The technique relies on re-mortgaging and negotiating good discounts on off-plan property to take a £50,000 deposit and turn it into a million pound property portfolio within a couple of years or less.

How does it work?

The technique only works in areas where house prices are rising fast and opportunities exist to purchase off-plan properties, where discounts of up to 15% are not uncommon.

Investors begin by purchasing one or two off-plan properties. These are properties that are not yet fully developed or have only just received planning permission. Developers tend to offer larger discounts to people who are prepared to buy properties at this stage of the build.

On completion, the investor will refinance the properties. A combination of rising house prices and the discounts gained at purchase, ensure that the property is refinanced at a higher figure than the original purchase price. The extra money gained through refinancing is then be used as a deposit for another two properties.

This cycle will be repeated a number of times by the investor until they have built up a strong portfolio of investment properties, with a combined value of more than a million pounds.

High-risk strategy

Sounds easy, so why doesn't everyone do it? Although many investors have made a lot of money using this technique over recent years, it does contain a very high element of risk and relies on a number of market conditions being right.

Potential obstacles include:

-- Falling house prices

-- Inability to obtain genuine off-plan discounts

-- Poor quality or undesirable developments

-- Difficulty in finding tenants to maintain rental income that in turn pays the mortgage costs

-- Potential capital gains tax problems if the properties are sold

Further advice

Before deciding to use this property investment technique, it is essential to get further advice on the legal, tax and financial issues.

A number of property investment companies exist to help advise their members on these very speculative investments, but be wary of the less scrupulous companies that charge their members £1,000s to attend seminars or build portfolios on their behalf.

Posted by Pat Kiisk on December 13, 2008 at 12:00 AM

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