In every deal you make there are four distinct levers which create you profit on a property.
People usually only think of Lever 2 – Rental Income, but the others are as important to your overall income.
Lever 1 – Discount
Whenever you buy an investment property you should always aim to buy with a discount, no matter how small, as this will multiply many-fold over the term of your purchase when in conjunction with profit levers 3 and 4 below.
Also, you should do your own due diligence on comparable properties to ensure that any discount achieved is real and is not due to the price being inflated artificially to enable discount.
Lever 2 – Rental Income
The monthly rental income is the bread and butter of every property investor and is the gift that keeps giving.
This is the money that pays all the bills for the property and the balance, after meeting the bills and putting your contingency into a separate account for rainy day issues, is your profit and can be used as wages for you or saved for future investments.
Lever 3 – Refinance
Every two to four years, you need to look to remortgage your investment properties with a view to releasing a lump sum income from the additional equity generated on your property.
By drawing out this equity on a regular basis, you receive a tax-free sum which can be used to buy other income-producing assets like more houses and investments or to use some, or all, of it to treat yourself!
Lever 4 – Equity Growth
With the year-on-year growth in the UK property market, a typical residential property will double in value, thanks to compounding, in around nine years. The equity of 25% that was held initially in the property is retained even with the refinancing activities that will have been carried out.
For a property initially purchased at, say, £100k, there will have been £25k deposit as initial equity equivalent to 25% of the purchase price left in the deal.
With the growth in value of the property, this initial 25% will still remain as the equity portion of the growth, but will have also doubled in value to £50k although this money can only be recovered on the sale of the property and would be subject to taxation.
In conclusion, these are the four areas where profit can be achieved on each and every investment property you buy so when you are doing your due diligence, always do your calculations based on these areas of profit.
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