Cycle of Money
One thing we get asked a lot is “how does property investment work?” and “how do you actually make money from property?” This blog describes how the ‘cycle of money’ works which shows how money can be made through property investment. Firstly it is important to understand how money flows through the process of the cycle. We need to know what money comes in and what is going out otherwise we could end up spending more money from our own pocket at the end of the cycle.
How the cycle works
The graphic below shows how the money cycle works on our serviced accommodation and holiday let property. Realm followed the ‘buy, refurbish, refinance’ property investment strategy, whereby we added value in the refurbishment stage. But ultimately similar principles apply whichever property investment strategy you would use. The cycle of money highlights where you start, the cycle of refurbishing the property and then the refinance and the money returned to you at the end.
The start
The cycle starts with the funds needed to buy the property. The purchase price was £117,000. You can then see the figures needed for the 25% deposit for the flat (minimum amount if you aren’t buying the whole property as a cash buyer), stamp duty, and legal costs all associated with the purchase of the property.
The costs that we spent to refurbish the property and the void periods we had are included. In this case Realm paid £44,360 as upfront costs from our bank account. In this instance Realm didn’t have the money to purchase the property as a cash buyer; we needed to secure investor finance (which could also have been a bridging loan) to make up the rest of the purchase price which was £87,750.
Revaluation
Once the property is purchased and renovated we move to get it revalued. Then we can put it on a mortgage based upon this new valuation – in this case £170k. The new mortgage of £127,500 (you still need 25% as a deposit as this was a 75% LTV mortgage product) pays down the investor finance of £87,750. We can then draw down the equity we are releasing from the property – which is £39,750.
£127,500 – 87,500 = £39,750
This equity is returned to Realm’s bank account allowing us to pay back our other investors and give them the additional interest that’s been agreed. It can also be used to fund the next property purchase.
Things to bear in mind
This is an example of a successful property investment. The cycle of money finishes with a positive figure meaning a profit was made. It is important to ensure that you run all your numbers on any property investment before you go ahead. It is very easy for your refurbishment costs to escalate if you haven’t budgeted for the work that needs to be done and have realistic quotes from a tradesperson you rate. Also that you understand the property market and are realistic about the valuation you will achieve once the property is modernised.
Realm has a calculation spreadsheet that we use for any potential investment opportunities. It includes the figures for every step of the cycle of money. Soon we will have this available to share along with a run through as to how to use it effectively. Please get in touch via our contact form if you’d be interested in finding out more.
Realm Property Investment are still actively pursuing opportunities. We are out actively viewing properties and will pay good referral fees for any opportunities that go through to purchase.
We offer great returns on your investment but without the hassle. Get in touch if you would like to learn more. To read more about our recent projects head to our projects page.