Investment Property UK – FAQs

Investors who are new to Investment Property always have a ton of questions for us about the basics. Buying a profitable rental property is challenging, and if YOU are keen to start making lifestyle supporting passive income, here are the 8 top questions we get asked that you want answered…

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1) Should I Buy Outright or Use a Mortgage?

Use a mortgage – this is hands down the most crucial decision factor between whether your investment provides a life changing return or a mediocre one.

If you buy outright you might need to spend £100,000 or more on one rental property, whereas for the same money you could buy up to 4 mortgaged properties in the same area.

In terms of monthly profits, you must pay some mortgage interest, but your revenues are 4 times higher.

In most circumstances, using a mortgage is the obvious choice. The rest of the market is doing it, and this is factored into rental prices.

And who can afford to spend £100k or more on one undiversified asset?

Applying For A Mortgage Can Be Daunting - But Necessary

2) Do I Need a Special Type of Mortgage?

Yes – the best model in our opinion to buy investment property is with an interest-only mortgage.

This is in fact the default mortgage type for buy-to-let property purchases. We invest for cash flow, and this is not achieved if we must repay hundreds of pounds of equity each month under a capital repayment mortgage structure.

By being patient and holding the property for 30 or so years, we expect the equity to build to a high enough amount to make the loan balance negligible. This is achieved when the house value increases.

Be Patient - Play The Long Game With Your Portfolio

3) How Much Money Do I Need to be Able to Invest?

In some areas of the North of the UK, a decent rental property can still be bought for around £100,000. A buy-to-let mortgage will let you put down a deposit of no less than 25%, so that’s £25,000 of capital.

Add to this stamp duty of £3,000 and legal fees, and you’re looking at around £30,000 for the average investment.

Don’t live in the north? No problem! – you should be using a property agent to manage your assets anyway. There’s no need for you to live down the street from your rentals.

You could also go halves with a friend – up to 2 people can be listed on a mortgage. More friends can be involved if you buy through a company structure.

On this note, buying through a company can open the option of 20% deposit mortgages although this is not common– an upfront cash saving of 5% on your deposit!

A Northman Contemplating His Vast Property Portfolio

4) Do Landlords Spend All Their Time Fixing Toilets?

I have never fixed a toilet in my life, and I don’t intend to! The only landlords who would are doing so because they’re “accidental” landlords (i.e. they’ve inherited a house), or they have bought a property based on reasons other than the highest profit margin available. Maybe they thought it looked pretty.

They don’t know what they’re doing finance wise and are forced to cut costs on maintenance. No, pay a plumber to do it for you, and have a management agent arrange it for you.

You Shouldn't Be Doing This As Investor

5) Should I Set Up a Company to Buy Property?

This is up to your preference and circumstances. Note that limited company mortgages carry higher interest rates than personal mortgages.

But companies are a way to protect your wallet from the tax man, and you pay tax at the corporation tax rate, currently 19%, which is cheaper than paying income tax which you’d pay if it was owned in your own name.

But you’d also have to pay dividend tax when you take your profits out of your company.

Whichever method you use, don’t plan to change it later, as you’ll incur stamp duty and legal fees to do so. Make your choice now; and stick with it.

Keep The Taxman Away From Your Dollar

6) What If Interest Rates Go Up?

If interest rates went up, the cost of your mortgage would go up, and your profits would go down.

But the same would be true for every other landlord in the country – will they all just continue taking that hit to their profits?

No, they would all raise their rents at the first opportunity, out of necessity, and so could you.

The Bank of England knows this, and they know that by raising interest rates, most of the additional cost will inevitably be passed on not to the landlords, but to the tenants.

So, they are reluctant to raise interest rates significantly as a result, unless it’s spread over a long enough term to allow rents to rise gradually.

As always, there is a risk that an investment will lose money, and interest rate risk is one of the biggest for property investors – only invest what you can afford to lose.

Put Rents Up With Interest Rates

7) Do Tenants Have All the Power Now?

In June 2019, new laws have come in that mean tenants don’t have to pay agent fees – these costs are likely to be shared now by the agent and the landlord, so factor this extra cost into your profitability calculations before investing.

It is the latest in a string of new laws that give tenants more rights. What this really means is you need to be aware of the rules now more than ever, and extra careful not to fall into any traps by accident.

A good management agent will hold your hand regarding the rules; they’ll make sure that new tenants have a good credit history, will chase up late payments, and help with any evictions.

Avoid taking on problem tenants in the first place using proper referencing, and take out legal cover insurance for evictions, just to be extra safe.

Avoid The Landlord Traps Set Up By Parliament - Stay Knowledgable

8) What Are the Scary New Tax Changes

We always get asked about the tax changes to mortgage interest – it’s something that seems to strike fear into the hearts of wannabe investors.

But you may not need to worry about this one – if you are a basic rate taxpayer, the impact is negligible.

The main effect being that your taxable income is increased by the amount of the interest, which could push you up into the higher tax bracket by a small amount.

If you are a higher rate taxpayer, you will be stung by this if you own your properties in your own name. Two solutions are to either buy in the name of a spouse who is a basic rate taxpayer, or to buy using a company.

What other questions do you have us about property investing? Let us know in the comments below.

Will Property Prices Fall in UK After Brexit?

Will property prices fall in the UK after Brexit? It’s the question that’s on the lips of buy-to-let investors and first time buyers up and down the country.

Brexit uncertainty, tax changes and new laws to protect tenants are shaking up the housing market in a way not seen since the 2008 recession.

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As investors, low property prices can be both a blessing and a curse – low prices mean we can buy more cash flow generating freedom assets, but also mean more competition with other investors; and ultimately, if prices fall too low, negative equity and dried-up credit lines.

So where is the UK property market heading, and will the post Brexit world (if we ever get there!) continue to be a land of opportunity for property buyers?

Bank of England

Where is the UK Property Market Now?

The expert advice is all over the place on this one. The Halifax have house prices surging 5.2% in the year to May, a fantastic rate of return for property investors, if true.

But the industry considers Halifax to be an outlier. The more consensus view is that house prices rose between 0.6% according to Nationwide and 1.4% according to Official Government figures. Either way you look at it, prices have risen over the last year.

The recent relative stability of the housing market is due in our opinion to wider economic factors outside of the Brexit debate.

Employment remains high and interest rates remain low, keeping mortgages affordable and house prices steady.

However, an economic upheaval such as a recession due to a mishandling of Brexit, or by a Corbyn government keen on shaking up the economy, could change all of this.

RPI Measure of Inflation

The RPI measure of inflation differs from the more commonly used CPI in that it includes house prices.

It is somewhat correlated to house prices as a result, and useful for tracking prices in the whole economy.

Above, we see how RPI has moved over the last 5 years. What is interesting is the period from 2016 to 2019 – despite the uncertainty caused by the Brexit shambles in Parliament, prices across the economy have continued to rise at a traditional rate of inflation, around 2-3% – led by a strong jobs market and affordable interest rates.

Brexit - Will Something Finally Happen Soon?

Brexit

Coming onto Brexit – what this now represents for economists is uncertainty.

Prolonged uncertainty is the death of an economy, and in our opinion the protracted feet dragging in Parliament is causing a much more severe economic impact than either Leaving or Remaining in the EU would bring.

No matter your position on Brexit, you should at least agree that something needs to be done quickly.

There are 2 realistic options for Brexit now in our view – a No Deal Brexit, or Leaving with a Deal.

Remaining is of course possible too, but doesn’t look likely in the short term, and certainly is not expected by the markets – and property prices are driven by market expectation.

Why Does Nobody Have Faith In The UK?

No Deal

Rightly or wrongly, the market is terrified of No Deal, and the latest line from the Bank of England is that they would lower interest rates in the event of No Deal to stimulate the market – possibly even down to 0%!

Under normal circumstances, we might expect lower interest rates to lead to higher house prices, as people can more easily afford mortgages and have more disposable income, creating more demand – more people competing for the same limited housing stock.

However, these are not normal circumstances, and if a No Deal Brexit is delivered incompetently, there could be an economic shock akin to the last recession.

We expect this would drive house prices down as buyers pull out of the market, over and above the effect of an interest rates fall.

Our expectation in a No Deal Brexit scenario would be that property prices hold steady at the least, or fall in the short term.

"Accidental" Landlords Will Drop Out

Leaving with a Deal

The Bank of England have said that if we Leave with a Deal, they would put interest rates up.

Raising interest rates would likely slow the economy as spending becomes more expensive, decreasing demand.

At the same time, accidental landlords would drop out of the market as their mortgages become too expensive to make a profit, increasing supply. When demand is decreased and supply increased, prices fall.

Other than the impact of interest rates, we expect that Leaving with a Deal would be business as usual.

Some investment cash may be released into the economy that had been held back, raising prices, but we think the impact of interest rates would be more significant.

The reason we think that interest rates will have a greater impact than Brexit itself is because we expect the Bank of England to over-correct the interest rates adjustment in response to Brexit, as they are so terrified by it.

We believe that the UK will carry on regardless of membership of the EU, or lack of it.

3. Mini Crash
The Property Cycle - Mini Crash

The 18 Year Property Cycle

Another tool in our arsenal is Property Cycle Theory. We’ve looked before at how the property market broadly moves in 18 year cycles.

As a refresher, the 4 phases are: Recession; Recovery; Mini-Crash; and Boom.

We are currently in an extended Recovery phase, teetering on the start of the Mini-Crash.

We think that the Brexit uncertainty of the last 3 years has held the market in paralysis, and is delaying the inevitable.

Once Brexit is resolved, we expect the market to return to form and see falling prices for a couple of years during a Mini-Crash, followed by rising prices during a Boom Phase – akin to what happened during the 90s.

4. Boom Phase
The Property Cycle - Boom Phase

Conclusion

We expect property prices to hold steady in the short term, then fall naturally for a year or 2 in line with the Property Cycle once the pressure valve of a political decision over Brexit is taken, possibly in October 2019.

Finger in the air, we would then expect property prices to return to strong growth during a Boom phase for several years more – but looking more than a year ahead really is guesswork.

Low prices mean investors can buy more houses – price rises mean we’re making a better return on our existing portfolio, and can take advantage of equity release to improve cash flow.

High or low, a good investor will take advantage of property prices as they stand.

Do you think UK property prices will fall? Let us know in the comments below.

FIRE Financial Freedom – Financial Independence Retire Early

The Financial Independence, Retire Early Movement, or FIRE movement for short is a lifestyle choice to retire early by gaining financial independence at a relatively young age – usually aiming to retire in their thirties or forties at the latest.

In one way it’s something we’ve been teaching on our channel from the very beginning but never referred to it by its name.

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When we talk to people about early retirement, we generally get 1 of 3 responses:

  1. Complete and utter disbelief that it’s even possible – often accompanied by the sentence, “I can’t retire for another 40 or 50 years.” This really grinds our gears as these people have given in at life before they’ve even started, accepting a state dictated retirement date.
  1. Criticism for some reason for wanting to live your life to the full. Often accompanied by the sentence, “I wouldn’t know what to do” or “I’d be bored”. Honestly, we don’t get this one at all. Why on earth would these people not want to be masters of their own destiny.
  1. And a response that finally makes sense – general excitement and a desire to know how.

So, what is the FIRE lifestyle? How is it done? Do we agree with it? And can it really be achieved?

Your Money Or Your Life
Your Money Or Your Life

Although we think the concept of Financial Independence, Retire Early must have been around since the beginning of time, many of the main ideas have been credited to the best-selling book Your Money or Your Life, linked here, so make sure to get yourself a copy. If you learn anything from this book, then it’s been worth the price.

What is FIRE?

FIRE‘s formula is very simple: spend less than you earn and invest the surplus. FIRE is achieved through aggressive saving – and we’re not just talking about a bog standard 10-15%.

The objective is to accumulate assets until the resulting passive income provides enough money to cover living expenses in perpetuity.

If you can only save 10%, then it will take 9 years to save for 1 year of living expenses.

However, if you can pump those up to a 50% saving rate, then that is just 1 year of work to save for 1 year of living expenses.

Some people are able to go even further to 75% and beyond. Also factor in some investment growth and you’ll be financially independent in no time.

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We're not talking bull... honest

We can sense some people will think that’s impossible and that we, and all those that preach this stuff, are chatting complete bull.

So, How is it done?

Those seeking to attain FIRE intentionally maximize their savings rate by finding ways to increase income or decrease expenses.

The extent of how much you decrease expenses is up to you. If you can live off and are happy to live off rice, live in a tent and do nothing else, then you can probably save quite a high percentage of your income.

But most people, including us are unwilling to go to such extremes.

You can of course cut out all the unnecessary spending, and if you follow the teachings in Your Money or Your Life you will identify every single penny that comes into and out of your life.

This way you’ll finally see where you spend and potentially waste money.

We prefer to increase earnings, whilst being semi frugal.

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Do you really need this?

Some ways we each maximise our savings rates is by increasing our earnings through multiple streams of passive income.

This includes ad revenue, which you may have seen on our YouTube videos and affiliate marketing.

We are also now live with the MoneyUnshackled.com website, which will bring more helpful information to you and hopefully an even wider audience.

Supporters of FIRE suggest the use of 4% as a safe withdrawal rate, meaning you would need an investment pot of 25 times your annual living expenses.

Of course, the 4% rule may be too high, but it could also be argued that you need far less if your investments perform far better than the stock market average.

youtube egg
The most liked video on YouTube - this could make some serious passive ad revenue

A few investment properties could return 20%+. We’ve done a video on how this is possible, here.

Do we agree with it and can it really be achieved?

Absolutely. Personally, neither of us would want to scrimp and save to the point life was no fun but FIRE is not much different to what wealthy people have done for generations – living off their wealth.

Achieving it is not easy otherwise everyone would do it. But if you can build your income and keep lifestyle inflation to a minimum you can definitely achieve it.

We’re both already on the path to Financial Freedom and would love for you to join us.

“But I don’t want to retire”

Upon reaching financial independence, paid work becomes optional – you don’t have to retire.

For some reason, many people get confused with what freedom is.

You are free to do what you want. If that is work, in whatever form, then so be it.

Are you or will you be living a FIRE lifestyle? If so, we want to hear how you are doing this. Let us know in the comments section.