If there is one thing the pandemic has taught us, it's that we can actually spend time with our families. In fact, we rather liked it.
So much so, many people have completely adopted a strategy to ditch the office completely. Employers are struggling to get around it and employees are taking full advantage while they can in a bid to ensure this new way of life continues.
But what if you could leave the rat race altogether and 100% of your income was completely passive?
Your income could replace itself on a monthly basis with very little intervention from you, raising your net worth year on year. Waking up on a Monday morning and not having to think about the pressures of work is a privilege of the few and a distant dream for the many.
You may enjoy the buzz of what you do, thriving through the interactions of the workplace and the people within it. Ask yourself though, if this will be the case in 20 year's time. People’s life goals change as they grow older, and so do their bodies and minds. Older people appreciate the currency of time far more than younger people. And you may not always be as resilient to stress as you think you are now.
Get prepared
Replacing a hard-earned income with a passive one is not an easy thing to do because it takes time, effort, money and above all, an awful lot of dedication. But if you have excess income, it is one of the most rewarding things you will ever do.
When is the best time to start? Today of course. And by that, I mean pulling together a strategy of how you are going to do it. Perhaps you haven’t’ t got the available capital to start just yet, but you hope to soon. When? Have you started saving for that oh so important first BTL property? Your partner wants a new kitchen, or perhaps a new car is on your mind. There is always something else better to spend your money on.
I have heard a lot of excuses why people have yet to start investing. Most people spend their lives buying things that cost them money, rather than make them money. They create liabilities instead of creating assets. They get promotions and earn more money, so they buy bigger houses and bigger cars. They wear nicer clothes and buy expensive items to impress their friends at dinner parties. The desire for more is continuous and the rat race continues.
And why not? Life is for living, is it not? Don’t think I am preaching to you – I have spent more money on useless detritus than I care to think about. But I grew up and (mostly) stopped doing that a while back. I feel incredibly guilty and materialistic when I stand at the local recycling centre throwing old exercise bikes, sofas and bread makers into skips. If I can offer younger readers the benefit of experience, then my work is half done.
But if that is what you want then go for it, but you’ll need to trade your time for money forever to keep funding it all. You will always work for your money, rather than letting your money work for you. But if you are serious about buying lots of property, you’re going to need lots of capital. So, you’ll need to reduce your outgoings and practise living frugally. When you get rid of all the stuff you don’t need, you’ll not only feel freer, and less stressed, you’ll also have more spare cash.
BONUS: The more frugal you become, the less income you’ll need to replace through your investments.
Nitty-gritty
So let’s assume you already have spare funds sloshing about in the bank, how much will you need to work towards an income that is completely passive? How many properties? I can only talk from my own experience, so bear with me.
Get to know the property market in your area. What are the prices doing, how much are the houses renting for? Work out your yield and never stray for your minimum. 5%+ is a good guide but try for 6% or more. Don’t overpay for anything despite how much you want it. The Rightmove app is your best friend here. Get your ideal property search set up so you get daily reminders of the availability of stock. Make sure you know the ins and outs of every property in your search.
Check the sold prices in an area before you start making offers. How long have they been on the market, have they been reduced, and why? Don’t set your heart on one property, find three and work on those offers. One will be yours at the right price.
Get to know some agents. If you’re buying more than one property over a period of time, they will want your business, and once you’ve started buying through them, they’ll have you in their little black book. You’ll start to get ahead of the game. An agent once asked me how many properties I was planning to buy. ‘50’ I said with eternal optimism. He became a very useful friend.
Let’s keep numbers simple: A £200K property means a £50,000 deposit plus disbursements. Despite the tantalising offers of finance companies, don’t be tempted to borrow more than 75% LTV. You’ll end up in a pickle if the market goes awry. Borrowing more than 75% is for first time buyers and people in financial difficulty. Plus, you’ll reduce your profit and the whole exercise won’t work properly. You’ll need another £6K for stamp duty (£8,700 if your buying in Wales) You’ll also need funds for the refurbishment of the property. A 2 or 3-bedroom property will set you back £7,000 - £15,000 for the upgrades.
So around £65,000 will get you on the ladder and this will make you £470 per month profit. You can do the math to work out how much capital you will need to replace your current income.
Wealth creation
Your properties should rise at around 5% per year. This last year has seen 10% or more in some regions. Fast forward ten years and a ten-property £2m portfolio will likely grow by £100K in a year. Combining the magic of fixed mortgages, increasing rents and compounding capital growth, and you’ll be reaching for the cigars.
A good mortgage broker who understands specialist and BTL mortgages is essential to your plan. Try and find a broker that is also an investor (I never trust people who don’t practise what they preach).
Depending on how many properties you plan to buy, and if you intend to keep the mortgages in play, will depend on whether you buy them in personal name or limited company. I use both as I was investing long before the tax rules changed. An SPV (Special Purpose Vehicle – a limited company set up purely for renting) will most likely be the most tax-efficient format to operate your portfolio. You’ll need to check with an accountant and discuss your personal circumstances first.
You should expect to charge at least £900 rent a month for the above scenario. From that, you will make around £470 profit per month once the mortgage and insurance are deducted. Account for 10% of the rent to be used for annual maintenance. You may not need all that on this property, but another property may cost you more, so it’s worth budgeting for, even if you don’t use it.
In addition to a mortgage broker and an accountant, you’ll have to draw upon the services of the following:
Plumber
Conveyancer
Letting agent
Electrician
Decorator
Handyman/woman
Carpet fitter
Roofer
I say plumber first because 95% of the calls you get will be plumbing related. Find yourself a very good plumber or two and your problems will be few.
Like with any business, build a good team of people and they will make you money while you sleep, eat, play with your kids, exercise or build model aeroplanes. Pay them well and on time. Make sure the properties you rent are refurbished well and pay attention to the small details. Fresh paint and carpets are a winner. Keep the décor the same to make it easier for your contractors. Depersonalise the property. You want the tenant to feel like no one has ever lived there before them.
Quality properties attract quality tenants, and the opposite is also true. Always ensure you give it the final sign off and by cleaning the property yourself prior to rental, you will find the petite nuances before your new tenant does. I always leave a ‘new home’ card and bottle of good wine for my new tenants. It doesn’t cost much but the sentiment goes a long way.
If you have a little time on your hands (and eventually you will have plenty) you’ve no need to pay an agent to manage your properties. You can manage the portfolio yourself and save a bundle of cash. By doing so, you will become the point of contact for the tenant and you will build their trust, ensuring they pay on time and stay longer. I was CEO of an organisation of 140 people and I managed it, so you can too.
One fine day, many years from now, you will awaken and realise that you no longer need to work for money, because your money is now working for you.
And somewhere in the distance, I will be raising a glass to you – because you’ve earned it.
