Growing up in the 1980s, on a Saturday evening we would gather around our old television set and tune into our favourite TV show ‘The A-Team’. Unfamiliar with the plot? Allow me to explain:
· Good guys are persecuted by bad guys, usually to drive them off their farm or out of their house or business.
· Good guys hire The A-Team, a group of ex-soldiers
· The A-Team work together seamlessly to fight and humiliate the bad guys until they are driven away for good.
At the end of each show, their charismatic leader, Hannibal Smith would light a large Cuban cigar and with a big smile would announce, "I love it when a plan comes together."
Be like The A-Team
In any successful business, there is a plan that has been constructed and executed. Well-run, profitable businesses don’t happen by mistake. Someone needed to plan and build it, and then someone needed to carry it out. The plan had to be tweaked and fine-tuned continuously throughout the journey.
Buying rental properties is no different. What you are building is a portfolio of raw investments that is constructed from scratch. In other words, you didn’t pay someone to put it together or buy into an investment that already exists. Because you built and followed your plan to success, you get to benefit from all of the profit that has been earned, and all of the capital growth of the properties over time. The more you plan and build, the greater the reward you reap.
If you want an easier life, you could buy a packaged portfolio, such as a range of stocks and shares that a wealth manager or IFA would pick for you. In this scenario, you will be paying someone for their knowledge and experience to build it and manage it on your behalf, so you will be giving some of your profit away.
Building a plan
The need for a solid business plan upfront is paramount so your investment doesn’t go pear-shaped. Most new investors will make the mistake of finding a property that they love and overpaying for it. They will then rent it out for less than the market rate and instruct an agent to manage it. Much of the profit has now gone, and they’ll ask themselves why they aren’t getting the return on capital they had anticipated. It’s unlikely they’ll ever buy another investment property because they feel burned by the first experience. Aside from a lack of capital, 50% of landlords never buy more than one property, and this is perhaps a strong reason why.
A favourite line of would-be investors who approach me about investing is this:
“What happens when someone calls about a blocked toilet on a Saturday night? – I couldn’t cope with that!”
Well, if a fully-grown adult can’t create a relationship with a 24hr plumber, that’s just terrible planning. I’ll suggest they invest their hard-earned money elsewhere.
Structure
Think about how you’ll own the properties you buy with the most favourable tax environment for your portfolio. If you have a business partner, consider their future needs. Will they always want to keep investing? If not, don’t bother starting, or choose a new one, or better still do it yourself. What about the professionals you’ll need? – mortgage broker, accountant, solicitor building surveyor and tradespeople. You must have those people in place before you get starry-eyed and start bidding on a pretty little cottage with a darling rose garden, that may also be full of rising damp and need knocking down.
Although the housing market is strong and employment levels are high, there are undoubtedly headwinds that must be considered. Inflation has lost the plot and to beat it back into its nasty little box, the interest rate stick is being wielded by Sunak et al. You may be in a good place and feeling smug right now. You might think there is nothing in the world that can knock you off your current perch. In my personal experience, smugness has been quickly followed by egg all over my face.
‘You must spend the summer planning for winter, because winter always comes’, said a famous person whose name I can’t recall.
It’s the main reason I wanted to create a recurring passive income in the first place. And for me, rental property was, and remains, my principal vehicle to do this. We Brits love property because it’s an asset class we all understand. I wanted to remain financially liquid no matter how hard or long the storm.
Today, as I drive about in my car in the sunshine, listening to my favourite tunes and generally feeling good, I stop myself from getting overly excited and remember that someone or something somewhere is always plotting to fuck things up. It’s what keeps me on my toes and it keeps me investing.
What about if you don’t have any liquid capital, but you still want to invest? There are solutions to this. Around half of the people who approach me for property advice are equity rich and have savings that are doing nothing. They have nice homes that have increased
dramatically in value, with low mortgage balances. They want a better return on cash that they have sat in the bank, and they want to know how best to do it.
The matriarch
Just recently somebody with £50,000 savings approached me for advice to start investing in buy-to-let properties. He wanted to start immediately and purchase 1 property every 2 years from cash he was able to continuously save from his business. His plan is to build up a passive income that would supplement his income and eventually replace it. Standard investor behaviour. It transpired that he had a property valued at north of £500,000 with less than £100,000 left on the mortgage. I call this the matriarch property. I advised him to consider raising an additional £200,000 via a remortgage.
Maths that makes people richer
If you’ve got this far, well done, you’re interested. Time to concentrate.
Stage 1
He could then purchase 4 properties of £200,000 each putting down 25% deposit. Buying at today’s prices is always better as future capital growth is yours from the day you own them. The savings he has in the bank would pay for the stamp duty and refurbishments. All of the money would be lent to a Special Purpose Vehicle, a tax-efficient limited company set up purely to own the properties.
The extra repayment on his residential mortgage would equate to around £800 a month but would be offset by the properties generating £2,000 profit a month, leaving over £1,200 a month (£14,400 a year) of cash (before corporation tax). This can be drawn from the limited company as future cash flow allows. They are treated as loan repayments and are therefore tax-free.
The profit from his new venture alone would cover the entire cost of buying and running his own home. All his other income then becomes ‘fun tokens’ or some of it can be lent to the portfolio pot for faster growth. It’s what we call working smart.
Stage 2
Capital growth on £800,000 of properties bought today appreciating at around 5% per year, would add around £220,000 of additional value, over 5 years. He could remortgage them to 75% once again and raise another £165,000 of fresh capital. This is more than enough cash to purchase at 2 additional properties at their value in 5 years’ time. Rents would have increased by 25%, which would generate a further £1,200 a month of cash.
Stage 3
5 years after that, all 6 properties would be worth around £2,000,000 with £850,000 of equity. They could all be remortgaged to create fresh capital for 4 new properties. The enlarged portfolio would produce around £80,000 profit per year and would appreciate in value by around £100,000 a year.
Don’t procrastinate
You see, by having a solid plan and timeframe stamped in your mind and written down, you will be able to spend the next 20- or 30-years creating income for yourself, wealth for you and your family and a lasting legacy that will endure for generations. The plan will need to be tweaked and amended as time goes on and financial cycles ebb and flow but overall it should remain on track if you stick to your guns.
Just like creating a family, an entire portfolio of properties can be spawned from just one matriarch property, given plenty of time and solid planning. It won’t happen overnight though. So beware - if you leave it too late to start the process, you may not ever be able to build your family large enough.
