OK, so far we’ve covered what I’m trying to achieve long term – passive income from a portfolio of no mortgaged houses. The strategy I use – buying £60k - £150k houses that rent for 7% yield. What I did in this case - £110k 2 bed end terrace that rents for 7.1%. And the due diligence I undertook to make sure it stacked up for me – rental figures, demand in the area and value of the property. At this point I’m pretty convinced owning this house is a good idea and I want to move forward with it, but there’s the small matter of paying for the property. I’ve already discussed that I wanted to go for 70% LTV on this one, which equates to £77k. Let’s look at what I decided to go for in the end and the logic behind it.
Now before I get started, as you may know I am a qualified mortgage broker – so the following is absolutely not to be taken as advice for anyone reading it. Each person and property has a unique set of circumstances, so you need to either figure this shit out for yourself on your own… or speak to a qualified broker like me who can give you bespoke advice. And a vital point, that I’m obliged to point out, your property may be repossessed if you don’t keep up the payments. Right, with that – “Don’t do stupid shit and sue me” – out of the way, let’s go on to this specific deal. As a broker, I get to check the whole of market and look through all of the possible products out there. I can’t be arsed going into all the various options that are available, but they basically fall into a couple of main headings.
Where the money you pay each month covers only the interest portion and not the sum you borrowed. So at the end of the period, I’d still owe £77k.
When each monthly payment covers the interest and a part of the sum you borrowed. So at the end of the period, boom – no mortgage!
When the rate of interest you’re charged is fixed for whatever period you sign up for.
When the rate of interest changes during the mortgage. It’s usually linked to Bank of England base rate, but can sometimes be linked to Libor. There are a bunch of variations, but this covers most of the finance world for investment properties. Again, speak to a broker to figure out what’s best for you. Given the interest rates are pretty low at the moment, I decided to go for a variable rate term mortgage with the lovely people over at Coventry Building Society. This means the interest rate will change over the life of the mortgage, but it’s also going to remain in place for the 25 years I took the mortgage out over. Now despite my strategy being to repay the capital as quickly as I can, I actually went for an Interest Only option. Why? Cos I hate being told what to do. I have authority issues. With this interest only mortgage I can overpay as much or as little as I want each year. But it’s my decision how much and how often to overpay. That gives me a lot more flexibility. So the interest rate I’ll be paying is around 2%, which works out at £130 a month in mortgage costs. Pretty nifty if I’m getting £650 in rent. Why did I go this route? Well, for now it’s pretty cheap money. I personally think that interest rates will go up over the next few years, but as there is no tie in period with this mortgage I can refinance at some point in the future when things start to turn. I like flexibility and not being tied into something. This is a lesson I learnt the hard way, I’m currently tied in to 5 year fixes on 4 other properties, each one will cost me around £4k to get out of, and I’m paying around £100 per month more than I could be doing on each one. Boooooooo. Having said that, I am relatively risk averse, so I do like having some mortgages fixed rates and some variable. That gives me some protection in case rates go up to 10%+ again anytime soon. But it’s a very personal preference and goes to your level of risk aversion so…. Guess what?
TALK TO AN ADVISER ABOUT IT!
I’m pretty dull when it comes to the long-term plan, so it’s just a case of owning it and renting it out and paying down the mortgage when I’ve got the cash. I used to always self-manage my properties, but I’ve started handing this off to management companies more recently. Sometimes it goes terribly wrong, other times it goes quite well. I used one company recently in the Wirral; Hamilton Square Estates – www.hamiltonsquareestates.com – they fucking suck. Hope this somehow ends up in a Google search result for people considering working with them. Don’t. You can do as much due diligence on the management company as you want, sometimes you just get it wrong and end up with a bag of dicks managing your property. At that point, all you can do is take it off them, and find someone else and hope for the best. I plan to put a management company in place and continue to rent it to the existing tenants. I’ll end up paying around 10% for full management, but I’ll still have to keep an eye on the money coming in, just to be sure. So what do the numbers look like overall…
|Mortgage cost pcm||£130|
|Management costs pcm||£65|
|Return on Investment||16.5%|
Wouldn’t it be great if what you do on a piece of paper is what happened in real life? Well, it doesn’t. What a lot of people won’t talk about is the extra costs that you’ll incur. So take into consideration the cost of voids – when nobody is living at the property, maintenance – the cost of fixing shit when it breaks. Then take into account the fact it’s not just £33k I put into the building, but throw in the extra £5k in costs. Now we’re looking like this…
|Total upfront costs||£38,000|
|Total monthly costs||£357.50|
|Total annual profit||£3,510|
I’ll be expecting to make around £290 a month from this property, but as you know I’ll be using that to pay down the mortgage. So yeah, that’s about it really. That’s the blueprint for what I do, and what I’ll continue to do. Sure there are specifics about what I look for when viewing the property, and where I go to find the properties and the information I need to assess them, but basically that’s the whole process from start to finish.
It’s not like I invented any of this, and if you’re reading this and think ‘Hey, I could do that’, then I’ve served my purpose. Property investing isn’t as difficult as the gurus would have you believe. And it’s absolutely something you should be doing if you’ve got yourself a bit of cash available and want to secure your long-term future. This strategy isn’t going to make you rich overnight, but if you combine this with a long term view and a few tweaks here and there – you might not have to work into your retirement, and your kids may never have to worry about money again. Fun huh? That’s it. There’s loads of free info out there that will help you get started. Poke around my blog (www.theepinvestor.com) and join my Facebook Group (www.facebook.com/groups/theepinvestor), they are good starting points.
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