Four Key Principles For Profitable Property Investment

At Axis we find ways to give our investors a sustainable advantage by choosing us as their investment partner. We also meet the differing growth and income requirements that are important for any discerning property investor.

In our determination to be different (and better!) to our competitors Axis has adopted four key principles that Rod's training programme, PIPS: The Property Investment Profit System teaches investors.

These four principles drive Axis' selection of profitable property investments:

Principle One - Buy Below Market Value (BMV)

Principle Two - Maximum Leverage, resulting in Low or No Money

Down investments

Principle Three - Positive cash flow

Principle Four - A clear exit strategy

Our goal is to continually deliver deals which score highly across all four principles. We don't always succeed. Why? Because fast capital growth and high rental yields are often not compatible within one property type or location. In such cases we usually meet three of the four criteria, but each criteria will be very strong.

This is not a weakness of our approach, far from it. It's a recognition of the reality that there are different types of property that suit different investors. This underlines the importance of an investor having clarity about their strategy so that they invest in the right property for them!

Let's take a closer look at each principle, why they are so important, what they mean for property investors in general and Axis clients in particular.

Buy Below Market Value (BMV)

If there is one principle that we hold sacrosanct this is it. The biggest value that Axis offers clients is the ability to save money on their purchase. Our clients purchase property at wholesale, not retail price.

For new investors this can be a surprise, even a shock! If your experience of property is limited to a conversation with your local Agent you will have little knowledge or experience of the wider market, and the varied situations that can lead to buying Below Market Value.

With more than 20,000 registered investors, Axis is uniquely placed to find and deliver heavily discounted property investments to clients.

What's achievable? That depends on many factors including the country, location and property type. Discounts range from 15% in Central London, to 70% or more in Florida!

It is extremely rare for Axis to offer any deal that isn't at what we consider a wholesale price. In general we save our clients tens of thousands of pounds on every property investment they make through Axis.

Why is buying Below Market Value important?

Apart from the pleasure at saving money there are hard-headed commercial reasons for buying BMV.

Firstly, you reduce risk. If you should need to sell quickly and you saved 25% on the true market value, you should be able to sell your investment easily and at least recoup your cash, maybe even making a profit. Pay retail price and you don't have a chance of doing this.

Secondly, you gain immediate equity which increases your return. If you buy 30% BMV, you have effectively made a profit of 42% on your purchase costs at the moment you buy. Since you are in the property business to make money, locking away an immediate profit is a great start.

Thirdly, you increase your rental return. Suppose the rental yield is 8% on a property with a market value of £100,000. If you pay £70,000 then your rental yield increases to 11.5%. Quite a difference. Which would you rather have?

Finally, buying well below market value enables Axis to frequently structure a Low or No Money Down investment, providing increased leverage on your money. Without the NMD element this can't happen.

Convinced? We are, which is why Axis is the home of discounted, cheap property.

Maximum Leverage and No Money Down (NMD)

The holy grail of most investment strategies is to buy assets using other people's money, but retain the benefit of growth and income yourself.

Ever tried going to a stockbroker and asking to borrow 75% of the value of the share portfolio you want to buy? Or to a bank and asking to borrow 75% of the value of the savings account deposit you want to make? I'm joking of course... but there is a serious side to this.

You can borrow 75% (or more if you know how) of a property purchase and retain all rights to income and growth. And you can do it at a low rate of interest and not pay the money back for years. It's quite outstanding and it's what separates property from any other asset class.

We call it leverage. Axis is a firm believer that if you are short of cash, maximum leverage is the way to go. Put simply, it's the fastest way to become wealthy from a relatively modest base. A big claim, but one we can demonstrate and believe in wholeheartedly.

What does maximum leverage result in? A Low or No Money Down investment. And just what does that do to your return? Here's a simple example:

Low Money Down and Increased Return On Investment

Suppose you purchase property for £100,000 that in 10 years is worth £200,000. We will ignore everything except the capital growth for the purposes of this example.

If you pay cash for the property, you will make a gain of £100,000 over 10 years,

Your ROI (Return on Investment) is 100% over 10 years. Good but not spectacular.

Now suppose you purchase the property BMV (see the previous section) for £70,000. And you get a mortgage for 75% of that amount. You will need to find £17,500 (plus fees of course) to invest.

Now do the numbers. Your profit is now £130,000 (don't forget to include the £30K discount achieved on purchase). Your investment was £17,500.

What's your ROI now? Astonishingly its 742% - more than 7 times higher than before.

Now suppose Axis could find a way to reduce this investment by half - to around £9,000 say? (And we often can) - what then?

Your ROI would now be 1444% - some 14 times greater than paying cash.

Food for thought I hope?

Can You Make £1 Million In Ten Years?

Let's assume that two people had £100,000 for investment and they chose different investment approaches.

One is extremely risk averse and pays £100,000 cash for one property. In ten years their portfolio is worth £200,000 and they have £100,000 equity profit.

The other investor chooses the Low Money Down approach and invests £10,000 per property. They purchase 10 properties, which are now worth £2m.

Their equity profit is now £1 million.

The first investor's equity profit is £100,000. Which would you prefer?

Positive Cash Flow

Property investors usually hold their investment for years - in our view 10 years is the minimum realistic time horizon except for certain special situations. During that period the property will be rented.

There is a conundrum here. The more you leverage your cash with higher borrowing, the greater your mortgage payments and the more of your rental income that is used to make the interest payments.

The problem in the years from 2004 to 2007 is that mortgage rates increased, quite alarmingly towards the end of that period. At the same time property prices were going through the roof and rental income wasn't keeping pace. The result was that rental yields fell and many new landlords with substantial borrowing found themselves paying every month from their own pocket to top up the mortgage. Not a comfortable situation.

The situation now is very different. Property prices are much lower, mortgage rates have reduced a little and rental demand is strong. The end result is that in many areas the gross rental yields have almost doubled and mortgages are lower than before.

For the first time for many years Axis is delivering deals that have positive cash flow with maximum borrowing! Yields in the UK can reach 10% gross, and in certain locations in the USA are touching 40% gross. Astonishing but true.

It doesn't always work, even now. Properties in London and the South East will rarely cash flow with maximum borrowing. Investors in these areas should be either prepared to put more cash in the deal to get to, at least, a break even, or be willing to subsidise the property for a while but be OK on the basis that they put very little capital into the property.

The point to make is that we positively hate investment deals that don't at least break even. Our clients can expect us to find the very best positive cash flow investments even if they borrow to the max!

Buy Property Only If You Understand The Exit Strategy

There is a common saying that it's always easy to buy and difficult to sell. It's critical that when you purchase an investment property you are clear about the exit strategy. The exit does not have to be a sale - it might be that you plan to keep the property and pass it on to children in your will.

What matters is that the property suits the strategy you wish to persue. Axis will always advise on the most appropriate strategy for a particular investment.

For example, we currently have investments available in Florida that we see as a strong capital growth recovery play over the next 3-5 years. We can't be exactly sure of the timeframe, but we are pretty confident that it will be time to sell during this reasonably short period.

Would we recommend that you kept these properties for 30 years? Can't be sure - we'd have to revisit the property in 3-5 years and perhaps reconsider. But for a long term hold we would point you elsewhere at this time.

Axis evaluates the possible exit strategies for every investment opportunity and will advise accordingly. You will also need to be sure that any investment fits your personal strategy before proceeding.

Four powerful principles that deliver profitable property investments

Each one of these four principles is critical. Together they are immensely powerful for evaluating every property investment and deciding if they meet your requirements.