This property formula will make you rich

0:02Hey everyone, it's Rob B here with Rob D and you are listening to the Property Podcast. This is going to be one of those episodes that you bookmark, I promise you. It's a big claim, but I promise you this is going to be one of those podcasts that you're going to go back to, share with others, because once you understand this formula, once you understand how wealth is created in property investment, when you put all these pieces together, it's almost a bit mind blowing and I really want you to understand what we're sharing today and I really want you to share it with others because it's going to make a huge difference.

0:41Welcome to the Property Podcast, thank you for joining us. In case you don't know, we run a business that buys more than 100 million pounds worth of property for our clients every year. You can find out about that at propertyhub.net slash invest and today we are sharing the entire foundation that all of that investment is built on. Everything that we do, the whole way we invest, all the decisions we make are built on this. So stick around because we're going to explain it all. It's time for our new story of the week. And this story comes from Property Investor today. And the headline reads, how transport influences house prices.

1:11Rob, we talk about transport links and the importance of them a lot. So there's a bit of data here to back that up. Yes, there is. This is a piece of research from Nationwide that's looked into patterns across London, Glasgow and Manchester when it comes to transport and they've surveyed a bunch of people the majority of whom say it's very or somewhat important to be near transport links so far not so interesting what's more interesting than what people say is what they do with their money and the data shows a clear premium for property located close to stations so if you make a like of like comparison everything is the same between properties except where they are in relation to a tube station in the case of London then if it's within 500 meters of a station people pay 8 % more falling down to three and a half percent a kilometre away and even in manchester where you'd think it was less important because people are still a bit more car reliant than they are in london and the city centre is very walkable there is still a 4.9 price premium so all very interesting but the implication here rob is that when there are changes in transport links that's what makes things interesting for investors it does because you tend to see with any infrastructure project where transport to an area that you have that initial boost in prices which makes sense there's a bit of hype then things calm down and then you get another boost when it's actually delivered we've talked about this on the podcast before so that's a way to take advantage of these uplifts personally and i think it's important to make clear that although the data doesn't exist for other cities and it's just the cities that rob's mentioned this plays out across every major town and city.

2:44Transport links are so important. And when we look out of cities, when we do our investments with Property Hub Invest, the smaller towns that we look at, we make sure that they have really strong connections into a major city as well, whether it be by road or train, or hopefully both. So it is really, really important. It sounds like a bit of a mundane news report, but it's a good reminder of how important transport links are to your investment. And if you are considering an investment in an area where transport links aren't very good, you might want to think again, because that's just common sense.

3:14It says invest with strong fundamentals like transport links. The data here backs it up. Everyone knows that there's the potential to make a lot of money in property. Everyone knows people who've done really well. You see the rich list and all the people on there with their property fortunes. And let's be honest, even if you're into refurbs or interior designs, you've got a passion for property. We want a bit of that as well. We want to get rich with property. But a pattern that we've noticed, having done this for way more than a decade now, is that most people are wasting most of their time with what they do in property.

3:45There's a lot of things that a lot of people spend their time doing that really make no difference or even hold them back. Because when you get down to it, there are just a few factors, a few key things where if you understand them and you get them right, it's really hard not to get rich with property. And Rob, it's those factors that we're going to run through today. Yes, this is our magic formula to property. But in this episode, yes, we will share our magic formula to building wealth in property, but what we will also do is add an advanced strategy at the end. And by giving you a real example, a deal that has actually been done recently, I think it's going to make it even more powerful for you.

4:24But let's start with what might be the most important part of property investment as an investor, the most important wealth tool that you can use. We've mentioned it before, but don't worry if you heard us say this before, it's about putting this all together. And what I hope you're now shouting on your commutes or your runs is leverage. Yes, leverage. Leverage is the wealth multiplier. It's a tool that property investors get to use. It's a tool that if you want to be wealthy in property, that investors must use. And if you're very, very new to this, and this is the first time you're hearing us talk about leverage, leverage is using a mortgage using debt to accelerate your wealth because you're able to control a large asset with a small amount of capital so on average with property investment you'll put 25 % down and the lender will give you 75 % just think about it for a moment we just take it for granted but you're only putting 25 % in to buy an asset that's going to make you wealthier and someone else is going to give you 75 % of the money needed so if you're buying cash you could buy that one asset.

5:31But if you are leveraging, you could go and buy four. Yes, all right, there might be some cost involved, so it might come down to three. But the point stands, you can buy a lot more, control a lot more assets with that debt by using leverage. Yes, and as we'll see later when we get into a real example from a deal that we put together this year, what that means is that you benefit from 100 % of the assets upside, even though you only paid for a fraction of it. And again, as you'll see, the difference that makes your returns is enormous. It is the single biggest advantage of property over any other kind of investment.

6:07I've gone so far in the past as to say that leverage is almost the point of property investment. It's the reason for me why property is worth considering as opposed to any other asset class. If you weren't allowed to use leverage, if it was suddenly banned overnight, would I still invest in property? I'm not sure because the returns may be better than the stock market. It may not be. And personally, I find it a lot more interesting, but it's a lot more work and there are a lot of other drawbacks. It's leverage, not on its own, but combined with the other factors that we're going to talk about that make property such a ridiculously powerful wealth builder.

6:39So we've put this first for a reason, Rob. It's the absolute fundamental. And I believe everyone needs to get comfortable with the idea of leverage. Many people are not. Many people are programmed to be anti-debt in every circumstance. I completely get that. It's a hard mindset shift to make, but it's well worth making. It's essential you make it. Without leverage, I know we're really stressed at this point, but without leverage, you can't make property investment work in this low-growth market. It just doesn't make sense to do. And Rob, as he's already said, has gone further to say it's the point of property investment.

7:10Leverage features really heavily in the book Rich Dad, Poor Dad, and he talks about good debt and bad debt. And it's really that lesson in that book, and I know some people don't like the author or whatever, get over it, the lesson's what's most important. the lessons that you take from that the understanding of what good debt is and what bad debt is is so powerful so bad debt is credit cards to buy liabilities and good debt is using debt to buy assets like property investment and if you take 100k and let's forget costs for a moment let's keep it simple if you put 100k into one property then that one property is worth 100k right and then you take that 100k and split it into 25 deposits so you go and buy four properties So you put 25 % down in each one.

7:55So now you've got assets worth 400k. So the person who bought with cash has got 100k property portfolio and the person who bought with leverage has got a 400k property portfolio. Now the person with cash might get a little bit more rent return, that's fine because they're not paying mortgage costs, but the real wealth of property is made for that capital growth over time using this formula that we're talking about. And it's easy to see when you use a simple example because let's say at some point the market goes up by five percent then the person who bought with cash has made 5k in gains but the person who bought with leverage has made 5k on each of their four properties so they've made 20 000 in gains so the market's only gone up by five percent but one person has a paper gain of five thousand pounds and another has 20 000 pounds and they both started with the same amount of money.

8:46All they've done differently is use leverage. It's incredibly powerful. But let's layer up the next part of the formula because that alone is super powerful. But when you start to build on top of it, it becomes insane. Yeah. So the next ingredient in the magic formula is inflation. And most people think about inflation as a bad thing. It means that all your costs go up and you have to hope that your income goes up to match. And for most people, it is the enemy. But as a property investor, using debt in the form of a mortgage like we just talked about, inflation is actually your best friend. And the reason for that is that the amount of money that you borrowed is fixed.

9:22If you borrowed£100 ,000 and you pay the interest every month using the rent that's coming in to pay that interest, and you never pay off any capital, you never make an overpayment, you never do anything at all, then that amount you borrowed stays at£100 ,000. But meanwhile, thanks to inflation, the price of everything else is going up. So yes, the price of coffee is going up, the price of your supermarket shop is going up, but also your income will be going up, your rents will be going up, and most importantly the value of your property will be going up. And that is incredibly powerful because it means that purely thanks to inflation the value of your debt shrinks over time.

9:56So we talked earlier about borrowing 75 % of the property's value and at first that might sound scary. You've borrowed all this money, borrowed potentially hundreds of thousands of pounds, how are you ever going to pay it all back? But imagine that inflation lifts the value of your property and everything else, nothing special about property, just lifts the value of everything by 3 % per year. And we know it's meant to be lower, but over the last 20 years, it's averaged more than 3%. Let's just say 3%. After 10 years, your loan to value, the amount that you borrowed relative to the value of the property has fallen to 56%.

10:25And after 20 years, it's fallen to 42%. So even though you haven't paid off any of your debt, all you've done is pay the mortgage. And even though nothing has really happened to the property other than it going up in line with inflation. So there hasn't been a property boom, you haven't done anything clever, you haven't done a refurb. Purely because of inflation, your loan to value has fallen from 75 % to 42%. So Rob, it's the combination of those two factors working together that just creates this force that's building wealth for you almost inevitably. Other than moaning about inflation a bit, most people ignore it.

11:00They don't really see what it's doing. They don't really take action, maybe because they don't know how to. This, for me, is incredibly important because if you understand these things, the thing with inflation is it's not really fair because it makes one group of people wealthier and it makes another group of people poorer. And the government likes inflation. They might not admit it. They don't want super high inflation, but they've got a lot of debt. The government has more debt than any of us. It's got a level of debt that most people can't even comprehend. The size of it is so big, and it's just our government, other governments around the world.

11:39And by having inflation, it helps them erode that debt, that value of the debt. They want this. They will panic if we even get close to deflation. And that deflation is the other way, where things are devaluing. Some of you may have never even heard of deflation before, because governments will go out their way to avoid it at all costs. A previous head of the Federal Reserve said they would drop helicopters of cash down to avoid deflation. That tells you everything you need to know. That inflation is here to stay. And if it's here to stay, then you need to get clued up. You need to understand that it is creating a wealth divide.

12:17And people are getting wealthier on one side and poorer on the other. And this just continues year after year. But it's so subtle. And that's why most people don't pay attention to it because it is subtle. It's just slow. The decline in your wealth over time is slow. It's not a jolt. And also it's slow with the wealth creation as well. But those who understand it, those who take advantage of it, they are becoming wealthier over time, year after year after year. And this is one of the reasons we do this podcast is to educate people. We only work with a tiny, tiny fraction of our audience, but we're educating many, many more.

12:57And we encourage you to go and share this information because this is massive. If you understand the power of inflation against or for you, then you could start to take action. And once you're educated, then the choice becomes yours. You might not be able to do it straight away, but you can start to put things into motion that allow you to take advantage of it. So leverage and inflation sounds really boring, right? If someone comes up to you and goes, let's talk about leverage and inflation, you're going to run away. But we've still got you here now because we're explaining to you how powerful and transformational it can be to either your advantage or your detriment.

13:35That's right. As you've already said, Rob, this doesn't happen overnight. And that's why another critical ingredient of the magic formula is just time. The thing about property is nothing happens quickly. And I think this is where a lot of people struggle. They'll look at what's happened after a year and go, well put a lot of work and nothing much really seems to have happened but then wait 10 years or 20 years and the forces of leverage and inflation have done unbelievable things for you and the great thing is time's going to pass anyway time is going to happen so you might as well set yourself up so the mere passing of time makes you richer and the other great thing about allowing plenty of time for these forces to work in your favor is that long-term property investing is very forgiving of mistakes and even just things like bad luck if you have an unexpected big repair if you have a tenant who's not paying their rent.

14:20That'll really blow up your numbers for that one year. It could make a significant dent in that year's figures. But zoom out to five years and look at the rental income and the capital growth and you probably won't even be able to notice that it happened. The same goes for buying bad properties or at least buying properties that don't perform as well as you wanted to or properties that prove to be problematic or even buying when you shouldn't really be buying. Time sorts all of this out. So pretty much the worst time you could have bought property in recent memory was January 2008. That was pretty much the UK house price peak and maybe not at the time but in retrospect that was very easy to tell that the market was in a bubble and things were going to end badly.

14:56So if you bought in January 2008 the next couple of years would not have been good for you. House prices fell over the next year and a half by 15 percent so if you figured out your leverage loss at that point after 18 months it would be looking really really bad. But the amazing thing is by spring of 2014 you would have been back ahead again. So purely the passing of time would have rescued you from that really bad decision within, what, six years. And if you were still holding on today, then you would have done incredibly well. So time helps you out in so many ways. It rescues you from your mistakes, it makes everything easier, and it allows that combination of leverage and inflation to work their magic.

15:34The final part of the magic formula is buying at a discount. Okay, it's not easy to do but it's absolutely possible and actually in this market environment it is easier than normal with some effort you can build in equity from day one we do this for a living we have a team of people that go across the hotspots that we believe in putting deals together and on the podcast we've shared with you how you can do this too because we want you to do it we want you to go and put your own deals together and buy at a discount. If you can go and buy anything in life at a discount, why wouldn't you? Particularly when it's one of the biggest purchases you'll ever make, a property investment.

16:18If you're going to put that amount of money in and you know it's possible to get a discount, it's actually a little bit crazy not to do it. There may be some very good reasons but they are the exception rather than the rule. So if you can buy an asset for these huge sums of money at a discount. You must absolutely do it. If you are using a sourcing company, because Beyond Property Hub Investor or others out there, you must be making sure that the money you're giving them is getting you a discount. And if you're not giving them money to get you a deal, they're getting it from somewhere else. And that might mean that you're not actually buying at a discount.

16:57And often we see that people are overpaying, which goes against this whole magic formula but that's a story for another day it's just important to say that if you're using a sourcing company it doesn't guarantee that you're getting a discount you should always do your research whether you work with us or anybody else you must always do your research but if you do your research whether you're doing it by yourself or with a third party and that research tells you you're buying at a discount you're winning but it is absolutely possible that's the most important thing to understand but this all is easier to understand once we put it into a real example so we've got one more layer an advanced layer to add to this magic formula but for now let's look at a deal that we did recently now i want to make it clear from the off this is sold out so this is not a pitch for this development i'm not even going to go into all the detail of it i'm just going to give you the headline numbers but this deal was in manchester city center and i mean right in the center of Manchester.

17:54So great location and we got a genuine discount. How do we know it's genuine? Because it was off sold prices. So other people had been paying at this full price and we had the evidence of that and then we got a genuine discount from that number and actually in pound notes it was a big discount. So the market value of this unit, the price that other people were paying for it and had paid for it was£363 ,000. But we were able to achieve a discount of£25 ,000, bringing that purchase price down to£338 ,000. Nice, okay. So the discount part has been achieved. Now let's put it all together, Rob. Let's bring this magic formula to life.

18:39Yeah, let's do that and let's build it from the ground up. So let's imagine that you got that discount you just got on board for its full value of 363 000 and you bought it with all cash so don't like the idea of leverage no mortgage thank you i've got the cash i'm going to buy it for 363 000 pounds all cash now we'll go forward five years and we'll imagine that over those five years its value has increased by three and a half percent per year obviously we have no idea what's going to happen over the next five years and we can talk a bit later about why we believe three and a half percent for this in particular is pretty conservative but historically over the long term property price growth has averaged far more than three and a half percent per year but let's just take that number for now so what would happen is you bought it for 363 with all your cash that three and a half percent growth means after five years it would be worth 431 000 pounds that gives you a total gain of 18.7 percent which means your annualized gain is of course the three and a half percent you're also collecting rent of course making a rental profit but purely looking at the capital gain, that would be 3.5 % per year.

19:40Now, Rob, I don't know about you, but that doesn't excite me. I wouldn't be happy with 3.5 % per year. I could make more money doing something with far less effort and far less risk. Couldn't agree more, Rob. So I would not be buying, but luckily, it gets better. So let's up the ante. Let's use leverage, a mortgage. Let's not put a discount in yet. Let's just use leverage. So let's assume we paid the full price. We didn't get that 25k discounts and we put down a deposit so instead of putting down that huge lump sum because we've only put 25 % down the cash in would be 117 ,000 so once again that includes all the fees stamp duty all the rest of it your mortgage broker fees the lot you would be putting in 117 ,000 into that deal so what's the gain because you've obviously put a lot less in well the gain is still 68 ,000 pounds The total gain is completely changed because remember, you've only put 117 ,000 into this deal, but you've made that 68 ,000 pounds gain.

20:43So that now means your total gain has jumped from 18.7 % to 58.1%. It's exactly the same growth rate. We've not changed anything else except we've used leverage. So we've put less into the deal. And that gain has jumped dramatically. 18.7 to 58.1 percent in just five years if that doesn't stop you buying with cash I don't think anything else will that's not buying with a discount that's only part of the formula but that just shows you how powerful leverage is alone that's a massive massive difference or if we break it down to per annum again that's 9.6 percent return 9.6 percent return off a very very modest growth rate 9.6 now i'm interested rob now i'm getting involved sign me up 10 returns yeah i'm having a bit of that but we can do better we can be greedy we can and it almost does feel greedy because it's already so good right remember we've loaded in all the costs every single purchase cost is in there yet you're still taking this gain that you get with cash and effectively multiplying it by three so three and a half percent gain is giving you nearly a 10 return on your cash every year again without the rent we haven't started counting the rent yet but let's be greedy because remember we were so a client of ours bought this unit and they paid£338 ,000 for it so that is a £25 ,000 discount baked in from the start again not easy to do by any stretch of the imagination but possible property is an asset where you can do this whereas most others you can't so they bought it with that£25 ,000 discount baked in.

22:22So if the value does go up by 3.5 % per year for five years, they won't make a gain of£68 ,000, they'll make a gain of£93 ,000. That takes the total gain over that five-year period up to 79.5 % and the annualised gain 12.4 % per year. So the discount alone has taken the annual return from 9.6 to 12.4. And we're comparing that 12.4 against the base case which is buying all in cash of three and a half percent and you can see why we call it the magic formula yeah that's a massive jump that's a huge jump and remember that's per year that difference multiplied year on year on year is going to make an enormous difference to your wealth it's incredible that you're buying the same asset you're just taking a different approach and the returns that are possible within that same asset, the range of possibilities from investing in the smartest way possible to a way that would make property investment non-viable for us two.

23:25It'd be the end of the property podcast. I'm serious. We would not invest if we didn't use the magic formula. And it really is magic. It does feel magic because it's the same asset. It's nuts. You can take this a step further. And this is where it starts to get too good, Rob. It can always become too good to be true. It probably sounds a bit like it already, but the crazy thing is you can up the ante. And upping the ante is buying in the best areas. So you invest with leverage, you give it time, you use inflation to your advantage, you buy a discount, but then you go and buy in one of the better areas.

24:00Something that we're obsessed with, something that we talk about all the time. We're so militant on it that we won't even touch areas that we do not believe in, even if it's got a discount. We just don't do it. and let's take some numbers to give you an example so the home track report says property prices are up by about 1.2 percent the last 12 months that's lower than nationwide and halifax quite a bit lower but it doesn't matter what matters is the difference because the best place in england right now is liverpool so if the average is 1.2 liverpool is 3.6 sheffield is 2.6 newcastle is 2.2 and Manchester is 2.2.

24:41They're all areas that we've picked. They're all areas that we rate as a property investment location. That's an extra percent a year. And again, 1 % may not sound a lot, but when you compound it year on year, it makes a huge difference to your wealth. But the thing is, you can actually get it wrong and go the wrong way. Because according to HomeTrack, Bournemouth's down by 1.1%. So you could be going against yourself by just investing in an area that you really like personally. You're investing based on personal opinion rather than the fundamentals, the data, the information, the stuff that's helping you be the best investor possible.

25:23That's the difference. That's a huge swing either way. From Liverpool to Bournemouth, it's a swing of over 4%. That's how wrong you can get it. A 4 % difference by just investing in the wrong area. Now, the great thing is there's loads of good areas to invest. We talk about them all the time. It's not like there's one place where all the money is being made. There's many places, but just don't make it hard. Don't do property on hard mode by going into the areas that we say you probably should avoid right now, like the Southwest and the Southern coastal areas and beyond. We talk about them on a regular basis.

25:59They're places to avoid right now as an investment opportunity. And the reason why is because you could do so much better elsewhere. And what does all this do when you put it all together? Well, it takes property investment in a very non-interesting market, in a market with just slow growth, nothing to write home about, to an investment opportunity that gives you double-digit returns year on year. Imagine if the property market starts moving. And remember, none of this includes rent. None of these numbers have included rent. So then when you get your total return each year, you add rent on top, it's then going to sound too nuts that you're going to actually not believe us.

26:37So this is all without rent. It's important to remind you, it's crazy, Rob, but it's crazy powerful. And obviously, because you're talking about forces compounding for you over time, it does just get more and more powerful the more time passes. We took an example of five years, because if you look at 20 years, it just starts looking stupid. You can't believe that it's true, but it is. That's just how the maths works. Do you know that you're going to get, in our case, three and a half percent every year? No, of course not. No one knows what's going to happen. But that point you made about location, Rob, I think is so important.

27:09Could be a small difference, but it could also make a really big difference over time. Just that difference in performance compounding every year. And these are long-term trends. It's not like you're having to sell and buy every couple of years. These are very, very clear, obvious long-term trends in place, which is why we invest in the way we do now you can of course do more you can buy places that are run down and add value through refurb and you can use that to make bigger gains or to go faster you can buy properties and rent them out by the room and be generating more rent from those properties those are perfectly reasonable things to do and people do them really well but that for me is it's all like extra possibilities on top of this basic foundation maybe we're lazy rob but this is how we invest this is how our clients end up investing as well and we do it because this is how you maximize your returns while minimizing the work you put in.

27:55It is possible to make a lot of money in property over a year or two through hard work, but it is hard work. Whereas if you set yourself up to benefit from all these ingredients over time, like I said at the beginning, it's quite hard not to make a lot of money without that much effort at all. Right, we've tried to sandwich in as much value as we could into this episode already, but we're not done. We still want to give you more so it's time for hub extra rob you've got a new podcast to recommend please do share yes i do and an episode of this podcast in particular so the podcast is called invest like the best shockingly we haven't been invited on this podcast rob but it's called invest like the best and it's a pretty well-known podcast i've been hearing about it for a long time but i never really listened to it but i was drawn in by one episode in particular which is an interview with the founder of something called alpha school i'm really interested in alternative education and alternatives to the sort of like the nine till three kind of school day different ways of learning what he's doing with alpha school sounds incredible they've basically developed this learning technology which means that with just two hours a day using this technology that's everything you need for your core academics to perform really well then with the rest of the day they support the students to do whatever they want to do which could be starting a business or practicing a sport or learning different life skills it could be absolutely anything they're guided by what the kids are interested in and obviously i have no idea how well this really works, how scalable it is or anything else.

29:13But he's an incredible salesperson for this concept. It shows you just one of the models that people are working on for the future, which I think is super exciting. And it was a good entry point for me to this podcast. So we will link to that in the show notes. Well, that's us done for another week. We will be back on Sunday in the Sunday Times answering more of your questions there. We will be back on Tuesday with Ask Rob and Rob giving you an audio version of that. And of course, we'll be back same time, same place next week with the property podcast thank you for sticking with this episode we know it was long but hopefully you found it super valuable do share it share this episode i think it's going to be really powerful for people to understand and the more people that understand it the better until we're back again take care have fun bye-bye bye-bye