18th July, 2013 BACK TO ALL PODCASTS

This week we were back to normal after our live episode, and we eased ourselves back in by talking about leverage – a fundamental concept of property investing.

Leverage, or gearing, is another word for taking on debt – but we explained why taking on mortgage debt to buy an asset is totally different from the “bad debt” you’d associate with credit cards or other types of borrowing.

We gave an example of how it works, talked about the risks of being over-leveraged, and discussed how to decide upon an appropriate level of leverage to get the benefits without the risks.

Resource of the week

Do you ever find that your life is just too straightforward and you long for a bit of excitement? Excitement maybe like being chased by zombies?

Well have we got a resource for you! Rob B shared Zombies, Run! – an app for iPhone and Android that keeps you motivated when you’re jogging or training for a run.

You want to be healthy enough to enjoy the rewards of your property portfolio after all, and if the motivation of dodging zombies is what it takes…

News this week

We shared two stories from [The Independent](http://blogs.independent.co.uk/2013/07/04/house-price-inflation-at-three-year-high/): a finding that good weather leads to higher property prices, and another study suggesting that owning a property is still the #1 aspiration for young people – despite all the turmoil the market has been through.

This week’s mentions

Rob D mentioned that he’s written a free 8-part email course for beginners in property, which you can sign up for at propertygeek.net/course.

We were also really excited to learn that Andrea Morgan the @rightmoveaddict had managed to get The Property Podcast onto the Rightmove blog. Check out her own website here.

Tell us what you thought of the show!

Do you have any questions about leverage that we didn’t answer?

What level of leverage do you aim for with your own portfolio?

Just let us know by leaving a comment below!

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Transcript

Welcome to the Property Podcast, the home of news and debate about building long term wealth from property investment for beginners and experts alike.  And now for your hosts, before I met them I thought BTL was a sandwich. It’s Rob and Rob.

Rob Bence:                         Welcome to the property podcast episode 18. I’m Rob Bence and joining me every week is Rob “The Property Geek” Dix, Rob are you there?

Rob Dix:                               I am here, I am in Berlin and it’s really good to be here. It’s good to be back to normal after a very gruelling but very enjoyably live show last week as well. We’re going to go back to our recorded format this week. We’re going to be talking about leverage- what it is, why it’s good, when it’s not good, and how to decide how exactly you’re going to use it. Of course we’re going to have a weather related news story as well because this is a British podcast after all.

Rob B:                                   Yeah and it’s only polite to talk about the weather. Before we get going as always we like to send some love and appreciation to our iTunes reviews and they are continuing to come in so thank you very much.

First off we’ve got [01:05] who says, “Great advice. For someone as young as myself looking to start out, presented excellently with the listeners in mind. Looking forward to mind.” Dr. Kit says, “Rob and Rob provide and invaluable first hand experiences and informative to anyone aspiring or even already involved in property investing. From strategy to useful websites and tools, the podcast is full of golden nuggets. Well worth a subscribe.” Don’t like the nicknames, I hope that’s not ours says, “Very well presented and professional produced. Informative, detailed but not too heavy. Not sure about the silly introduction though.” Ric they’re still getting a panic but I have to say everyone, I know we had a lot of feedback some in support of Ric but most against. We have said it’s time to come to an end and I think next week will be his last.

If you do like him make sure you get him recorded so you can play back to your heart’s content because we will be losing Ric. Sorry Ric.

Rob B:                                   As a politician would say, “You got to make difficult decisions at a time like this.” It seems like the people have spoken. I think you might miss him when he’s gone. I think he’ got a place but the people have spoken.

Rob D:                                   They have and this is a democracy. Unless you leave us a bad review we won’t listen to you.  Democracy to our five star reviews.

Rob B:                                   What have you been up to Rob this week?

Rob D:                                   Well recovering from the live show for a start. Those were really good and I know you mentioned at the top of the show Rob. I’m hoping it came across as well as it went in the night what I felt was really good about the episode was that the people who have listened to the podcast got to ask direct and really specific questions about what was on their minds. I’m sure a lot of other listeners were thinking similar things as well. Hopefully last week’s episode was a massive benefit. It takes a little bit of time to put together but we’ll definitely do another one in the future.

It was really good, we really enjoyed it. Lots of emails in from listeners for show ideas. Next week’s show idea is, thank you to one of our listeners who suggested it and we’ll reveal it all later in the episode. We’ve got that and Andrea Morgan has been working her magic Rob.

Rob B:                                   Yes so I hear.  An episode about Right Move and all our tips and tricks to use that. It’s going to be featured by right move themselves which is fantastic.

Rob D:                                   So those of you who haven’t caught up in the last couple of episodes, Andrea is the right move addict on Twitter. Find her at @rightmoveaddict and you can probably guess from the name is very much in love with Right Move. We are as a property tool. She featured us on her blog recently which we’ll link to in the show notes. Also Right Move will also be featured on the blog as well, at the back of her blog which is just incredible.

Everything just seems to be going well podcast related. Everything we are involved in seems to turn out really good so long may that continue and thank you very much Andrea, the right move addict.  If you’re not following her on Twitter already make sure you do because she comes up with great information. We look forward to posting that blog in the show notes in the very near future.

Rob B:                                   On the subject of podcasts I’m actually bringing the currency rate of the Property Geek Podcast to an end by the time you’re listening to this. I think there will be just be one more episode to go.

Rob D:                                   Say it aint’s so Rob, say it ain’t so.

Rob B:                                   I know. I thought I heard a little bit of sniffling from you already. Every so often it’s nice to take a break and focus on other things, and concentrate on lining up some really great guests for the next series. I’m going to be taking a little bit of a break from it. If you’re a listener of that and you want to find out when it starts again, joining the mailing list is the best thing you can do because I’ll be announcing when it starts again on there.

I’ll also be announcing in advance some of the guests on that. You get a chance to actually submit some of your own questions.  I think one of the things I’ve learned from this podcast is that when it’s the listeners asking questions that’s always the very best thing and you get the best material. I’m going to experiment with that and see if we can get some advanced questions from listeners. That’s going to be real interesting.

I’ve also been busy putting together an eight part email course for property beginners. I’ve got my book of course but I know some people like to just kind of have information dripped to them over a period of time.  I’ve put together an eight part email course and you can sign up for that at propertygeek.net/course. That’s where I take some of the concepts from my book I have eight of the most important things I think you need to know as a beginner so you can go into your first property investment with confidence.

I’ll be interested to see how that goes and what reactions I get to that. To sign up for that it’s propertgeek.net/course.

Rob D:                                   I’m going there now Rob I’m going to sign  up.

Rob B:                                   All right. Well let’s get moving on to the news then. As I said earlier weather related of course.

Rob D:                                   A recent study suggested that when the weather improves so do the sales prices of property.  As we’ve had a bit of a heat wave recently in the UK if you listen to this [0:05:40] is probably peeing down because it’s a couple of weeks on. Hopefully the weather has continued and we’ve got amazing sunshine still.

If that’s the case then property prices will booming because apparently longer, warmer, and sunnier days have much more positive effect on buyers than rainy days. So what do you think of that Rob?

Rob B:                                   I can believe that. As kind of a counterpoint to that I was speaking to a letting agent I’m friends with the other day and he was saying that it’s terrible for lettings because people just don’t want to be going around and trekking around properties and thinking about that kind of thing, when they can be out having a barbecue or whatever else. Maybe good for sales but not good for lettings. He also operates in quite of a student-ey area and he says that rainy days are really bad as well because no one wants to be going out and looking up properties when it’s raining.

Maybe he’s just got really lazy clients and any kind of weather is bad for them I don’t know.

Rob D:                                   Mornings.

Rob B:                                   Morning’s not good, evenings tough. All sorts of things going on.

Rob D:                                   It’s a tough crowd.

Rob B:                                   he’s probably got a 60 minute window every day.

Rob D:                                   Exactly. Also in the news this week pulled byt he BBC. They spoke with 2,000 18-30 year olds and they looked at what was their biggest priority. Sixty-one percent of them said owning their own property was their biggest priority well ahead of getting married, going to university, or buying a car, 61% that’s huge.  it shows that young people are still very much switched on to property and maybe Rob when these first time buyer schemes come out in January that will certainly have an impact on the market.

Rob B:                                   I thought that’s really interesting because there’s this whole generation rent catch phrase isn’t’ there. Everyone’s started saying, oh well maybe now everyone’s going to get used to renting and it’ll become a bit back more in mainland Europe and people don’t have that home owning aspiration anymore.  If this study is to be believed then it seems like the people renting at the moment is very much circumstantial, and the desire for home ownership isn’t going anywhere.

We might well see that changing as circumstances change so yeah, I thought that was a really interesting story.

Rob D:                                   Okay so should we jump into the topic of the week?

Rob B:                                   Let’s do it. We are talking about leverage this week. It’s one of those words that you hear and you probably have a vague idea of what it means. You might not know precisely what it is or some of the things to consider around it. That’s what we’re going to be talking about.

People talk about leverage, people talk about gearing and what does it all mean? Well basically we’re talking about borrowing money and that borrowed money is put to use to use in theory at least, maximize your own returns. The best way I can think about of explaining this is to start with an example of how it should work in theory. Then we can talk about exactly what it is and some of the issues around it.

The most common form of leverage that people use is a mortgage, a buy to let mortgage. Rob I know that you’ve got an example with some numbers about how exactly that would work.

Rob D:                                   If you want to grab a pen and paper if you’re not on the move then feel free. You might find this easy but I’ll try to keep it as simple as possible. I’m going to give you two example. One with no leverage involved, and two we’re going to look at leveraging and maximizing our returns,

In our first example you could have a 100,000 pounds and you may go and buy one property cash for 100,000 pounds.  Now the benefits of that is you have no mortgage so all the rent that comes in and the minor costs is yours and you have no mortgage payments to pay. You also have lower risks because of that so that’s to buy in cash, not using leverage. 100,000 pounds, you buy a property outright for 100,000.

The second example we’re going to look at leveraging. What we’re going to id we’re going to split our 100,000 pounds into four so 25,000 four times.  We’re going to buy four properties worth 100,000 pounds and use mortgages of 75% on each one. On each property we’re going to have 25,000 pounds down and a 75,000 pound mortgage. Yes I appreciate some people might be listening to this and go, yes there’s cost and we’re just keeping it simple for example purposes..

We now have four properties. We’ve got rent coming in on all these properties as well but we do have mortgages to service. Over time the property market rises as it always has done.  At some point property prices will rise by 25% okay.  In example one a property that was worth 100,000 is now worth 125,000. Great okay.  On the 100,000 we initially invested we made a 25% return on our investment over time due to the property market going up on paper.  Great that’s example one.

Example two our first property is worth 125,000 our second, our third and our fourth. Each has gone up to 125,000.  Now that means that we’ve made 25,000 pounds profit  four times over which obviously comes to 100,000. Therefore on that original 100,000 we put in, we made 100% return on our investment because we leveraged.

What’s interesting we started with the same amount of money but because we took advantage of leverage we managed to increase our return four times over.  So instead of 25,000 we made 100,000 which is huge and a big difference. That’s why so many property investors get excited by leverage because the potential it offers you over the long term. It’s really one of the biggest wealth creation tools you can use.

Let’s go into a little bit more detail because some of you may be listening going, “Well isn’t it better to buy cash because it is a debt?”  Rob do you want to explain why the majority of investors are happy to take on the debt?

Rob B:                                   Debt is something a lot of people got a hang up about and you’re told that it’s bad to be in debt.  You have to make a distinction between good debt and bad debt. A bad debt is something like credit card borrowing where you’re just using it to buy a new car, or go on holiday, or something else. Something which is going to depreciate or something where’ it’s an experience like a holiday where you’re going to have it, and you’re going to spend it and it’s going to be over.

However debt in the form of a mortgage is something that you’re taking on very deliberately because you know you can make more money as a result of taking on that debt. it’s not like you’re going to take it and spend it on stuff. You’re going to use that money to buy an asset which you believe is going to generate an income for you and appreciate over time.

While it is debt it’s not like it is credit card debt where it’s meant to be short terms and it’s got huge interest rates and everything else. It’s a structured product which has got an affordable interest rate. It’s for that purpose, it’s over a long period of time. You can fix it so you know exactly what your payments are going to be.

I don’t even think of it as debt that’s the thing. Think of it as buying power rather than debt. What it really does is maximize your buying power, and maximize your return on investment.  You’re taking your own money and you’re amplifying the effects of the return that you get by using someone else’s money.

In the long term of course that is great it means that when you get capital growth you get greater                 ROI on that. In the short term it’s going to eat in to your profits because you got that interest payment that you need to make. You can’t keep all the money to yourself but as Rob’s explanation showed that buying power far outweighs the money that you’ve got to pay as a result.

However of course leverage you can have at any level. You could just borrow a little bit of money or you could borrow the majority of money that you need to buy a property. You can be overleveraged and Rob we’ve seen a  lot of that in the recent past. It didn’t work out to well.

Rob D:                                   The word leverage comes with a word of warning because if you use leverage. we’ve explained how it can make a much bigger gain but it can potentially make much bigger loses as well. In that first example we said the property market was up by 25%. You’ve then made 100,000 by leveraging, but if the property market dropped by 25% and you were forced to sell than on paper you’ve lost the 100,000 you originally invested. You’ve lost a whole 100%.

The important thing to remember if some of you getting nervous to listening to this if you are new to property you only lose money if you’re forced to sell. For me when the property market dips at certain parts of cycle as it does it doesn’t worry me because I’m not ever going to sell my property. I’m going to hold on to them and they’ll go back up over time.

Leverage is fantastic as a wealth creation tool to making money long term.  In the recent recession when property prices did dip and people we’re leveraging 95%, 100% of their property through mortgages. If they were then forced to sell they were in trouble. In fact if the property prices have dropped below the values then they could make a loss and have to supplement the mortgage payment back to the bank because if the sale price didn’t even cover the mortgage. They were the people who were forced to sell.

if you have a good cash flowing property even after the recession property prices drop and you can service the payments because your rent is higher than your mortgage then you shouldn’t be really too worried. I don’t want to give away too much but next week we’re going to give you some examples of investments and you’ll see that from one of my investments that is actaully a negative equity. I’m perfectly comfortable with that because it’s making me money every month rather than giving the game away now you have to listen in to it next week.

The point I’m coming to is leverage can be a fantastic tool but just be careful and cautious that you don’t over leverage yourself so your cash flow is restricted and even a negative cash flow. People were investing in property when they were losing money every month that’s not a good investment. That’s a bad debt. You’re supplementing your investments, you should never be supplementing your mortgage it means you haven’t got a good investment.

Just something to be cautious of when you’re investing over time. At the moment where the market is it’s very hard to do that because the property prices are so good compared to rent that pretty much any property you buy will cash flow well. Just to be wary of is the market improves over the coming years.

Rob B:                                   That is the absolute key point it’s only a problem if you have to sell, and you never want to be in a position where you have to sell. You can choose to for different reasons at any time but you just don’t want to be forced because that just means that you’re not going to be in a position to get the best price and you might be forced to take a loss at exactly the wrong time.

When it comes to leverage everyone’s got their own comfort level I think. I know some people who want to take the absolute maximum they can at all times because they love this fact and it boosts their returns so much. They got a model that they know works, they know exactly what to buy to make money.  It’s like great let’s borrow as much money as possible because then I’ll make more money.

Then you get other people who are al little bit more nervous about it and they may be worried about things like the feature interest rates. Interest rates are at a historic low at the moment. They’re only going to go in one direction at some point interest rates will go up. Obviously if you’re investing smart you’ve budgeted that in and you stressed tested your portfolio at higher interest rates. Some  people just don’t want to be worrying about that happening. If it’s going to be keeping you awake at night worrying about what that’s going to do your repayments then maybe a lower level is the right way to go.

Even if you only borrow 50% of the money of you invest that’s still going to do quite a lot to your buying power while still giving you a lot of room for interest rates to go up without affecting you too much and property prices to dip without wiping out your original investment.

You can really do appositely anything and it depends as always on the goals that you’ve set. It depends on where you are in the life cycle of your investments and how much money you want to make, how fast you want to scale your portfolio and it comes down to your personality as well as to how risk averse you are I  suppose.

I wouldn’t say necessarily unless you’re particularly cash rich that you should avoid leverage completely. Like we say it’s there for a reason and it’s one of the best things about property investment. You’re not going to get a bank lending you money to invest in the stock market or in classic cars, or anything else you might want to invest in.  Property is pretty much the only thing where you get to take advantage of this. Depending on your circumstances it probably makes sense to do so.

Rob D:                                   That’s leverage if you’re new to property you’ve learned a lot there and even if you’re experienced about some things we’ve gone over that’s refreshed it for you.  There’s a lot of podcasters who I’ve spoken to who are experienced investors say they love the episodes that are basic and for newbies because it just refreshes this stuff they should be focusing on.

Hopefully if you’re an experienced investor you got a lot from that and next week’s episode you definitive will so I can promise you that as well. Resource of the week and we’ve got a bit of a fun one this week. A few weeks back Rob gave you a fitness resource of the week. I thought it’s only fair that I chip in and give you one too.

Like Rob’s I want to keep it fun and I do use this so this is not one I just researched and plunked in here. It’s an app that I own and I use regularly and it’s called Zombie Run.

Rob B:                                   Can I just stop you there?

Rob D:                                   Yeah.

Rob B:                                   Have we not enough problems in your life without being chased by a presume virtual zombies?

Rob D:                                   I know and I have to also say to this point it’s not that I’ve got the maturity of a 10 year old that I play this. It is actually designed for adults and let me explain what it is before you judge me.

Zombie Run is a fantastic app it’s actually developed in the UK as well so you’re supporting  UK developers here which is another good thing.  The app the best way to describe it is a story. You run for your episodes each story. The story is fantastic because it was actually put together by a professional author, I forget her name but if you go to her website which we’ll link to in the show notes you’ll find out more.

She wrote this story for the app and it’s absolutely fantastic. What you do is you run through each episode and you can set different sort of distances or time limits that you want the episode to run for.  If you’re new to running and just getting started it’s great because you can do 30 minute episodes or if you’re a bit more experienced and you love running like myself you can go 60 minutes plus. It’s also got distances you can run to so 5 kilometres, 10, 20.

There’s lots in there. It’s amazing value. It is about 4,99.  Oh 4.99 for an app and it’s funny because you know an iPad is 400 pounds and we quibble over paying over 4 pounds for an app. It’s so worth the money it’s one of the best apps I’ve even downloaded. You’ll have so much fun.  The only problem you have is when you start to tell people about it like I am, everyone else is going to like what? Zombie Run how old are you? You play it it’s absolutely fantastic. if you love audio books and if you love running this is the app for you because it’s so much fun.

You’ll really find that you’ll look forward to going out to your next run. They recently brought out a new app as well and updated them so there’s loads more levels for myself to tackle so I’m really happy about that.

Rob B:                                   I think that’s a successful sales pitch . I’ve never really got on with running and that’s why I sort of shed that resource from a few weeks ago of alternative ways to getting fit but I think I might be tempted to give that a go because my problem has always been boredom so maybe zombies is what I need to get me going.  As the resident non Apple user I need to point out that as I’m taking a look you can get on the iPhone and on Android as well. You’ve got no excuse not to get involved with the zombies whatever platform you use.

Rob D:                                   I do own an Android phone as well so it’s not like I’m an anti-Android. I know we always cater to the Apple user I’m glad that Rob’s here to balance me out.

Rob B:                                   It’s interesting maybe I should give it a go and report back and maybe if you’re listening and you give it a try, maybe you can leave a comment and let us know how you got on with it.

Rob D:                                   Next week business as usual. I have a property book as the resource of the week for you. If you’re thinking when did this turn into a fitness podcast it’s not.  You want to be around to enjoy your property so staying fit is important. It’s just such an app, I’ve got to throw it in one week and I’ve been using it for months and months now.

I’ve been waiting to squeeze this one in. Go and download it, it’s really good. Next week we’re back to property resources.

Rob B:                                   Next week we’ve got a very special episode as well because it was suggested by our listener wasn’t it?

Rob D:                                   It was and we’ll credit the listener in the show.  Like I said there’s been a lot of suggestions recently but he contacted me a few weeks ago and he mentioned  some ideas he’d like. What he wantedwas tangible examples of what we actually done ourselves and I thought that was a fantastic idea. We’re going to actually look at our first vital investment and how we got started. Our first  investments each explain about what we did well, what we didn’t do so well, what we learned, what we do differently. Obvisouly all successes.

That’s going to be a really good example I feel like that’s a great suggestion. It actually wasn’t on our list and we’ve got a massive lists of episodes of different episodes we wanted to do and that wasn’t there so we’ve pushed it to the back.  We think it will offer loads of value so make sure you join us next week.

Rob B:                                   Definitely I’m really looking forward to that one. I can’t believe we didn’t think of it ourselves.  It was a really great idea. That’s going to be great. Also check out the website as well if you haven’t done recently because we’re going to be making some changes to that and making it even more valuable hopefully. While you’re there if you haven’t signed up to the mailing list yet it’s always a good idea to do that and join all the other people who have been signing up recently. We’re going to tell you about every episode as it comes out.

We’re going to sort of slip you a special little extra as well.

Rob D:                                   But for now enjoy the smooth tones of Ric’s voice because it’s his second to last podcast. We’re going to miss you Ric. Good bye everyone have a great week.

Rob B:                                   See you later.

Ric:                                         thank you for listening to the Property Podcast. Don’t forget to check out the show notes and join the mailing list at the propertypodcast.com.