I’ve been a bit quiet recently, but behind the scenes I’m working on a couple of very exciting projects. More on those soon!
For today though, a quick post with a short but important reminder: there’s no rush.
When you sign up for my mailing list, I ask you to fill in a short survey about your goals and challenges in property investment.
Many people want to get a couple of buy-to-lets to serve as their pension, or flip the odd property as a challenge and to make a bit of extra income. But another very common theme is along these lines:
I plan to quit my job in 6 months, release equity from my home, then buy 5 properties in my first year through a combination of BMV
purchases and lease options, then refinance to add two high-cashflowing HMOs in year two.
Actually, there’s nothing wrong with going hell-for-leather if those aims are realistic, fully thought through and you’re going into it with eyes wide open.
But there’s also nothing wrong with taking it slowly: keeping your job (the benefits of which I’ll be talking about in another post soon), and pursuing a tortoise-like investing approach.
You and your wife/life partner/snugglebunny are 30, and you have a combined income of £60,000.
Maybe one of you is a high earner and the other doesn’t work, or you both contribute in some combination. Tax-wise, let’s take the case of one person earning £60,000, with a post-tax annual income of £42,000.
You currently have cash savings of £30,000.
You buy a 4-bedroom house in Milton Keynes for £100,000, putting in £25,000 of your savings. You spend the other £5,000 in refurb and purchase fees.
(You should really make sure you’ve got an emergency fund of course, but let’s keep this simple.)
You rent it out for £950 per month, and end up netting a £400 monthly profit after mortgage, management and all other expenses, including a small contingency for unplanned maintenance.
Rental profit at end of year 1: £4,800
You frantically save, living on half of your take-home pay. You save up £21,000, to which you add your £9,600 from two years of rental profits (your rental profits haven’t been taxed, because you’ve used the tax-free allowance of the non-working partner).
Cash in the bank: £30,000, give or take.
You buy an exact replica of your first property – all figures the same.
Rental profit from this year: £9,600.
You start the year with another £21,000 saved, plus £9,600 of rental profit. That gives you the cash you need to buy another identical house.
Rental profit from this year: £14,400.
(So you’d only need to save £16,000 of your employment income this year to buy your next property.)
You have 9 properties, bringing in £43,200 in annual profit.
As you’ve been living on £21,000 this whole time, you can retire aged 40 – and still buy a property every couple of years to boost your income.
Achievement unlocked: financial freedom by age 40.
If you’re earning half as much? Or you’re a decade older when you see the light? Or there’s just no way you can live on less than 75% of your take-home pay? Well, then you retire at 50. Not such a bad worst case.
(None of this has accounted for inflation, but let’s assume that inflation, your wage, rents and house prices all go up at roughly the same pace and the numbers change accordingly. If house prices go up faster than inflation, you’ll be able to remortgage some of your existing properties to finance the shortfall in buying (now more expensive) future properties.)
This has all been highly simplified: tax on rental income will kick in at some point even if you’re still buying and claiming all allowances, and unexpected expenses can easily knock you off course. You’d also want to keep an ever-increasing cash buffer rather than reinvesting all your savings in the early years.
But it’s also simplified because:
There’s nothing clever at all, in fact. You just have to make exactly one purchase per year, and nothing else
I like this hypothetical model because it makes you realise what can be achieved in a decade, even if you’re having the majority of your time taken up by work, family and other activities. That’s reassuring when I’m going through a phase like I am now, where other projects mean I’m giving very little attention to my own portfolio.
It’s also based on the sound principle of living off 50% of whatever you earn. Sound radical? Plenty of people live off an even lower percentage of a lower wage than we’ve assumed for the purposes of this post.
Property therefore becomes a way of storing and accelerating the growth of money you’re saving through living a sensible financial life, rather than a get-rich-quick scheme or an alternative to working for a living.
In between, there’s a whole lot of middle ground: spending more time on your investments and doing better deals or adding value as a result will dramatically accelerate the process, or reduce the need for saving quite so much.
But even with property as only an occasional, in-the-background activity, slow and steady can win the race.
It’s a bit of a cheat, of course, because frugality and sound financial management works most of the magic and property just helps. But if you need the goal of saving up for your next property to keep you away from expensive cars and lavish spending…well, there’s nothing wrong with that.