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

opinions4u

bendix wrote: »

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.

Post 6.

The esteemed poster said:

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)

Cleaver

jones87 wrote: »

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.

Firstly, congrats on having a decent income and a sensible, basic approach to money at the age of 22. I think the idea sitting down and looking at future, long term plans is a really good one and shows that you're thinking about how you will cope in twenty or thirty years time. Fair play to you.

It sounds from your language used that you've maybe read the book 'Rich Dad, Poor Dad'? Nothing wrong, as such, with the sentiment in that book and I would also applaud the idea it gives of growing assets. But the examples he gives for property won't be possible any more. As Dopester said, the mental decade has gone for property. There will be a new investment vehicle that becomes the next mania of course, so try and find that and then get out before that crashes after a boom.

There's a lot of people on this board who will offer you good advice on investments. Use their wisdom and keep your plan of investing £1k a month, but look at a diversified risk - save some, invest some in sensible funds / vehicles and then (espeically at your age) take a good chunk of it and invest it in 'risky' things. Time is on your side and as long as you're happy to lose it then you may make some decent money. Shares that you've researched, volatile funds etc.

Don't get yourself in debt buying loads of property, that would be my advice.

Cleaver

jones87 wrote: »

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 in my other post, good on you for thinking long term. But let me offer some alternative figures:

Firstly, as a headline, eet's say you buy the ten properties in this way on I/O mortgages. You'll have a business that has debt of around £600,000. Would you be okay with this? Sure, in theory, you'll have assets of around £700,000 (in theory), but these are illiquid assets (meaning you can't get at cash quickly) and they may fall in value to less than £700,000, meaning you have a business that is in debt. If the value of the houses fell to £500,000, how would you feel having a business that is running at a loss which was £100,000 in debt? I'm just paiting the opposite view to your positive one of course.

Also, you've missed out some other aspects from your scenario which I think other posters have mentioned. For example, assume that maybe only 7 or 8 of the ten houses will be rented at any one time. And assume maybe 10% of the rent would need to be ploughed back in the houses on maintenance. You would also pay around 20% tax on the earnings (some at 40%), but you could offset this against the mortgage. Would you also use a lettings agent? That would be around another 10% of gross rent, and I would use one unless you have a good network of tradesmen to use. So your headline figure of earning £4,500 a month would actually be:

Gross: +£4,500
Voids: -£900
Letting Agency: -£360
Repairs: -£360
Net Income: £2,880

A BTL mortgage of £600,000 for the ten houses at 5.5% (which is quite low all things considering) would be £2,750 a month. Leaving you a profit from you business of around £100 a month. And this is with no capital being paid off. And this £100 would be liable for tax of course. So £80. £80 is not a lot of money for all that effort in my eyes.

Hey, I don't wanna be a killjoy as loads of people will be forward thinking like you and become millionaires. So your spirit is right, I'd just think a a bit more about the investment vehicle and look at worst case, or at least realistic, scenarios.

Blimey, when the missus makes me watch the Great North Run I really start typing away on here...

4$£&*(£$&*(!

I have to say the proposals sound awfully like pie in the sky in reality.

The bottom really has dropped out of BTL, but even worse, all those prospectors who watched the dreadful Channel 4 programmes telling you how to make a mint, have paved the way for thousands of small-time landlords thinking they will have it made.

The resulting problem is the market is pretty close to saturation. It's not as easy to let property now as it was a few years back.

There's also a massive cost you have forgotten to account for. The tenants. In the inner city areas you talk about - and this applies with any inner city, not just Liverpool (let's not forget there are always good and bad in any area), there will be people who wreck your homes. Then you may have to foot the costs of evicting them - including failed rental payments as they know for certain periods you cannot touch them - then getting builders in to repair the damage.

You also have costs of routine maintenance, such as boiler servicing and repairs (which is a legal requirement) and so on.

It's admirable trying to get a sound financial plan together, as you appear to be. But also keep grounded. Some of the things you talk about are pie in the sky, and experience will soon tell you you're wrong. The danger is, as a 22 year old, which we've all seen before at some stage, you may think you know best and anyone who gives criticism is raining on your parade. Listen to the wise words of people on here and take the criticism realistically, you will be grateful in a few years that you did, even if that means you don't decide to go with your initial plan.

Final thoughts though have to go to the tenants. Whilst you are on your path to glory, never forget you are financing people's lives and that has great legal and moral responsibilities. Be sure you know what you are getting yourself into, and be sure you are able to handle these responsibilities.

ed123_2

......I would put the £1k a month in your company pension plan (if your're lucky enough to have one!) and gain the tax relief. If not you could look at a SIPP where you manage your own pension. I feel that in approx. 1/2 years inflation will lift off (the govnt. wants to inflate away it's debt.) & interest rates will take off.

mike88

Buying property is an excellent idea but do not over extend yourself. Buy one property in Year 1, do it up and the rent should pay the mortgage. In year 3 buy another one, do it up and the mortgage should be paid again. In year 5 star getting more ambitious with new builds if you can acquire the land. Look at HMOs (multiple occupance housing) and start looking into weekly rentals into individual rooms which can be more lucrative.

Remember though that cash flow is very important. If the housing market begins to get overpriced think about selling one of your properties so that you have a cash reserve. As you're only 22 time is on your side. Its a marathon not a sprint.

opinions4u

Content of post deleted due to overeliance on an out of date link to HMRC.

Lesson learned: if you get it wrong, blame the government!


(Thanks to Jem and Aegis).

jem16

opinions4u wrote: »

HMRC doesn't allow such amounts to go in to pensions. Here's the linky. "The maximum employee contribution (Contractual, AVC & FSAVC) that can be made in any one Tax Year cannot exceed 15% of remuneration."

The 15% cap was done away with in the A-Day changes in April 2006. You can now contribute and obtain tax relief on contributions up to 100% of earnings.

There may be some companies who chose to keep the 15% rule but it was their decision, not HMRC.

Aegis

opinions4u wrote: »

HMRC doesn't allow such amounts to go in to pensions. Here's the linky. "The maximum employee contribution (Contractual, AVC & FSAVC) that can be made in any one Tax Year cannot exceed 15% of remuneration."

The OP should, however, consider maxing out pension contributions, utilising ISA wrappers, dabbling in a wide range of sectors including property along the way. A balanced portfolio is the key.

If interest rates rise sharply the cost of the debt repayment rises with it. So either you made it up or its a flawed policy. Probably the latter knowing this lot.

Reading through the rest of that page, it looks like it pre-dates A-day, where contribution limits were increased to 100% of salary up to the annual allowance of somewhere in the region of £240k.

kissjenn

There is a rule of thumb which says your investments should be split risky / safe by (100 - your age)/your age so as 78/22 ratio in your case.

BTL is risky, I know, I have the scars. I also have a bucketload of hard won experience and I'm glad we did it. We also have our own house and all the associated costs of that.

The things we mucked up which may help you

1) Work involved. Again there is a formula for children which involves squaring. 1 child = 1 unit of effort, 2 children = 4 units, 3 children = 9 units etc etc. Property is very similar. You will ALWAYS have voids, defaulters, repairs, court actions on the go. You either need an agent at 10% plus all costs or you need time. I worked full time until the recession hit and have no idea how I fitted in a job. September currently looks like this (this is the 20th) with 13 properties and including ex-tenants and those with multiple issues

a) 3 are on agreed arrears plans
b) 3 are at court summons stage
c) 1 is on as ASBO plan and escalating to Notice to Quit this week. Homelessness, Anti-Social Team, Child Protection, Police and Benefits Team all involved.
d) 1 is on a Notice to Quit
e) 7 are have gas checks being done this month
f) 1 has a roof leak (fixed) and shower room replacement (scheduled)
g) 1 has a water tank repair (done) and ceiling replacement (done)
h) 1 has a leak under the sink (fixed)
i) 1 needed a new washing machine (done)
j) 3 are late with their ongoing rent.

2) Contacts. You will need a team of reliable tradesmen and suppliers. We pay immediately, owe no-one a penny and after 3.5 years have guys who don't muck us about and don't take the mick (too often). For each one we have there are another 5 or 6 we've dumped on the way. Our team now involves (again through trial and error) lawyers for conveyancing and court advice, mortgage broker, accountant and marketing agent.

3) Money. You need a very healthy float to do this. Buying properties costs money and you need extra tucked away. You also need money put aside for void periods, repairs, professional fees and insurance. We have a float of around 3 months mortgage for the whole portfolio. Although some have fallen dramatically we have still kept the float at the old amount of £6,000 per month eg £18,000.

4) Hassle. Over and above the work involved you will have tenants who will drive you insane. Someone mentioned a cooker, I've had that and numerous others where you want to shake them until their brain hits the on switch. It is not easy money...it is a long hard slog and we completely underestimated the time, money and stress involved.

So understand why and understand grand plan. Your numbers are a bit all over the place but to be honest given the nature of the beast even perfect numbers are only perfect if the underlying assumptions are right. Why not do as Mike88 suggested and start with a toe in the water. See the type of tenants you get, research what the optimum property size is - is it 3-bed maybe in your market place but not mine - start building up a network of contacts and save a lot of money, deposit plus a years mortgage that'll buy you advertising, insurance, repairs, mandatory checks and cover voids.

Best of luck.