Retire on 5 properties or less! Many of us get into property with the idea of replacing the day job income whether as a long term pension provision or to be able to quit the rat race early and enjoy more free time without HAVING to work. It s the essence of what virtually all of us are trying to achieve, invest in income producing assets, work once and get paid forever. Of course it s never really quite as straight forward as all that. I have lost count of the number of property speakers who have confidently stated, if you want to earn 4,000 per month all you need is 20 properties generating you 200 pcm each. Well if it s as easy as all that why do I know dozens if not hundreds of investors with portfolios of this size who are not enjoying financial freedom? This 200 per month figure seldom takes into account the maintenance costs, voids and refurbishment costs you will invariably run into along the way. Also if you are just starting out then 20 properties seems like a huge number to get to with most lenders restricting re-financing to enable you to only recycle your deposit every 6 months. This month, here at YPN, we thought we would do something a little different and show how it really is possible to give up the day job and live well off of 5 properties or less. This is in all likelihood our most in depth article in the history of YPN. So if you are wondering how professional investors really make a living out of rental properties then sit down with a coffee and READ THIS ARTICLE. To do so we are going to set a benchmark target earning of 40,000 pre-tax, why? Well it s the UK s national average household earning for families where 2 or more people are working. Sure it s not going to enable you to enjoy a life of luxury on your super yacht but for many people would enable at least one partner to give up work. It s often assumed in property that More is more and I have lost count of the times inexperienced investors ask, how many properties do you own only then to judge you on the response. Let s put it like this. I know a lot of investors with 60 100 properties or more who have come unstuck as they weren t focussing on the monthly profit each property should be delivering. So enough of the theory, this is how it s going to work. In the following article we will highlight actual investments that YPN readers have made and show you the REAL profit and loss figures on a property. We ll show you what type of property they invested in, how much deposit was required, how much they spent developing the property and whether or not they re-financed to highlight how much capital was left in the deal. For balance we have chosen a number of occasional YPN guest writers and readers from different regions of the UK to show that no matter where you live it really is possible to create substantial monthly profits from a handful of properties. For each deal we ll also break down the actual running costs of a property and also try to give you an idea of how many hours per week are spent managing this particular property. Case Study 1 Richard Musgrave South West UK richard@propertybox.biz Regular YPN readers will know that Richard is an experienced HMO landlord specialising in renting to young professionals, many of whom are recent graduates and have just entered the work place. Richard offers high quality accommodation to a rental sector that choose to live in shared accommodation rather than renting on their own, The below example property is one that the YPN team have actually visited. A 3 bed terraced property located near the town centre now converted into a 5 bed, 4 bathroom with 1 reception. Purchase Price 116,000 Deposit (25%) 29,000 Mortgage 87,000 Additional costs 1,677 (legal and valuation costs) Refurbishment cost 25,300 Total money down 55,977.60 Mortgage costs (5.49%) 398.03 4
Monthly running cost incl bills 773.03 (at 375 pcm) and mortgages Monthly rent 1975 5 rooms at 395 pcm Monthly net income 1201.98 Annual net income 14,423.70 Here we see that Richard has created an annual net income of almost 15,000 with just 56,000 in capital. Not bad, with a little over 150,000 in capital our target income of 40,000 per annum, when replicated in similar deals, has easily been surpassed. It s important to note that because Richard offers very high quality accommodation he experiences almost virtually void periods and has a waiting list of tenants for his properties. Richard could have left it here but he chose to make his capital go further by refinancing, here are the figures post re-finance. Revaluation 170,000 Rermortgage (at 75% ltv) 127,500 Capital left id deal 15,477.60 Monthly mortgage 583.31 New net monthly income 996.69 New net annual income 11,960.25 This represents a whopping 77% annual return on capital employed after all costs. By stretching his capital and replicating this deal Richard will actually be achieving almost 48,000 pa income with just 4 properties and with a total capital requirement of less than 62,000 left in property deals. Case study 2 Gavin Barry Liverpool gavin@blackstoneproperty.co.uk Again regular YPN readers will recognise Gavin as a proponent of student let properties. Gavin has a substantial portfolio including single let, commercial, HMO s and student properties as well as his own management and construction teams. Gavin s focus is now on high end student properties as he believes there will continue to be demand for the best properties despite increases in tuition fees. A mixed use residential and commercial premises purchased from auction in December 2011, I m currently in the process of converting the commercial premises into residential accommodation and completely renovating the upstairs HMO. Note this property has already been let to students from July 2012 despite the fact it is some way from being finished. Purchase Price 115,000 Deposit (25%) 29,000 Refurbishment cost 25,000 Revaluation 200,000 (based on income) Mortgage costs 730 (commercial finance) Monthly running cost incl 550 bills, insurance and 200pcm sinking fund) Monthly rent 2945 Monthly net income 1,665 Annual net income 19,980 Capital left in the deal 0 Although there is a requirement for 60,000 in working capital to purchase and develop this property, it provides an extremely interesting example as almost 20,000 per annum with no capital left in the deal. By following this model our target 40,000 income would pretty much be achieved in just 2 property deals with the investor retaining their original 60,000 working capital. Rinse and repeat this model 5 times and you will be earning a cool 100,000 per year. However it must be remembered that deals like this are rare and don t come without complications in the form of substantial developments, change of use and planning. It s for this reason that such exceptional deals are rare for less experienced investors. 5
Case Study 3 Nigel Travers Griffin Devon Here at YPN we LOVE it when we hear a new niche strategy to make some decent cash out of buy to let but this one takes the biscuit. We challenge you to read this next case study without feeling just a touch jealous. Long term YPN readers may recall we covered Nigel s story back in February 2011 as the example of a successful investor who has flourished post credit crunch. In this case it s actually 2 self contained properties (a 2 bed flat and a 4 bed maisonette) above a commercial premises (funeral parlour) both with 125 year leases. Both had failed to sell at auction on a number of occasions enabling Nigel to snap up a couple of bargains. Property A 2 bed Flat Purchase price 45,000 Cash purchase Mortgage N/A Monthly LHA Rent 600 Interestingly Nigel now has post works valuations at 80,000 and 100,000 which would enable him to refinance to just 65% LTV and still keep his deals no money left in. After re-financing assuming a rate of approx 4% (currently available as a fixed rate) Nigel would be enjoying monthly mortgage payments of just 340 against a monthly rent roll of 1550. Even allowing for costs this one property deal (albeit containing 2 properties) will be netting well over 1000 per month. Duplicate this just 4 times and you have easily exceeded your 40k per year income target. In fact Nigel was kind enough to provide us with the financial breakdown of his last 5 deals so other YPN readers can see what s achievable (see table). Nigel s first 3 deals created almost 8,700 revenue from a total cash investment of 25,800. The final two properties (outlined above)which are yet to be refinanced mean that in total Nigel has created a net income of 23,614.45 from a total cash outlay of 123,294.74. Yes it s a little off our target 40k income but it s easy to see that these kind of high yield deals are creating significant income without a requirement for huge amounts of working capital. Property B 4 bed maisonette Cash Purchase at 50,000 Mortgage costs N/A Monthly LHA Rent 950 Refurb costs 18,000 Total capital expenditure 118,000 Annual rent 18,600 2011 Property purchase Purchase Price Valuation Capital Mortgage LTV Rent EBIT Yield ROI Refurb cost Notes 3 Bed maisonette, Plymouth - APR 4 Bed maisonette, Plymouth - MAY 3 Bed maisonette, Plymouth - JUL 2 Bed flat, Exeter area - DEC 4 bed maisonette, Exeter area - DEC 56,200 75,000 15,443.59 43,625.25 58.17% 7,140 2,586.02 12.70% 16.74% 6,794 Probate - bought with BTL mortgage 63,000 100,000 8,968 57,132.48 57.13% 7,560 3,744.09 12% 41.75% 6,759 Auction - bought cash, remo after 6 months 55,000 80,000 1,358.59 55,000 68.75% 7,140 2,338.48 12.98% 172.13% 7,980 Auction - bought cash, remo after 6 months 45,000 80,000 46,262.28 0.00 0.00% 7,219.68 5,577.71 16.04% 12.06% 18,000 Auction - bought cash yet to remo 50,000 100,000 51,262.28 0.00 0.00% 11,431.28 9,368.15 22.86% 18.27% 12,000 Auction - bought cash yet to remo Totals 269,200 435,000 123,294.74 155,757.73 35.81% 40,490.96 23,614.45 15.04% 19.15% 51,533 Capital costs were acquisition costs and refurbs are itemised separately. EBIT does not include refurb but all finance and running costs. The timing was the most important aspect in order to control capital costs whilst awaiting refinance. The final purchases have yet to be rented out so these are rental assumptions. 4/5 tenancies are LHA managed via a social housing letting agent who receive direct payments. There is 1 professional let that Nigel manages directly as it was already tenanted upon purchase. 2/5 properties could make excellent professional HMOs but Nigel is sticking to single tenancies for the time being. 7
Case study 4 Gill Hughes Bath There is often a misconception that to invest for income you need to be investing in the low value areas. We hope the following case study highlights that even in areas where house prices are significantly higher than the national average. In the following example in Bath the average house price is 290,088 compared to a national average 160,384 (source UK Land registry). A 4 bed, 2 reception end of terrace property located near the town centre now converted into a 5 bed 2 bathroom with 1 reception room. Purchase Price 175,000 Refurbishment cost 21,000 Revaluation 225,000 Remortgaged to 70% 157,500 Total capital left in 38,500 Mortgage costs (5% fixed) 656.25 Maintence budget monthly 250 Lettings fee 120 Monthly rent 1625 5 rooms at 325 pcm Monthly net income 658.75 Annual net income 7905 Almost 8,000 per year net profit after all costs and allowing for a healthy maintenance budget from a total cash investment of just 38,500 representing a massive 20 % return on capital employed. Granted this project had a requirement for the best part of 65,000 in working capital but with these kind of returns it has to be worth finding access to this kind of working capital. Gill demonstrates that with just 5 of these properties a net income of 39,500 is created with a total cash investment of under 200,000. Case study 5 Daniel Evans South Wales And if you don t mind owning a few more properties. Daniel enjoyed a career in IT sales formally working in London but is now living in Bristol having retired at 45. Daniel began investing in September 2010 after selling his home in London and moving to Bristol. He had around 200,000 surplus after buying his new home which he decided to put into property. I focussed on an area that would be relatively nearby but would deliver high rental returns so chose Newport as the house prices were significantly lower than nearby Cardiff. I m aware that I may benefit from less capital growth but Newport is a town that has been disproportionately hit by the credit crunch enabling me to buy properties cheaper here than anywhere else I have found in a 100 mile radius. A recent purchase A 4 bed ex local authority house in good order with decent infrastructure surrounding. Purchase Price 78,000 Deposit (25%) 19,500 Mortgage 58,500 Additional costs 1,200 (legal and valuation costs) Refurbishment cost 0 Total money down 20,700 Mortgage costs (5.1%) 248.62 Monthly maintenance 100 allowance + insurance + agents fee Monthly rent 650 Monthly net income 301.38 Annual net income 3,616 Here we can see that Daniel has done nothing to uplift the value of his property and has therefore been concentrating on simply purchasing cash generating assets. His strategy is virtually hands free as he employs a letting agent to manage his properties for him. Daniel s starting budget of 200k was enough for him to buy 10 houses generating a total annual income of in excess of 36,000. Although this is slightly under our target 40k income this is what Daniel had to say, Although on paper my earnings may have dropped slightly since quitting work running a property portfolio is far more tax efficient than being paid as an employee on PAYE. In reality I probably enjoy more money in my pocket than I ever did as an employee. I never would have thought it would have been possible to retire on just 200,000 but I guess that is what I have done. Most of my friends are working 50 hour weeks and commuting whereas my working week tends to consist of 5 minutes online banking to check rental payments are in and a catch up maybe once per month with my letting agent. Daniel s strategy is very different from the others showcased here as he has truly removed himself from day to day management of his properties. He had no intention to get involved in refurbishment, development or management but simply wanted to make his working capital work for him. 9
Case study 6 Kim Stones Doncaster kim@kimcoh.co.uk You may recognise Kim from last month s YPN where he was outlining his strategy of renting properties from agents and subsequently multi-letting them to pocket on average 550-800 after costs without ever owning the property. Here Kim talks us through one of his more traditional multi-lets where he was able to re-finance all of his working capital. Purchase Price 100,000 Refurbishment cost 4,000 Revaluation 150,000 Re-mortgage 105,000 Mortgage costs 350 Maintenance + Bills 450 Monthly rent 1,585 (allowing for voids) Monthly net income 785 Annual net income 9,420 Capital left in the deal 0 This large, 3 bed, end of terrace, situated in a very nice area of Doncaster, was actually in great condition so needed only minor works to enable me to create 5 renting rooms. My typical tenant is probably a little older and either working or in receipt of LHA. Case study 7 Monica Coalfield Leeds Monica is a full time property investor and YPN reader who has in recent years made an about turn from building up a portfolio of single let properties rented predominantly to those in receipt of local housing allowance to now specialising in larger properties rented to the student market. A 5 bed end terraced house purchased as a repossession which has been converted to a 6 bed student let property by turning the dining room into an additional bedroom. Purchase Price 120,000 Refurbishment cost 15,000 Revaluation 169,500 (based on income) Re-mortgage 118,300 Mortgage costs commercial 699.47 finance On repayment at 70% LTV = 5%) Maintenance allowance 165 Monthly rent 1,690 Monthly net income 830.53 Annual net income 9966.36 Capital left in the deal 17,000 Here s what Monica has to say. I love dealing with the students, they are nice kids from nice families and the properties are far more profitable than my single let properties. I have had to get to grips with having a specific time window within which to market the properties for rent and also moved into obtaining commercial finance for properties which is on a repayment basis rather than interest only but my student lets are extremely profitable even with capital repayment mortgages. This a fantastic example that Monica displays 15,000 in capital invested has resulted in almost 10,000 per year net profit after all costs with the property completely un-emcumbered at the end of the mortgage term. Monica self manages her student properties in order to maximise profit margins. Following Monica s example 40,000 annual revenue can be achieved with just 4 properties and with under 70,000 in capital left in properties. What s more at the end of the mortgage term all properties are owned outright. 10
Interest rate proof investments For those that are unsure where interest rates are heading beyond the next 12 months these types of investments provide a hedge against all but the very highest levels of interest rates. If we take Monica s example Deal and apply an interest rate of 10% a repayment monthly mortgage figure of 1,086 Monica is still pocketing 439 pcm ( 5,268 annually) whilst still managing to pay down the debt. How many standard single let portfolios would survive let alone deliver a profit at these kind of interest rates? very few. Quitting the day job some conclusions The previous examples of real life deals by YPN readers highlight s just what it is possible to achieve from investing in property. Most of our contributors have highlighted just how important it is to add value to the property if you want to force the appreciation of the asset enabling funds to be maximised into multiple properties. In some instances the use of commercial finance has been used to value the property as a business over and above its bricks and mortar value a fairly common approach by experienced multi-let landlords. In the main MOST (but not all) have stepped away from standard single let buy to let properties realising that far greater returns are to be had from student lets or houses of multiple occupation. We have covered a broad range of geographical locations also which highlights that depending where you wish to operate is likely to have a huge impact on the level of capital required. Producing this article has been an interesting experience as we have covered high end HMO s let to young professionals, LHA multi lets, student properties and high yield single let dwellings highlighting that no matter where you are there is likely to be a strategy that you can get to work to create ongoing income sufficient to replace a well-paid day job. So can you really retire with 5 properties or less and with less than 200,000 capital? Absolutely, but if you wish to do so with significantly less starting capital you are going to need to focus on buying cheap, adding value and maximising letting rooms. A number of our contributors have also chosen to self-manage which has vastly increased their monthly profitability so have they really retired? Perhaps not but they have created substantial revenue streams from relatively small amounts of working capital and been able to sack the day job in order to have far more free time. I hope this article has also finally laid to rest that old cash flow versus capital growth argument that suggests we should either be investing in central London developments for future growth (and negative cash-flow) or Grim terraced properties often considered to be oop north. Our case studies show that it really is possible to invest in quality areas and still maintain a healthy monthly profit and loss! This article has led me to consider my own investment portfolio and question whether any of us should really settle for a measly 150-200 pcm positive cash-flow when for just a little more effort we can be achieving so much more. Happy Investing Ant Lyons 11