Advanced Property Investment Strategies | Investing

Any professional investor knows that part of a successful investment strategy is to balance the competing aspects of risk and reward. One of the big risks to any residential buy-to-let investor is that in essence their investment is very ‘lumpy’. That is to say it is a large investment in a single asset class, in a single location. This is great when times are good, but if times are bad for residential investment in that area then there is no way of avoiding poor returns.Is there a way around this for landlords?The secret of good investment practice is a strategy that aims to spread an investor’s risks. This means holding a range of investments in different sectors. The theory being that when one investment is doing poorly others will be showing good returns and therefore overall the investors ‘pot’ will keep on growing.For a buy-to-let property investor diversifying their investment portfolio may seem to be problematic if not impossible. A landlord and property investor does not always want to buy another residential investment property in another part of the country in order to diversify the geographical spread of their residential investment portfolio and thereby reduce their risks to a fall in residential property prices in one part of the country because of the very practical difficulties of having to remotely manage a buy-to-let investment property. Also by buying another residential investment property a landlord is buying an investment in the same asset class. This is not really diversifying an investor’s portfolio and therefore reducing the risk to the landlord of their investment performing badly.


What a landlord and property investor really needs to do is to use their residential property asset as an investment vehicle to finance a portfolio of diversified investments thereby providing a landlord with their own diversified investment pot.FOR EXAMPLEJim Smith’s 2 bed terrace house in YorkJim has a buy-to-let investment property in York worth £200,000.The annual rental income is £12,000 which gives the residential investment property a gross yield of 6%. Therefore as it stands Jim is 100% invested in UK residential property and specifically in this case in the York housing market.To finance this residential investment property Jim has taken out a £100,000 repayment buy-to-let mortgage over 25years on which he is paying 6%. This costs £644.30 per month in repayments on his buy-to-let investment mortgage. Repayment of the mortgage leaves Jim with a net income after paying his mortgage of £355.70 (in reality this will be eaten into by other expenses).Jim therefore has equity of £100,000 in this residential investment property. Now say house prices fall over the next five years by 10%. This means the value of Jim’s property drops to £180,000 thereby reducing his equity to £80,000.How can landlords reduce their investment riskJim is keen to reduce his risk of sustaining a fall in the value of his investments. This is best achieved by following a strategy of diversification. This is how it is done.He increases his borrowing to £150,000 through a further advance of £50,000 on an interest only basis. Again the interest rate payable is 6%. This makes a total payment of £644.30 pm plus the interest only payments on the further advance of £250 pm. In total this amounts to £894.30 pm which is still covered by the £1000 rent. It is worth mentioning that rents are likely to rise over time whilst the repayment part of the mortgage will start to fall.Investment diversificationHere is the clever part. The £50,000 of the additional loan should then be invested in high yielding shares and funds. In the current climate it is easy to find funds & shares that pay dividends with a 6% yield.By doing this Jim has immediately diversified his investment from 100% in UK residential to 80% residential: 20% shares & funds and according to Portfolio Theory immediately reduces his risk of sustaining an overall loss.For example the share portfolio that Jim has invested in does reasonably well and rises by £20,000 or 40% over the 5 years. The result being that this cancels out the loss of equity sustained by his residential property.The ‘win win’ scenario is obviously that both the values of his shares investments and his residential investment property continues to rise.


RisksThe risks to Jim of this investment strategy is that his share portfolio does badly; however careful stock selection and in sectors away from the UK should mean that if the UK economy goes into a slump other markets will be doing well.The other risk of this strategy for Jim is that mortgage rates rise meaning his increased borrowing costs exceed his rent. Hawkeye can hedge against this by fixing the interest rate payable on all or part of his buy-to-let mortgage for the period.This strategy is not for the faint hearted landlord. However, for landlords who are comfortable with managing their own financial affairs and want a way to reduce their exposure to the UK residential investment market it offers a solution to a real investment conundrum faced by landlords of how to reduce the risks of a landlord sustaining a loss as a result of a falling or stagnating residential investment market.Final wordsWhat a landlord needs to do is go beyond thinking just of their individual residential investment property as an investment but to see it as almost an investment vehicle with which to create a diversified selection of investments with which to achieve a landlord’s individual financial goals. By using the undoubted income generating capacity and excellent long-term capital appreciation prospects landlords can then create their own diversified specialist investment vehicle.

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Getting Started With Investing | Investing

IntroductionTraditionally investing has been seen as the preserve of the wealthy and has a reputation for being a minefield to the uninitiated. As western standards of living continue to increase, more and more people are beginning to realize the benefits investing even small sums can bring. This article seeks to explore some basic principles to help you get started with investing.1. What’s the basic premise of investing?The Collins English Dictionary defines the word invest in the following way; “To lay out, for profit or advantage.” To layout refers to the fact that something of value is needed in the first place in order to generate more wealth. In essence investing is a means of taking a pre defined sum of money and using it in such a way as to increase its original value, therefore generating a profit.2. Why Invest?This is one of the most fundamental questions that any person looking to invest needs to ask. The general answer is pretty obvious, to generate a profit, but the reason behind the investment are far more important and will directly influence how and where you chose to invest. In addition the answer will also determine the level of risk you are willing to expose yourself to and which will be explored in more detail later.Reasons as to why people invest are varied and may include some of the following; to build up a nest egg for retirement, to provide a financial safety net, to pay for future education or university fees for children, for fun because of the buzz investing can create.


3. How Should I invest?This is also a deeply personal question and will depend upon the amount of money an individual has at their disposal. It is important to stress that investment takes many different forms all of which facilitate differing levels of investment. A single mum might decide to invest $20 or a business entrepreneur $1 million but both will seek a return on their capital outlay and how they go about achieving their investment goals may differ substantially.4. What level of risk should I expose myself to?Such a decision is very important as ultimately it will dictate the profitability of your final investment. In many respects this question will also be determined by the answer to the previous question, why invest? If an investment is being made to safeguard a financial future the level of risk taken may be lower than an individual investing for fun.Generally investments are made in three distinct categories low, medium and high. Low risk investments include Government bonds and savings accounts. Medium Risk investments could include certain types of shares or property. High Risk investments will almost certainly include shares in rapidly expanding companies exploring new markets. The dot.com crash in the late nineties, in which thousands of newly established technology companies went bust, is an example of a high risk investment going very wrong.What types of investment are there?This is not an easy question to answer because in theory anything that earns a profit from an initial outlay can be classed as an investment.There are however some common forms of investment that deserve further explanation.a) Government BondsThese are deemed low risk investments as money is invested in Government related projects and assets. It is unheard of in the western world for a Government to go bankrupt.b) SharesThis is a means of holding a stake in a company trading on the stock exchange and investors benefit from its profitability. Whilst share dealing can be low risk particularly if you are investing in established companies in the FTSE 100, most share investments are deemed medium or high risk. This is because such investments have the potential to return excellent profits but there is also a raised risk of losing your total investment.c) AntiquesAntiques are often a great source of investment given that they hold their value at the very least and have the added benefit of being easy to sell if you need a quick cash injection. In addition if you wish to leave a sum of money to family after your death they won’t be hit with inheritance taxes often associated with large amounts of physical cash. Perhaps one of the major drawbacks to investing in Antiques is the requirement of a level of technical expertise, or access to those skills, to ensure that suitable items are invested in.


d) PropertyProperty can also be a very lucrative source of investment as property prices continue to increase across the developed world. Generally property prices increase in value in the long term.e) SavingsWhilst banks often make the distinction between savings and investments, in essence savings are a form of investment as the money you save with the bank is invested in low risk shares on your behalf, which ultimately enables financial institutions to make interest payments to you.How to investNow that you have more information to help you get started with investment the next step is to speak to an independent financial advisor. These consultations are almost always free and you can get specific advice tailored to your individual needs concerning investing. In the UK there is an excellent site for finding Independent Financial Advisors called unbiased, see the link at the end of this articleSummaryThis article has attempted to provide advice to enable individuals to get started with investment. Discussion has taken place about the basic premise of investing and the profitability of such a decision, along with examining different reasons for investing. Attention has also been given to how much might be invested and at what level of risk this might be undertaken at. Finally we have explored the vast array of investment options available and what the next step is for a budding investor.