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As you may know ive just started my investment in property (Apart from Main residence). One thing I did was to write a detailed business plan with risk mgmt section as if I was pitching for someone elses cash (Im using my own)
It seems a bit formal but It really helped me to get down on paper what could go wrong, what were my real costs and potential yields, not the rosy ones. I built a model and stress tested at 10% 20% price falls, and cost increases. I expanded it out for future borrowing at 50% LTV and stress tested again with a series of interest rate rises.
For me, it helped to put risks in perspective, I also added opportunity cost risk ie keeping money in bank is a 100% chance of losing 1.5% of cash per year against inflation.etc
Maybe a bit overkill but for me it worked.
Open an excel spreadsheet with four columns
1 Address of property 2 Value 3 Mortgage owing 4 Equity.
Fill them in. Total them up.
The total in column 2 will go up in value over time with inflation.
The total in column 3 will go down if you are on repayment mortgages, or stay constant if you are on interest only.
The total in column 4 is what you are worth (before tax) if things go wrong and you have to sell.
The column 4 total is the one that matters. Concentrate on that.
I have a rough idea of what my column 3 amounts to.
I know without looking what the total in my column 4 amounts to.
column 2 may go up or down. For my sothern property it has dropped about £60k over the last threee years. But for one of my northern properties it has gone up about £50k over the same time.
Just did your exercise....Column 3 was shock inducing...column 4 now feeling quite proud!
Love it .
Column 4 brings the comfort and when it does column 3 doesn't really matter
When you start you know all the figures to the nearest 100
A few years down the road you start saying to the nearest 1,000
A few more years on you start saying to the nearest 10,000
A few more years on still you start saying to the nearest 100,000
When you get to the point you are saying to the nearest 1 million you know you its time to stop
Jonathan Clarke. http://www.buytoletmk.com
My first BTL scared me as we were focused on overpaying on our house mortgage - desperately trying to get that debt paid down & Im not a risk taker. It does require a whole new way of thinking. I do agree with the good/bad debt scenario & don't use credit cards, have car loans etc. Sometimes I lie in bed & count up my rental debt & it is quite overwhelming if you only look at this. As Bob the Dog says, its the equity column that's important & I have repayment mortgages on everything as that gives me comfort. After that first BTL was on track I felt more confident
This is one of the major differences between landlords and property investors. The latter understands debt, gearing and risk v. reward and is comfortable with it.
I remember reading something a long time ago that stuck in mind regarding debt. "If you owe the bank £100, you're in trouble. If you owe the bank £10,000,000 they're in trouble!"
LETS MAKE HOMES by treating landlords as partners, tenants as customers & every property as our own."
If you can borrow at x% and make a net x+y% you should borrow the maximum amount you can providing you think that x won't change much and that your capital is safe. I think those are 2 quite significant caveats though. Govt policy is a big consideration too.
At the peak of our BTL portfolio building in our mid 20s we owed well over 100 times my wife's salary, mostly ay 85%LTV. I never lost one minutes sleep over that.
Does anyone have a sample spreadsheet they keep track of all their properties to work out specific costs and mortgage payments?