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What income can I expect from £1m+?

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  • IronWolf
    IronWolf Posts: 6,445 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    I think 4-5% would be do-able with a no-effort equity portfolio, invested in good trusts that pay decent dividends.

    10% could be achieved with a more active involvement in the portfolio but would be much more volatile returns.

    I agree with everyone else on the BTL, not yielding enough so better to get rid. If you're retiring there will come an age where you don't really want the hassle of BTL and managing it, and I think an equity portfolio can provide stable returns with minimal effort.
    Faith, hope, charity, these three; but the greatest of these is charity.
  • SailorSam wrote: »
    I can't imagine there are many genuine people who have £1m in the bank would come and ask some strangers on a Internet forum what he should do with it.

    I don't have £1m in the bank and the strangers on here are being helpful.

    Thank you to all of you that offered helpful thoughts and comments.

    A few of the answers seem to suggest that the 3% return I get on the property value is very poor and that I should be getting a better yield, but I think the returns being suggested as reasonable look like gross rental yields. My figures are as I said "after costs and overheads". Here they are so please feel free to suggest if I really should be doing better!

    The following is if I repaid the mortgages. At the moment just over £15,000 goes on mortgage interest leaving me £23,000 net income before tax.

    Property Value £1,300,000
    Gross rent £55,000 (4.2%)
    Average rent after void periods £50,100 (3.9%)
    Maintenance p.a. £5,500 (0.4%)
    Agents fees £5,000 (0.4%)
    Ground Rent and Insurances £1,000 (0.1%)
    Total Costs £11,500 (0.9%)
    Net Income £38,600 (3.0%)
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    cedarmay wrote: »

    Net Income £38,600 (3.0%)

    If that is then to have 40% tax deducted it equals 1.8% with no guarantee that it'll keep up with inflation. Not Awfully Good.

    Questions:
    (i) Do you have a spouse available for use as a tax shelter?
    (ii) What provisions do you want for bequests to spouse, children, others?
    (iii) When you say £60k per annum, do you mean before tax? In other words would you settle for £10k taxed at 0%, £30k at 20% and £20k at 40% i.e. £46k p.a. after tax?
    (iv) How big will your State Pension be, and how big will the gap be between your retiring and your becoming entitled to draw the State Pension?
    (v) Would you be happy if your £46k p.a. were partly a fixed income, thereby reducing in purchasing power as time rolls on?
    Free the dunston one next time too.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    edited 9 September 2013 at 2:40PM
    Other question: can you list the properties, showing for each the (approx) value, the income after expenses, the size of the mortgage, and the interest rate on the mortgage? In other words, give us a feel for the extent to which the property portfolio could be broken up, with the most profitable kept and the least profitable sold.

    I ask because I'm likely to suggest selling the least profitable now so that you can fill ISAs like billy-oh before you retire. And probably after you retire too.

    Also, can you tell us whether you pay 40% income tax at the moment? Because if so, and if that would also be true after selling some property, I'd suggest that you avoid the 40% tax by contributing to a pension, confident that some way will be found for you to avoid 40% tax in retirement.
    Free the dunston one next time too.
  • cedarmay
    cedarmay Posts: 21 Forumite
    edited 9 September 2013 at 3:22PM
    Thank you kidmugsy
    kidmugsy wrote: »
    If that is then to have 40% tax deducted it equals 1.8% with no guarantee that it'll keep up with inflation. Not Awfully Good.

    Questions:
    (i) Do you have a spouse available for use as a tax shelter?
    (ii) What provisions do you want for bequests to spouse, children, others?
    (iii) When you say £60k per annum, do you mean before tax? In other words would you settle for £10k taxed at 0%, £30k at 20% and £20k at 40% i.e. £46k p.a. after tax?
    (iv) How big will your State Pension be, and how big will the gap be between your retiring and your becoming entitled to draw the State Pension?
    (v) Would you be happy if your £46k p.a. were partly a fixed income, thereby reducing in purchasing power as time rolls on?

    I would only pay 40% tax on income over £32,000 and using both my wife's and my tax free income allowance would mean the first £18,880 would be tax free (2 x £9,440). I think, back of an envelope, that after tax the current BTL income net after all costs and assuming no mortgages would be approximately £33,600 net income after tax.

    To answer the questions:
    i Yes, do you mean for the annual tax free allowance or another tax benefit?
    ii The properties and any assets to be left to children
    iii The £60K is a target after tax to maintain a similar take home to our current joint incomes.
    iv The state pension should be a full one and 10 years before I can claim it.
    v I would worry about inflation so would not like fixed incomes.
  • cedarmay wrote: »
    Here they are so please feel free to suggest if I really should be doing better!

    Property Value £1,300,000
    Gross rent £55,000 (4.2%)

    Yes, I think you really should be doing better, my gross yield is more like about 6% - lowest yielding property about 5.5%
    IANAL etc.
  • Linton
    Linton Posts: 18,292 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    Interesting to see some real numbers for BTL:

    You have equity of £900K in your BTLs from which you are getting a net income of £23K or 2.5%. This can be expected to broadly rise with inflation but is subject to full taxation as income.

    The alternative is to sell your BTLs and put the money into investment funds which could fairly safely give a return before tax of say 4.5% roughly inflation linked - £40.5K. With a bit of clever planning, £11K of that could be Capital Gains (within the annual allowance), and the remaining £29.5K could be dividends which are tax free to Standard Rate tax payers. Its easier if you have a spouse.

    So the BTL could only make sense if you actually plan to sell the property at some stage and benefit from an increase in property values, as a source of ongoing income it looks pretty poor to me.

    Or have I got something wrong?
  • kidmugsy wrote: »
    Other question:can you list the properties, showing for each the (approx) value, the income after expenses, the size of the mortgage, and the interest rate on the mortgage?In other words, give us a feel for the extent to which the property portfolio could be broken up, with the most profitable kept and the least profitable sold.

    I ask because I'm likely to suggest selling the least profitable now so that you can fill ISAs like billy-oh before you retire.And probably after you retire too.

    Also, can you tell us whether you pay 40% income tax at the moment?Because if so, and if that would also be true after selling some property, I'd suggest that you avoid the 40% tax by contributing to a pension, confident that some way will be found for you to avoid 40% tax in retirement.

    No we are both under the 40% tax band.

    For income I understand the logic, it would make sense to sell the lowest yielding and keep the more profitable. In the case of the least profitable, I would have to balance this against the potential capital appreciation over the next few years (as the property market could be set for growth after a few down years). My lowest yield is in the most desirable location, and the best yield is a small studio in an undesirable area.

    You asked for a list of properties to analyse the options, so here we are:

    Property 1
    Value £575,000
    Mortgages £300,000
    Interest Rate 3.99%
    Rent Allowing for Void Periods £18,975
    Mortgage Interest £11,800
    Total Costs £3,500
    Net Income With Mortgage £3,675
    Net Income if Mortgage Repaid £15,475

    Property 2
    Value £275,000
    Mortgages £150,000
    Interest Rate 2.30%
    Rent Allowing for Void Periods £13,292
    Mortgage Interest £3,450
    Total Costs £2,500
    Net Income With Mortgage £7,342
    Net Income if Mortgage Repaid £10,792

    Property 3
    Value £130,000
    Mortgages NA
    Rent Allowing for Void Periods £5,500
    Total Costs £1,700
    Net Income £3,800

    Property 4
    Value £300,000
    Mortgages NA
    Rent Allowing for Void Periods £11,000
    Total Costs £3,000
    Net Income £8,000


    Property 5
    Value £20,000
    Mortgages NA
    Rent Allowing for Void Periods £1,650
    Total Costs £500
    Net Income £1,150

    I know a lot of buy to let figures do not factor in void periods but they are a reality so my figures reflect the actual income averaged over a few years.

    But could I manage the target income of £60K p.a after tax (with 2 x tax allowances) on a property portfolio of this size + my £250,000 in ISAs. Or how will I need to change this mix to get there?
  • atush
    atush Posts: 18,731 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Quote:
    Originally Posted by cedarmay View Post
    Here they are so please feel free to suggest if I really should be doing better!

    Property Value £1,300,000
    Gross rent £55,000 (4.2%)
    Yes, I think you really should be doing better, my gross yield is more like about 6% - lowest yielding property about 5.5%

    yes, I still feel that 4.2% is low enough it isn't worth the bother. I would think a return of Over 5% would be require to make any BTL worth it. I would keep a property getting only 4.2% only if I had actual plans for the property ie I was going to use it myself at some stage, or gift it to someone in a will etc.
  • plunt
    plunt Posts: 525 Forumite
    Part of the Furniture Combo Breaker
    Where are your properties located? And would be good to know as Linton mentioned if you plan to gain from capital increase or was your intention to gain most of your profit from the rental?

    there are also some inflation linked corporate bonds if you are worried, then again bonds can be high risk! (and currently not many good ones around)
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