THE PLAN: Save, Buy Property, Retire at 50.

jones87_2

Hello,

I would like to run a plan past some experienced folks on here, tell me what you think. I am a 22 year old who earns around £2k after tax. Debts now paid and I survive on £1k/month and have £1k/month left over/saved. I believe what most people do wrong with their lives is working for money, instead of making money work for them. My plan is to buy assets (property) over the next 10 years.

Tell me I'm wrong but my opinion is we're coming out of the crunch too fast, dead cats bounce springs to mind, I think within the next 1-5 years property values will return to around 3x income and good property will be available to any landlord looking for a long term investment.

So, the plan - I will try and keep it as simple and rounded as possible Remember it's just a plan, multiple things could go wrong. It's just the general idea, point out the flaws and remember I'm just 22. The plan is based on an 'ideal world' scenario! ...

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My market location would be Liverpool 'inner city' L6/L7/L8/L4 (Terraces) areas which is where I live.

Use 12k of savings each year to buy a property at auction which matches my target market (3 bed terrace, local, good rental location etc) buy £70k, mortgaged £59,500 interest only

So do that over say 10 years, I would have 10 properties on interest only mortgages.

I haven't figured the maths out but when is comes to paying back to £59,500 capital at the end of each mortgage, I would have to sell another of my properties to cover this. I figure selling 1 property would pay back the capital on 3 of my other properties (or am I wrong?)

So in 25-35 years time I will have good assets producing a good rental income to see me into my last living days. If it we're today, I figure £450/month rents x 7 properties I have left after selling other 3 to pay capital back. £3,150/month

As I said the figures may be out a little as I'm not sure on future valuations etc. But I do know houses in my area which went for 70k in 2003 are all producting rents between £450-500 now.

My questions are:

What would a £70k house be worth in 25 years?
Should a 15% deposit on a BTL give me a positive cashflow?

Please point out my flaws and where I am wrong

It would be great to hear feedback from those who have done this themselves, whether it be in the last 10 years or the last 30.

Thanks for taking the time to read...

Nick,

dopester

You're living in a fantasy land imo.

Your £70K houses might only be worth £50K in 18 months, or less.

The decade for your scheme to work has come and gone... it seems you've not twigged it yet... but many people are waking up to the fact house prices can actually fall... and fall a lot in value. Hard to believe, but it is true.

jones87_2

I understand that, but I'm not talking about buying now, I'm talking about buying in 3/4 years or so, when the market is/maybe flat/bottom. It may not be bottom then but there will come a time when it will, and prices steadily increase in line with income until the next boom/bust.

[Deleted User]

you need to diversify re asset building

I like your ambition but don`t get bogged down re money. You can`t take it with you and there is much more to life

amcluesent

>I haven't figured the maths out...<

You are Grant Bovey and I claims my £5! :beer:

opinions4u

jones87 wrote: »

I would like to run a plan past some experienced folks on here, tell me what you think. I am a 22 year old who earns around £2k after tax. Debts now paid and I survive on £1k/month and have £1k/month left over/saved. I believe what most people do wrong with their lives is working for money, instead of making money work for them. My plan is to buy assets (property) over the next 10 years.

The good news: Property values have, over extended periods, outstripped inflation and provided positive returns.

Here's a chart showing UK house prices over recent decades.

I think you need to carefully consider what has driven the growth spurts though.

1) 1988 saw a budget that ended joint (unmarried) tax relief on mortgage interest for property purchase. The period between announcment and implementation saw a massive upward shift in prices as people rushed to secure their joint tax relief entitlement! Marriage rates dropped.

2) The period from the late 1990s onwards saw British lenders move away from relying on personal savings from their depositers to fund mortgage lending and pulling in money from wholesale funders internationally (e.g. American pension funds). This massively increased the amount of money available to lend, expanding sub-prime and self-certified mortgage availability. The removal of much of this wholesale funding was called the Credit Crunch. You need to ask why banks would want to rely heavily on such funding again in the future.

You also need to ask what is going to drive growth in property values in the future. Reduced immigration, no tax subsidy and a shortage of mortgage funds are not an ideal mix to drive asset values upwards.

Tell me I'm wrong but my opinion is we're coming out of the crunch too fast, dead cats bounce springs to mind,

A dead cat bounce is always a possibility. I think a drop in stock market values is likely in the not too distant future. But I'd say there's a long way to go before we're out of the woods because unemployment continues to rise, bank lending is still well below levels of a couple of years ago (and they don't have the liquidity or strength of capital to correct that) and tax rises for petrol, VAT and stamp duty are all on the way (petrol is already here).

I think within the next 1-5 years property values will return to around 3x income and good property will be available to any landlord looking for a long term investment.

I refer you to the link above. Look at the period between 1990 and 1997. It isn't pretty. Factor that in with what caused the boom in prices after this date. What do you think will fuel the next boom in prices?

Some people have done well out of buy-to-let. Others haven't. As part of a diversified portfolio property can be a good thing. But when one of Mr Brown's budget opened up the possibility of people investing their pensions in a single property he encouraged an "all eggs in one basket" rush that has damaged far too many people's retirements.

Use 12k of savings each year to buy a property at auction which matches my target market (3 bed terrace, local, good rental location etc) buy £70k, mortgaged £59,500 interest only

In the current market, can you get a buy-to-let mortgage on an interest only basis for 85% of the purchase price?

So do that over say 10 years, I would have 10 properties on interest only mortgages.

I refer you to the lack of growth in property prices from 1990-1997. There is no guarantee that property prices will rise.

I haven't figured the maths out but when is comes to paying back to £59,500 capital at the end of each mortgage, I would have to sell another of my properties to cover this. I figure selling 1 property would pay back the capital on 3 of my other properties (or am I wrong?)

Depends on the value of the property at the time.

So in 25-35 years time I will have good assets producing a good rental income to see me into my last living days. If it we're today, I figure £450/month rents x 7 properties I have left after selling other 3 to pay capital back. £3,150/month

Of course, property requires maintenance and repairs. Landlords have legal requirements to comply with that cost them money. If your property does appreicate in value then HMRC will be quite happy to collect the Capital Gains Tax you owe. as and when you sell your assets.

As I said the figures may be out a little as I'm not sure on future valuations etc.

Prices can go up. Stay the same. Or fall.

But I do know houses in my area which went for 70k in 2003 are all producting rents between £450-500 now.

Except the empty ones that have no tenant.

What would a £70k house be worth in 25 years?

I don't own a time machine.

Should a 15% deposit on a BTL give me a positive cashflow?

You need to do a business plan that has a more cautious consideration of the costs of maintaining your property empire. Factor in buy-to-let mortgage set up fees, potential higher interest rates (which could screw you, 15.4% rates would have murdered BTL landlords and they have happened in the last 20 years), building up a liquid capital base to allow you to maintain your empire through the next property recession (there will be 3 or 4 during the period you have in mind).

It would be great to hear feedback from those who have done this themselves, whether it be in the last 10 years or the last 30.

I haven't.

- what will fuel the house price growth you need to benefit from the plan?

- managing a dozen tenants will take more effort than you seem to think

- rental income isn't guaranteed. You will get non-payers, under-payers and empty properties

- costs of insuring, maintaining, repairing, complying with legislation need to be met from your non-guaranteed rental income or underlying liquid capital.

All eggs in one basket. You might make a lot, but you have a chance of being crippled financially and never recovering.

brewerdave

Also don't forget to factor in tax - you would have to pay income tax on the rental income less allowable expenses - who is to say whether that tax rate will remain at 20% ? The government need our money desperately currently - I can see some grab on unearned income coming up!

Lansdowne

kittie wrote: »

you need to diversify re asset building

This is not asset building, it is liability building. Nick is proposing to get hugely into debt, well over half a million to acquire these "assets", with no guarantee of rate of return.

jones87 wrote: »

Hello,

I am a 22 year old who earns around £2k after tax. Debts now paid and ...

Do you mean "I am a 22 year old who has given up on ever having a love life"?

Maybe you are a gay man who hopes to find a rich daddy figure some day. But otherwise, one day you may want to "settle down and start a family".

Children are expensive things (partners as well sometimes). Imagine how many times you could be telling your (wife, child) "Sorry love, we can't afford that (romantic honeymoon, first bicycle, university fees), I've still got these 11 mortgage debts to pay off".

gibbyni

Would a better option not be something along these lines,

Find the type of house you want, you know approx rent that can be charged. Now i would take a 9 month out of 12 occupancy. So for 3 months its sitting empty while you find new tenants. Now take away your expenses, property maintenance, insurance, emergency fund, estate agent fees for renting and anything else you think of as an expense. Dont forget Tax

Would all this be enough to pay your interest only mortgage and have a little extra to pay off the capital amount on the mortgage?

If its a YES then it MAY be a good deal.
If its NO I would stay well away from it.

I wouldn't even consider the future house prices in your plans god knows where they could be.

Using them rules I would think properties that would fit them would be few and far between.

Now I have never bought a house in my life so I could be talking rubbish here but that is the rules that I would use.

Wobblydeb

First of all, well done you for getting to such a good financial position at only 22! You've got the right idea with buying assets, and making your money work for you

My thoughts?

What you have described is the upside scenario. Next you need to model the likely scenario, and finally the downside scenario.

So the likely scenario should include void periods for each property, and all the costs (such as regular refurb, insurance, equipment breakdown and legally required certs).

A downside scenario (for example) could include half the properties on void for a period of 6 months, or prices falling below the mortgage value.

You should definitely look at diversification, and also check whether you can get 85% BTL mortgages any more.

I tried property investment in 2003 in Newcastle upon Tyne. I got tenants okay initially, but then struggled. That was because increasing numbers of brand new city centre flats were being completed, falling empty and then the landlords were reducing rents to prevent voids. My flat wasn't as posh as the new builds and I thought I would get students while the new builds would be more expensive and attract young professionals. But the new build owners dropped rents to the point where students could afford a posh pad. So I got voids and was paying £500 interest only mortgage a month with no income. I could see the situation was only going to get worse (more flats being built!) so decided to do a spot of renovation and then sell. I sold it in 2005, and was glad to break even.
Property is time consuming (I was called out one evening because the new tenants thought the oven was broken - they just couldn't read the instructions properly) and voids have got to be one of the scariest things imaginable when you have taken a mortgage out. The only thing I could imagine which would be worse is a tenant who has defaulted and having to go through court proceedings to have them evicted.

I am not saying don't do it (there are certainly some negaholics around here!) just you need to be as aware of the potential downsides as the upsides, and plan on how you are going to cope if the worst happens. I had a reserve fund when I was renovating the flat, which paid for the work and the mortgage so I wasn't living on the breadline paying 2 mortgages from my regular salary. I was a month away from that when it finally sold...

bendix

Nobody seems to have mentioned interest rates. He is talking about buying 10 properties over time on interest only deals. That's all very well while retail borrowing rates can be had for 5%, but all the smart money is on interest rates rising relatively steeply to more historical norms of 7-10% over the next few years. Given the properties are in low-rent neighbourhoods, that's going to be a major factor for the OP to consider.