as that comes with its own risk, although that said lenders are very good now with their strict criteria and stress tests, so if they’re happy to lend on a property it can be a confidence boost.

Another reason is that property has a proven track record. We’ve got years and years of data going back a very long time, and the one thing you can always see is that property is very robust over the long-term and there’s a consistent, upward trend in prices. There are peaks and troughs, of course, but over the long-term, prices are always steadily increasing.

[Nick]
I agree with that. It’s one of the fortunate things about working in the UK property market, it’s one of the most well-established and robust systems around.

It’s really important to take a medium to long-term view of the market – not how it’s going to perform over the next year or two, but how it’s going to perform over the next 10-15 years, and how has it performed over the past 40-50 years.

It’s almost comparable to the stock market. When people look at the stock market, they get the impression that it’s volatile and there’s lots of ups and downs, with companies going through successful phases and then downturns depending on millions of factors. However, if you look at the FTSE or the S&P over the long-term, there is an upward trend there.

[Tobi]
Right, and then a third reason for choosing to invest in property is that it provides monthly income, which can be a passive income stream.

And there’s the capital growth factor, as we already touched on in regards to prices. Capital growth can be an excellent way of recycling cash or building the pot back up to re-invest again in the future.

And finally one more factor, which is linked to supply and demand, is that land is finite. There’s only so much we can build, so that supply is always going to be limited to some extent – and that will affect prices.

In brief, those are the advantages of property investing. To summarise:

  • You can use a mortgage
  • Property has a proven track record with a consistent upward trend
  • It provides another source of monthly income
  • Capital growth can enable re-investment in the future
  • Limited supply of land means prices should always increase

So, now we’ll focus on how we would assist an investor looking to spend £50,000 on property. We are going to focus on a specific type of investment, based on the fact there’s a limited pot of £50,000. And what is that type of investment?

[Nick]
There are plenty of property strategies out there: buy, refurbish, refinance, rent-to-rent. There’s plenty of things that can be done, but ultimately we want to consider how we can generate the strongest return on a £50k investment in the medium-to-long-term.

So with that in mind, we recommend investing your £50,000 into an off-plan property. Go for a city-centre, residential apartment in a high-growth city where we’re likely to see good capital growth and appreciation over the long-term.

One of the main reasons we recommend this approach is because with off-plan property, you have the chance to buy-in at a discounted price. You’re buying at base pricing, direct from the developer.

In addition, if you’re working with a quality partner that sources developments and has a strong working relationship with developers, you should actually be able to secure property at a discounted rate even in comparison to other off-plan projects as well.

So it’s a really good opportunity to get into property at a much lower price, which will usually far outweigh any rental income that you may get from buying a ready-to-let property.

[Tobi]
It’s instant equity as well. As people say in property, it’s the price you buy at, not the price you sell at, where you make your money.

[Nick]
Absolutely, buying in at a discounted rate means you already have a margin of profit.

And what’s more, you have the chance to benefit from any capital growth during the construction period. So ultimately, what you’re doing is putting down a deposit during construction, but gaining from the growth of the full property value despite not having paid the full amount. That’s going to put you in a really strong position to get good appreciation over the long-term.

Another factor to consider for off-plan too is that you get the pick of the apartments – when we’re buying apartments we want to go for something unique to minimise void periods, increase tenant demand and get good resale values. That unique factor could be a balcony, corner views, a duplex apartment, etc.

[Tobi]
The earlier you get in, the more choice you have. If you’re looking at a block of apartments, if you get one with a unique factor, it can help with both sales and rental demand and you can charge a premium on both.

One more aspect as well is that you have the chance to buy parking spots, which can make a huge difference for a city-centre property.

[Nick]
That’s why it’s worth focusing on off-plan property and why we suggested that specific strategy for the £50,000 budget. You could buy a freehold, 3 bedroom terraced house, for example, there’s going to be thousands of them available on the market for investors at any one time.

Whereas if you’ve got a unique apartment, you’ve got parking, you’ve got proven tenant demand, it’s going to be really appealing in the long-term.
So it’s all about buying in at the discounted rate, then increasing that value from the factors we just discussed.

[Tobi]
That’s a very good point. If you look at busy markets, such as we’re experiencing in the north with Liverpool, Manchester, and Leeds, you have to remember any houses or secondary-market apartments already have a lot of eyes on them, so the demand is massive and that pushes up the price. You end up getting into bidding wars, which can cause you to overspend.

Instead, off-plan properties have less eyes on them, so you’re not getting caught in bidding wars and you know what the price will be. It’s a lot more straight-forward.

[Nick]
A reason for that, which I don’t think many investors are aware of, is that developers place restrictions on marketing their projects. You can place generic adverts on Google or Facebook, for example, but for the majority of developments we market, you can’t actually put adverts on places like Rightmove and Zoopla, which are huge property platforms. But that gives us the opportunity to limit the extra competition.

So we’ve discussed plenty of advantages of off-plan property there, but ultimately the main thing is that off-plan has the best chance of delivering the strongest possible return on your original £50,000 budget.

With that in mind, where should you buy?

[Tobi]
Location is going to be very important, especially with a limited pot of money because we want to find somewhere with strong capital and rental growth potential.

If we had an investor in front of us today, our top two recommended locations would be Manchester and Liverpool. The reason we lean towards those two cities is that we’re really focusing on the capital growth aspect – so we’re looking at places with a good track record for growth from market data.

Research is key for finding a location though. We always do a lot of the research for our clients, but we still recommend they do their own as well. For example, if you look on Zoopla, recently they’ve been saying Manchester has had a 27.18% increase in house prices over the last 5 years. That’s just over £43,000 as an average, which is excellent.

There’s also plenty of regeneration in the city too, which is a great fundamental to look for as it can indicate further growth in the future.

We can also look at data like the home price index. In their November 2020 report, Hometrack, for example, stated Manchester is seeing a 5.7% year on year growth.

So again, not only can we see it’s had good figures in the past, but it’s carrying on too. That data gives us the confidence we need to say this is a good place to invest the £50,000 into.

[Nick]
The reason we’re focusing on the capital growth in these cities is that we benefit from the capital growth, then we can withdraw the equity we’ve built up, then recycle those funds and put them into another property investment.

The alternative is to look at cheaper cities, the likes of Stoke, Hull, Bradford, Burnley, for example. For the £50k budget, you may even be able to secure two properties in those cities, but it’s going to take you really long to build up equity in the property because the capital growth is more limited in those cities. Whilst you may get a higher rental yield in the short-term, it could take you longer to build a portfolio.

[Tobi]
Good point. Yield is obviously great, but it drip feeds in and it can take a while to build up your pot again. That isn’t a bad thing, it’s good to look at yield because that’s a monthly income, but if you want to grow a property portfolio then the best way of doing that is getting a big chunk of money you can draw out of a property. And the quickest way to do that, in this instance, is through capital growth.

[Nick]
Now, when we’re looking at what to buy specifically, in most cases what we say to people is to go for a city-centre property, where there are investment fundamentals: major employers, big education institutions, strong transport links, and so on.

If those things are in place, we know the demand for the property is probably going to be there. And if it is in the city-centre, it’s more than likely going to be an apartment.

So we recommend to go for city-centres, and go for a high-quality apartment that’s going to be in high demand.

[Tobi]
And that means demand in both rental and sales. That’s going to give you the highest chance of good rental income and a high sales value.

The quality is important. You want to be looking at good developers, good builders, good spec finishes – these are all little factors that help.

[Nick]
To sum up all of those different factors then. We’ve got the £50,000 there, which we want to grow a property portfolio over the long-term and really build some wealth, so we want to go after quality, off-plan developments. We want to get a unique apartment that will attract tenants and future buyers. We want to target a city with really strong capital growth potential so we can potentially withdraw funds at a later date to buy the next property. Then we want to make sure we’re getting a really good product with excellent specs, from a good developer and builder. And finally, by leveraging with finance and buying during the construction period, we’ll benefit from growth during construction.

Now, let’s move on to a specific example now so we can see how our strategy works in terms of real-life finances.

[Tobi]
We’re going to call this strategy “complete and repeat”.

Let’s say we’re looking at an off-plan property. It’s 12 months off completion and we’ve secured a conservative 10% discount (we usually get more, but we’re going on the low end for this example).

It was £150,000, but we’re buying off-plan for £135,000. We secure that property with a 30% deposit at the price. That means the developer cannot turn around and try to increase the price in a year’s time, because you’ve already exchanged contracts and they’re legally obliged to sell the property at the agreed price.

That 30% deposit will be £40,500. When you factor in stamp duty, legal costs and, potentially, a furniture pack for the apartment, that will round up to around £50,000.

So that’s your £50,000 budget invested all into a property.

Twelve months later, the property is completed and you get a tenant in. You rent that out for the following two years.

Since you secured your investment, prices have increased 4% year on year. So from the time that we secured the property at that price, to the completion, and then to the end of your two years renting it out, that will be a capital growth of 12% in total (4*3%).

Now keep in mind, with that 4% we are being conservative. The prices we’re discussing are realistic prices in Liverpool, for example, and Savills have forecasted a 27.3% capital growth over the next 5 years, which works out at over 5% a year- making our 4% figure very realistic.

So, now we can figure out how much the property is worth. The market value when we secured the property was £150,000, then add on the 12% increase and you’ll now have a property valued at £168,000.

That leaves you with £33,000 equity, which is excellent because that’s a big pot of money you now have available.

But there’s more, let’s say over the two years you’ve been averaging a net rental income of £400 per calendar income. That will give you £9,600 over the two years.

Take the £9,600 plus the £33,000, you’re looking at a total of £42,600, which is a deposit for another property!

Obviously, that’s a very simplified example, but it’s realistic in terms of the figures. So it shows how you can recycle the money, pull it back out from your investments and re-invest it.

A lot of people don’t see that, unfortunately. They’ve got £50,000, but they don’t think they have any chance of building up a property portfolio, but this example proves that wrong. The “complete and repeat” strategy does work.

[Nick]
Brilliant, hopefully that was really helpful for our investors. The figures may vary slightly from case to case, but the idea is to show our listeners the power of recycling money from your property investment.

It won’t take you long to build up a portfolio, if you do 3 or 4 of these cycles, you’ve got a substantial property portfolio.

The only thing I’d add is in regards to the additional costs that Tobi mentioned. We’ve got the initial 30% deposit, but then additional costs of stamp duty, legal fees and furniture costs. We can add value in financial terms in some cases because we can pre-negotiate deals with developers. In instances where we take on 100-200 apartments for sale, the developer might say to us, “For any buyers who get in earlier on, we’ll offer a stamp duty contribution”. And that might be 50% of stamp duty covered, or in some cases – like one of our projects at the moment – it can be the full stamp duty covered regardless of whether you’re a resident or non-resident. There are potential savings of up to £20,000.

Why would developers offer such deals? In a lot of cases, they’ve got hundreds of units to sell and they want to be competitive. We’ve got external factors like Covid and Brexit, so now is a good time to squeeze extra incentives out of developers. That can be in the form of stamp duty, as mentioned, or it could be a free furniture pack or contributions to legal fees.

It’s worth considering, compared to buying a property on RightMove, if you can get incentives across these three areas (SDLT, legal fees & furniture) then you can really save yourself a significant amount of capital.

[Tobi]
I hope that was very insightful for you. If you do have any questions feel free to reach out to us, we’re always a phone call or email away.

Thank you for listening and we’ll see you next time.

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