What to do after 2 years cashflow is up?
One of the most commonly asked questions from the female partners is if l use this money borrowed from my home what happens after the 2 year cashflow is all spent?
The first thing you have to understand is that when it comes to building a portfolio I always, always work on Realistic Worst Case (RWC). I have always been good with numbers and when I say cashflow for a full two years I actually know full well that if you follow the strategy to the letter you will more than likely have 3 or 4 years cashflow.
Let me explain why I say 2 years but actually provide for 3 or 4. Firstly I say 2 year cashflow because I have always found that most people will never plan tomorrow, let alone 2 years in the distant future.
The second reason is that so much can happen in 2 years, so much can change. The one thing I know for certain is that every property that I have owned for at least 2 years I have been able to do something with in terms of restructuring so l can cashflow for another 2 years. I will either re-mortgage, refinance, place a secured personal loan beside it or as a last resort, sell it.
I firmly believe this.
So let’s backtrack for a moment because this is important. The whole reason we need to cashflow is that we want to hold the property for 7-10 years while it doubles in value. Remember the only assumption I make in property is that it will double in value in 7-10 years.
So based firmly on this assumption I simply look at RWC backed with experience and chose 2 years as the benchmark.
OK so how can I say 2 years but actually mean 3 to 4 years. Again it’s RWC.
Once we do the 2 year cashflow and work out how much we need to quarantine the assumption in our calculations is that we go out tomorrow and starting paying interest on the money we have borrowed. This is often not the case and sometimes it might be many months before you actually complete the property and start paying a mortgage or worrying about cashflow. Now while that money sits there in our mortgage or bank we are not being charged interest which is saving us money that will extend out the 2 years.
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Let’s look at an example.
You have £100,000 in available equity that you can borrow from your home mortgage. You have a flexible mortgage in place and are ready to spend it. We work out that if tomorrow you borrowed the entire £100,000 at say 6% that would cost you £500 per month in interest payments or £12,000 over 2 years. So we promptly quarantine £12,000 and that leaves us with £88,000 to invest.
So let’s assume that it takes us 2 months to buy our first property. Straight away that has saved us £500 x 2 months on interest or extended our cashflow out by another 2 months. So we now have 26 months of cashflow secured. Now let’s say we do the 2 year cashflow on this first property and it comes out that we need £15,000 to purchase the property and another £5000 to cashflow for the 2 years. The £5000 that we are putting aside now works the same as the £12,000 on our home. We only spend a little bit each month but we acted as if we spent it all on the first day after completion. So we are saving interest.
Every property you purchase will have the same cumulative effect on your 2 years cashflow.
It’s the power of this quarantining money that means that when I say 2 year cashflow, I practically mean 3 or 4 years.
Now certainly there are cases when 2 years means 2 years and that is fine because the principle will hold up in any market. This is where an experienced Portfolio Manager will be able to inform you of your options and support you to make a decision about the best course of action.
One final Realistic Worst Case to consider. Let’s say that your property has gone down in value, the market is crap and there is no way that you can refinance, sell or re-mortgage. To cashflow the property for another 2 years you will need between £1500 and £8000.
Now remember this is realistic worst case. You cannot get money from anywhere. Simply go to what I call a “Loan Shark”, just check the back pages of the Sunday newspaper or watch TV ads. Yes you will pay through the nose but they will give you a loan for that amount easily.
Never forget that you have REAL ESTATE after all, and real estate is one of the most tradeable commodities about.
Live with passion,
Brett Wood
