The journey of property investment is as exhilarating as it is challenging. For many investors, the allure of generating wealth through property or real estate investing is met with one recurring limitation: capital. Time and time again, investors find themselves looking for outside angel investors to keep their projects afloat or to keep the momentum on investing whilst simultaneously facing prolonged payback periods that stall future opportunities. But what if you could become your own angel investor?
In this article, I will share my own experiences and we’ll explore together strategies that I utilised to leverage my own resources more efficiently, avoid unnecessary cash drains, and how I have kept the business momentum going without constant reliance on external funds.
For property investors, capital is the lifeblood that powers each project. Yet, even seasoned investors find themselves struggling to keep the cash flow steady. Why?
The issue often lies in how funds are allocated within a deal. Investors sometimes place too much initial cash into a project, either through high deposits, large down payments, or by leaving excess cash in the property itself even after refinancing. This capital becomes ‘locked in’ to the property, making it unavailable for further investments.
To overcome this issue, investors need to approach each project as though they were their own angel investor. How would an investor, focused on returns, approach this deal? What would be considered a sound investment decision?
- Maximise Loan-to-Value Ratios
One of the biggest hurdles property investors regularly face is the amount of cash they leave tied up in each deal. When a significant portion of your funds are locked in property, your options are limited. Here’s how to avoid excessive capital allocation:
Maximise Loan-to-Value (LTV) Ratios: Seek to obtain higher LTVs from lenders while maintaining manageable debt servicing costs. Although this might slightly increase your leverage, the freed-up capital can help you diversify your investments and improve your overall returns.
- Shortening the Payback Period
Payback periods—the time it takes to recoup an initial investment—play a crucial role in determining your liquidity and readiness for the next investment. Long payback periods mean your capital is dormant for extended periods. To address this:
Opt for Higher-Yield Projects: Look for opportunities that offer a faster return on investment (ROI). Properties that promise strong cash flow, such as short-term rentals, HMO’s and apartment conversions, can provide quicker returns, helping you recover your capital in less time.
Exit Strategy Planning: With every investment, establish a clear exit strategy. Are you looking for a flip with a quick cash return, or a long-term rental for steady cash flow? Each approach affects your payback timeline and will determine how soon you can reinvest your capital.
High Profit Margins vs High Volume: In property investing be mindful of chasing volume over profit margin. I would rather have a highly profitable portfolio of 10 properties versus low margin portfolio of 100 properties. Property has inherent risks such as being highly regulated and susceptible to interest rate and inflation fluctuations.
Add maximum Value with Minimal Outlay: Instead of extensive renovations, consider smaller improvements that can significantly increase a property’s rental income or resale value. Cosmetic updates, adding extra rooms, or simple fixes can boost the property’s earning potential without excessive upfront costs.
- Reinvesting Rental Profits
Rental income is often seen as passive income to supplement the investor’s lifestyle. However, when viewed through the lens of angel investing, rental profits become a valuable reinvestment source. Consider the following approach:
Establish a Reinvestment Plan: Instead of pulling rental profits for personal use, designate a portion specifically for reinvestment. Even modest rental returns, when reinvested consistently, will accumulate into significant capital over time.
Leverage Cash Flow for Further Investments: High-yield properties provide ample cash flow that can be used to fund deposits or smaller projects. If managed correctly, this reinvestment cycle will give you the financial independence you need without constantly reaching out to external investors.
- Focusing on Return on Equity (ROE)
Often, investors focus solely on Return on Investment (ROI), but overlooking Return on Equity (ROE) can lead to capital inefficiencies. ROE measures the profitability of your equity in the property—an often-overlooked but crucial metric. Here’s how to enhance your ROE:
Sell Underperforming Assets: If a property’s ROE is low, consider selling it to free up capital for more lucrative opportunities. By continually evaluating your portfolio’s ROE, you can identify properties that may be holding back your overall performance.
Equity Optimization: Avoid leaving substantial amounts of equity in a property that could be better utilised elsewhere. Instead, leverage that equity by refinancing and reinvesting the funds into higher-performing projects.
- Utilising Debt Wisely
Self-financing through strategic debt can allow you to accelerate growth without dipping into cash reserves. When used correctly, debt becomes a tool to enhance your own investment capability:
Seek Low-Cost Lending Solutions: Look for loans with favourable terms that can be repaid from the property’s cash flow without causing financial strain. As an example, not so long ago I managed to obtain a loan from my bank with an interest rate comparative to a normal mortgage.
Interest only mortgages: In-order to improve your cashflow take out interest only mortgages. Ensure you stress test your repayments with higher interest rates that way you mitigate any unforeseen interest rate hikes. We did this pre COVID and maintained our cashflow inspite of increasing interest rates.
- Building Reserves for Liquidity
Cash reserves provide a financial cushion and allow for proactive, rather than reactive, investments. Many investors find themselves strapped for cash because they’ve poured everything into properties without leaving sufficient liquid reserves. A self-funded angel investor approach requires a healthy reserve for opportunities and contingencies.
Save Save and Save!: Revisit your living costs. Avoid spending creep and focus on investing. This is very important at the onset because the alternative is to pay high interest rates and fees that have the potential to make your projects uneconomical.
The Benefits of Becoming Your Own Angel Investor
By adopting an angel investor mindset, you gain significant advantages:
Increased Control: You can make decisions without external influence, maintaining full control over your investments.
Reduced Dependence on External Funding: No longer reliant on outside investors, you can pursue opportunities at your own pace.
Higher Profits: Without having to share returns with outside investors, you retain a larger portion of your profits.
Long-Term Sustainability: A self-sustaining business model gives you the freedom to grow at your own pace while reinvesting earnings into new projects.
In conclusion, property investors can become their own angel investors by maximising capital efficiency, minimizing cash drain, and reinvesting strategically. Through disciplined financial management and a focus on optimising returns, you not only keep your investment momentum going but establish a sustainable business model that builds wealth for the long term.