How would you achieve positive passive income with £150,000 and a 1 bed property?

Zockedi

Due to a bereavement I am set to receive £150,000 as gift from my mother who has inherited some money.

I feel incredibly lucky and want to make the most of this opportunity; we are not a family that tends to have much money.

I also feel incredibly stupid because I have this windfall and seem utterly unable to turn it into a positive cashflow.

I currently own and live in a South London 1 bed property worth £360,000 (I had it valued). I still have £107,000 left to pay on the mortgage and have a fixed rate mortgage (ends in 3 years) where I pay £495 per month.

I am 38 and have an extremely stressful job as a IT contractor (think 12-14 hour days) and would love to own a property portfolio so I can generate passive income and do something else with my life.

I think buying a buy-to-let in London makes sense because the shortage of housing in London means it would be less likely to stand empty than other parts of the UK. I also know the different boroughs of London well (good and bad) which helps make ti easier to decide on which area is one that tenants would like to live in.

I had planned to pay off my home mortgage with the £100,000 and a bit of my own money, and then rent out that property - and use the £50,000 as a deposit to buy a new home for myself.

However, although this sounds sensible - is it? The kind of property I want to live in (circa 550 square foot in a nice area of South London, e.g. Dulwich) costs £425,000. A £50,000 deposit would result in a sizeable mortgage payment each month of circa £2000.

However I'd also be renting out my current home, and judging by similar properties in my area, renting that out would get me £1200 per month. So, my mortgage would be paid off and I'd be paying £800 p/m rather than achieving a boost in income. And that's not including repairs or vacant periods.

I can afford it if I continue as a contractor but I don't think it will help me to achieve my goal of being financially free. And I am not confident that this is the best use of the money - the best use is to make the money make more money, right?

(I know I'm being simplistic, that's why I need your help.)

So then I started thinking - what if I didn't pay off my mortgage. What if I bought TWO properties in a cheaper area that is still quite decent, like Beckenham? There are nice two bedrooms on the market for £350,000 so it's not unreasonable to be able to get an offer accepted at £330,000. Based on a mortgage rate of 3.90% (using Rightmove's calculator) would mean each of those two properties would cost me £1300 in mortgage repayments, a total of £2600 in costs per month. My research shows me that circa £1300 is also what they tend to rent for.

So, with renting out my current home, and renting out a Beckenham property I would be making £2500 per month, from that money I would need to pay my home mortgage of £495 (let's call it £500) AND the mortgage for two Beckenham properties (one of which I would live in) each costing £1300 (total of £2600) resulting in a cashflow of MINUS £600 per month.

So, that seems like the better option. But it seems riskier. It assumes I will rent out both properties, It assumes that repairs will be small. Let's face it, it will probably end up MINUS £1000 p/m all things considered, and while I can afford that I don't know if I'm doing the right thing. Of course half of it will be lost to taxes anyway!

I feel like I should be able to achieve a POSITIVE cashflow out of this situation. Another person would be able to, but I haven't figured it out. I don't want to squander this money. Any advice gratefully appreciated.

I am not a fan of flipping properties - I prefer steady passive income. Plus, post Brexit I feel that house prices will continue their decline.

AnotherJoe

If you think rental properties provide "passive steady income", I have some [STRIKE]swampland[/STRIKE] prime farming estate for sale.

If you have a stressful job, just imagine what happens to stress level when tenants stop paying rent, refuse to leave, trash the place, call you at 3am saying the heating stopped or theres a dripping tap, or mould everywhere or a mouse ?


FWIW two £350k flats would cost you £36k in SDLT.

You do the maths on how long it woudl take to break even not considering voids and maintenance.


Why have you just looked at property? Why not investments? What pension provision do you currently make? Putting money into a pension would give a big payback especially if you run your own company.

letitbe90

Hello fellow IT contractor .


I would personally not pay off the mortgage. The interest rates are low enough that the money is better off being invested in bonds/equities via ISA's/Investment accounts (Vanguard, AJ Bell, IWeb, Welfify, Nutmeg, Fidelity to name a few platforms).


Before you jump into the BTL market, I'd have a look at the landlordzone forum - it isn't the stress free income that you may think it is. It also has its risks and laws have changed in the last decade, mostly against landlords (and it could continue down that path). This is not to say you can't be successful as a landlord, just know that it isn't risk free and it is hard work.

AdrianC

Zockedi wrote: »

Due to a bereavement I am set to receive £150,000
...

I also feel incredibly stupid because I have this windfall and seem utterly unable to turn it into a positive cashflow.

Put it into a bank account, at 1% interest, and you'll have a positive cashflow of £1,070/year, as risk-free as is possible.

I still have £107,000 left to pay on the mortgage and have a fixed rate mortgage (ends in 3 years) where I pay £495 per month.

The fixed rate ends in three years? So your payments will probably go up.

How much of that £495 is interest? Say £300/mo... If you pay the mortgage off, you have positive cashflow of £3,600/year.

I am 38 and have an extremely stressful job as a IT contractor (think 12-14 hour days) and would love to own a property portfolio so I can generate passive income and do something else with my life.

STOP RIGHT THERE.

Who promised you it worked like that? They were lying and/or clueless. Read any of a thousand threads here where landlords are having grief from tenants, or have worked out that the return really isn't all that.

I think buying a buy-to-let in London makes sense because the shortage of housing in London means it would be less likely to stand empty than other parts of the UK.

Anywhere will stand empty if it's too expensive for the local market. If it's sensibly priced and well presented, it won't.

the best use is to make the money make more money, right?

You tell us.

I'd say the best use of the money is to help you achieve your life goals. There's a lot of people with a lot of money who haven't achieved them... and a lot of poor people who have.



So is "less stress" one of your life goals? Would an easier way to achieve that be to step off the rat-race a bit, and get out of London...? There are IT techies in other places, y'know. Or maybe you've had enough of the IT treadmill, and fancy a change of life completely? After all, you spend a very large portion of your waking life at work, right...?

So then I started thinking - what if I didn't pay off my mortgage. What if I bought TWO properties in a cheaper area that is still quite decent, like Beckenham? There are nice two bedrooms on the market for £350,000 so it's not unreasonable to be able to get an offer accepted at £330,000. Based on a mortgage rate of 3.90% (using Rightmove's calculator) would mean each of those two properties would cost me £1300 in mortgage repayments, a total of £2600 in costs per month. My research shows me that circa £1300 is also what they tend to rent for.

Well, that sounds like a bloody lousy idea, straight off.

So, with renting out my current home, and renting out a Beckenham property I would be making £2500 per month, from that money I would need to pay my home mortgage of £495 (let's call it £500) AND the mortgage for two Beckenham properties (one of which I would live in) each costing £1300 (total of £2600) resulting in a cashflow of MINUS £600 per month.

Then there's the hassle and stress of having multiple rented properties, and that massive debt monkey round your neck. Oh, and you haven't even counted the purchase costs yet...

I feel like I should be able to achieve a POSITIVE cashflow out of this situation. Another person would be able to, but I haven't figured it out. I don't want to squander this money. Any advice gratefully appreciated.

Clue: Property is not the only investment.

Plus, post Brexit I feel that house prices will continue their decline.

Another thing that says "Why buy now, then?", isn't it...?

Soundgirlrocks

Different idea for you, upgrade your current property to something bigger and take a lodger, you can get an extra £7,500 tax free pa (quite possible for a nice room in a good location in London.)


Minimal stress, better property, and more money in the bank each month

Zockedi

All good points, very well made.

There is a key factor that I should have mentioned but didn't...

My mother's gift is dependent on me investing in property. She and my father have never invested any other way so it's the only area of investment they have confidence in. As luck would have it, they have not had periods of vacancy or tenants not paying on time in the two properties they rent out. And they've been doing this for circa 10 years. Plus they are good at DIY and have easily managed repairs. Because of this they've found it entirely stress-free and are keen for me to benefit from their experience.

Of course I know they are wise to some extent, but extremely lucky too. They are not rich by any means but the money makes for a decent pension.

Added to that my grandfather lost a good deal of money on the stock market - his life savings - and the shock of it we believe led to his early death. He'd done really well and then lost it all - except for his paid-off home. Hence they have no faith in other investment options.

In a way, I don't mind this. I like the idea of having something physical, rather than trying to chase the stock market and I love properties. But just because I like it it doesn't mean I am not worried that rental yields are low.

It's hard to overstate this point: pretty much any job that doesn't involve sitting in an office working to silly deadlines is preferable to my current work as a contractor. I only stick with it because it pays well and I thought I could get out of the rat race through it.

I am not ungrateful for my career btw I have done well and been greatly appreciated in every role, even won some small awards thanks to my work ethic. I just hate it that's all. My reasoning is that if I can do well and work like a maniac in a job I hate, surely I can do decently as a landlord, given it would suit my nature (truly being my own boss) if I do my research?

I have created a website that I love working on which is getting some positive feedback so I hope one day to make money out of that in addition to property. I write a lot of articles and would consider that passive income if It included affiliate links, so I probably just have a weird idea of what passive income is.

I don't mind hard work at all, but want to care about the work that I do - and continue earning when I'm asleep. That would be amazing.

I think the compromise I need to make maybe is to find high yield areas outside of London if I am to become a landlord.

I also think if I added the rental properties to my remit as a limited company it would be more profitable than otherwise - but please let me know any thoughts you have.

It's such early days. I feel like I know NOTHING but acknowledging that is the first step to better educating myself.

csgohan4

Bargepole for me for BTL

https://forums.moneysavingexpert.com/discussion/5983050/taking-tenant-to-small-claims-court

https://forums.moneysavingexpert.com/discussion/5956212/need-advice-after-evicted-a-tenant

https://forums.moneysavingexpert.com/discussion/5896992/evicting-tenants-via-court-and-bailiffs

G_M

Zockedi wrote: »

My mother's gift is dependent on me investing in property. She and my father have never invested any other way so.....

Then you don't have much choice do you? Accept the gift and the condition that goes with it, or decline the gift.


Though, bluntly, a parent who dictates to you how you should spend, invest, save, use your money is pretty manipulative!



Just because they went down the BTL route does not mean they should force it on you.


And just how are they going to police this once they've given you the money?

AdrianC

Zockedi wrote: »

There is a key factor that I should have mentioned but didn't...

My mother's gift is dependent on me investing in property.

Pay off your current mortgage, then put the rest on one side for when you're ready to move to a more expensive property.

Bingo, invested in property.

steampowered

The big thing left out of your calculations is tax.

Remember that you'll have to pay the higher rate of stamp duty on a second property. Also remember that income tax is payable on rental income.

Particularly if you are a higher rate tax payer, you would be much better off financially putting as much as possible into a stocks & shares ISA or into your pension, to get all of the tax benefits associated with doing that. Though I understand the condition attached to the gift makes that more difficult.

So, my mortgage would be paid off and I'd be paying £800 p/m rather than achieving a boost in income

Yes but you'd be paying off a bigger mortgage and living in a more expensive property than you are the moment (plus paying a lot more tax). That's where the money would be going.

£150k is not enough to achieve everything you want to achieve. I think you have to make a decision regarding what you actually want to do with the money. Is it getting a passive income, or is it moving to a nicer property?

AdrianC

BTW, if they've been in the business for a decade, I'd like to assume they had gained a bit of a clue regarding yield, and the amount of work required.