How to hedge my risk on my strategy

[davidandalouse]

Hello,

 

I am very new to property investment I am 40 and currently working. I have read a couple of books from Rob D already and I was thinking to implement one of the strategies in his book. Basically I want to start investing by buying 1 property (1 or 2 bed flat in say London) every 1.5 years. I will keep working during those 15 years and I will have the deposit coming from savings I made while working. After 15 years, I will end up with 10 properties and assume that property doubles in price every 9-10 years in London (and this is the big if), on average all 10 properties would have doubled in price (some will be less others more depending when they were bought). I can pay out all of the mortgages by selling just 5 properties and now I end up with 5 properties which I completely own. Now it is time to retire and live exclusively on the rental income of those 5 properties (if in London each 1-2 bedroom flat should rent for more or less £1300, which is a comfortable gross £6500/month income). My question now, does this seem like a reasonable strategy, have I missed something? and most importantly, the whole strategy relies on the fact that property prices will double (in London) in the next 10 years. Is this reasonable to assume and what is the chance for it happening? If not, how can hedge against this risk or what should I add to my strategy to make it more robust to such risks?  

 

Thank you for your advice,

  

David

[johndennehy_hotmail_com]

Hi David,

 

As a newbie myself, I'm not really in a position to give you much advice, but I was wondering how much you envisage paying for each property? 

 

I have a similar plan myself, but one thing we both need to consider is that we may have to wait longer than 15 years if only buying one every 1.5 years as it will only be the first couple that will have long enough time to double in value.

 

Also, some might argue that London may not double in value as its prices are already quite high.

 

Finally, when you will have acquired your fourth property, you will be a "portfolio landlord" meaning everything will be stress tested at 5.5% interest * 1.45% (if buying individually) or * 1.25% if buying through a Ltd. Co. Others have pointed out that the cost of property in London / South East compared to the rental income generated will be almost impossible to achieve, so you may want to consider looking outside London...

 

Hopefully others may correct any misconceptions I may have made, or offer better insight!

[davidandalouse]

Hi, Thanks for the reply. OK I think I rushed a bit the numbers of years there, but it should be more like for example buying 1 property every 2 years and doing that for 20 years. After 20 years you will end up with 10 properties. Given a doubling in price every 10 years in London (and that is the big IF), on average each property would have doubled (some will quadruple, ie the ones you bought in year 1 and 3 maybe and some that were bought towards the end will increase only a bit). The strategy I am laying down only cares about capital gains alone (so I do not really take into account the rent  to simplify). 

My question now is it reasonable to say that my exit strategy is to now sell 5 properties, pay out all the 10 mortgages and live off the rental income of the remaining 5.

How taxes should be taken into account? How can I hedge my risk against the properties not doubling in price every 10 years?

 

 

  

[Dan Sch]

David,

 

Can't begin to guess at the tax implications, as there's every likelihood that the taxation environment will have changed unrecognisably in the 15-20 year horizon that you're looking at. In terms of hedging, I guess you have to be looking at what would be likely to have gone up if the price of London housing has gone down. Generally speaking, a hedge is there to ensure certainty and therefore mitigate against fluctuations, and I doubt there's much you can do that will guarantee you'll double your money in the timeframe indicated without possibly doubling your outlay or accepting a considerably lower return. If you're looking at it from an 18-year property cycle perspective, you might find that you're retiring just as the market bottoms out - at that point you'd be mad to sell half your portfolio and pay off the other mortgages, but there's nothing stopping you selling one or two to fund your lifestyle in the short term, and selling more of your portfolio as the market recovers.

 

If it's genuine hedging you're after, you should probably be looking at buying fewer houses and investing in other assets which could potentially be used to pay off mortgages later (but that's probably not a Property Hub sort of strategy, and you obviously lose out on the leverage).

 

Incidentally, not to be nosy but you need to make sure that you're able to produce the funds to buy a house every 1.5/2 years and also ensure that you've built up enough equity in them all to execute the strategy you're talking about.

[Dan Sch]

David,

 

Can't begin to guess at the tax implications, as there's every likelihood that the taxation environment will have changed unrecognisably in the 15-20 year horizon that you're looking at. In terms of hedging, I guess you have to be looking at what would be likely to have gone up if the price of London housing has gone down. Generally speaking, a hedge is there to ensure certainty and therefore mitigate against fluctuations, and I doubt there's much you can do that will guarantee you'll double your money in the timeframe indicated without possibly doubling your outlay or accepting a considerably lower return. If you're looking at it from an 18-year property cycle perspective, you might find that you're retiring just as the market bottoms out - at that point you'd be mad to sell half your portfolio and pay off the other mortgages, but there's nothing stopping you selling one or two to fund your lifestyle in the short term, and selling more of your portfolio as the market recovers.

 

If it's genuine hedging you're after, you should probably be looking at buying fewer houses and investing in other assets which could potentially be used to pay off mortgages later (but that's probably not a Property Hub sort of strategy, and you obviously lose out on the leverage).

 

Incidentally, not to be nosy but you need to make sure that you're able to produce the funds to buy a house every 1.5/2 years and also ensure that you've built up enough equity in them all to execute the strategy you're talking about.