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Property goes up by 11% making his 'portfolio' now worth $250,000. Remember that he can remortgage up to 75% of value of his properties. That means he can borrow up to $187,500 in total. Seeing as he has so far only borrowed $150,000 (2 x $75,000) he has another $37,500 he can draw on. What's a landlord to do? Buy another house, using $37.5k as deposit, on a house worth up to $150,000!
All well and good, you say. He's becoming rich, rather rapidly. Until.... market turns and starts to fall. Our landlord now has $400,000 worth of property under his control, for a tiny initial investment of only $25k. His gearing is immense - x16 in fact. For every $1 market rises, he 'makes' $16. For every $1 it falls, he loses $16. In fact, a 6.25% fall in property market will wipe out his initial cash deposit, meaning that to all intents and purposes, buy to let landlord owns nothing. The outstanding loans are same as value of properties, so bank owns 100% or it. The landlord, of course, still has RESPONSIBILITY.
But, I hear you say, landlord is only really interested in rental yield - as long as he can cover monthly payments with his rents, isn't he ok? Yes - until, for example, roof starts leaking, or a new boiler is required, or a bad tenant stops paying. At which point he's up a certain creek without any form of paddling implement.
This is reason why many professional property investors (;-) offloaded last of their investment properties last summer - chances of a property crash just looked too large to justify any possible future gains, given record house prices and low interest rates. As song says - only way is down. If you still hold investment properties, it's probably too late to sell. You'll have to hang on grimly until market turns again - probably around about 2008. Good luck with it!
Peter Parsons writes exclusively for www.mortgagedown.com , the free site offering articles and tips on how to reduce your mortgage fast