Having had the pleasure of working with a lot of fledgling and existing property investors over the last few years, I have been able to conclude that there is one common goal they are all chasing – financial freedom. By this, I mean that they are prepared to put tens of thousands of pounds of their hard-earned savings into a small rental property that will deliver a few hundred pounds a month of income. Then they will repeat the process continuously until they have acquired more and more of these small rental units.
They’ll keep repeating the process until they can cover the minimum amount of money they need each month to pay their bills and live reasonably. Depending on their lifestyle that may be 4 properties or it may be 40 properties. To achieve just 4 properties they may have had to invest £200,000 or more. For many people, this may not seem worth the bother. For an investor though, it’s crystal clear.
Why do they do it then? And what do they know that most people don’t? They understand that financial freedom is a long game. Let’s say for argument's sake that the few hundred pounds of extra cash flow a month from their first investment represents 10% of their current monthly income. Then they only have 9 more equal chunks to replicate.
If they can do that while they are still fairly youthful and have the drive and energy to achieve it, they know that they will spend their later years reaping the rewards of their labour. As rents rise, and property prices increase, their personal wealth and income will slowly but surely continue to grow.
Some have already achieved it and others are on the road to getting there. So why isn’t it then, that we don’t all concentrate on doing the things that take us those incremental steps closer to achieving financial freedom? Surely it’s the Holy Grail?
I read a great quote the other day:
“Life is like a shit sandwich, and every day you take another bite. But the more bread you have, the less shit you can taste.”
We can all resonate with it, but most people won’t do anything about it. They'll just keep eating shit, day in, day out. They’ll blame their boss, the government, utility companies and just about everyone else for their hand-to-mouth existence. In fact, the only person they won’t blame for their situation is themselves. They are resigned to being a player in somebody else’s game and will go on repeating the daily grind until they take their last breath.
Perhaps for most people, achieving financial freedom is just too much hard work, too complicated and takes too long. Maybe there are too many other lovely things to do along the way, that eat up would-be investment capital but provide instant gratification. Or perhaps the belief that it can’t be achieved is stronger than the belief that it can.
I’m not sure this is the case, but I think it may be. I guess at the end of the day, it’s about how much extra crap you are prepared to deal with along the way, to get to the point where you have enough bread that the taste of shit is less obvious. It seems that most people are prepared to eat the same amount each day and simply can’t stomach any more.
If you were all fired up and ready to do something about it, the current economic situation may have stopped you in your tracks. I’ve heard this a few times: “I’ll lay low and ride out the current situation and see what happens”. Complete nonsense. Sometimes you must prod the grey matter a bit harder and redesign your solution.
Here’s an example:
A few weeks ago, just a couple of days after Truss/Kwarteng’s disastrous mini-budget, I completed on what, I must admit, I thought may be my last investment property. At least for the foreseeable future. Rates on a standard limited company buy-to-let 2 or 5 year fixed mortgage have become eye-watering and don’t make sense at the moment. There must be a way though; there’s always a way.
A week or so later, as I’m checking out the refit work, I see a van pull up and hoist a for sale sign outside an identical property down the same street. It looked really good. I snuck into the garden and had a nosey through the kitchen window. It was good - it was fully refurbished and ready to rent. Nobody was getting this property - in my head, it was already mine. I immediately called the agent, sold myself hard on my background and knowledge, and made a good offer (albeit less than I paid for the property I’m standing in). Within 24 hours it was accepted.
The developer had got the willies about declining lending conditions and wanted his money back out, sharpish. Happy to help sir! I managed to get one of the last palatable fixed rates available from Foundation Homeloans (thanks Grant) but at over £200 a month more than the other property. Still, there’ll be nearly £500 of cashflow in it each month. Although the monthly mortgage cost is greater, the investment is well worth it considering the purchase price and the time and cost of refurbishment.
If I was doing that same deal today, I’d be considering putting 35% down instead of my usual 25% and I’d be going for a discounted rate. Checking Foundation’s website today they are offering a 5.99% discounted rate. Yes, the cash into the deal would be greater, but because there are no refurbishment costs, it sort of balances itself out.
In any case, I’d be winning from a higher equity point of view and the monthly cash flow would be similar to where I currently am. There’d be plenty of margin to play with if rates continue their upward trend. Although cash flow may fluctuate a bit while rates are moving about, no early redemption penalty would mean I’d be free to move when things settle down.
The property would still be mine and you can’t benefit from rising values and rents until you have ownership. The timing and conditions may not be perfect now (they never are), but you’ll be well-placed to receive all the benefits of that ownership as the market swings back into your absolute favour. And that’s what investors understand.
Because as any seasoned investor will tell you, it’s no use being in an investible position after the event, you need to be ready before the next upswing. Even, darling, if it means you must swap Bollinger for Prosecco in the short term.
