Who
is investing in property today?
Property
is the cornerstone of wealth creation. An examination of Forbes rich list will
reveal that a high proportion of millionaires made their money through
property. Those who made it through business rely on property to protect their
fortunes.
Alan Suger is best known for his success with
Amstrad and his TV series, “The Apprentice”. But where is his money now? It’s
in property. He buys and sells large hotels and makes vast sums of money. He
doesn’t even like property, saying the only fun is when you buy and when you
sell. But he can’t ignore its power in wealth creation.
Queen Elizabeth has a significant portion of her
fortune in property. Aside from the state owned castles and palaces, she owns a
lot of commercial and residential property.
Many members of the coalition cabinet have money
invested in property. Most politicians, especially Conservatives, are aware of
the importance of property as a means to create and protect wealth.
The Chinese and many other overseas millionaires are
investing in property in the UK. London is considered the second best city in
the world, after New York, for capital growth on property investment. In these
uncertain times, property is a safe haven for the rich.
If I asked you what was the core business of
McDonalds, you would certainly say, selling hamburgers. But you would be wrong.
McDonalds main business is property. They are one of the world’s largest owners
of commercial property. Every restaurant is owned by them and leased to the
franchisees. The sale of burgers is what allows their tenants to pay the rent and
make a living.
Now you might be thinking that because the rich
invest in property, then only they are able to do so. This is not the case as
property investment is rapidly becoming a major source of accumulated wealth
for thousands of ordinary people in the UK today. Private rentals now make up
17 % of the UK housing market, up for 11% in 2003 (Source: English Housing
Survey). Many thousands of business people, professional people and manual
workers have discovered the power of property investment, often by accident.
You invest in property, if you own your
own home. The problem is you need to own more than one in order to profit from
property.
What can property investment do for
me ?
At
this point you may be expecting me to tell you that you can become a
millionaire. Well many people have become millionaires through property
investment but let's just say you aren't that keen to become one yourself.
Let's stick to more down to earth, easily achievable goals.
Provide
an additional income.
One
benefit of sound property investment is positive cash flow. This means a
regular income to supplement your salary. As employees we are used to going to
work and getting paid, spending our money, then going back to work to earn
more. Although this is normal in our day it was not always so. The Industrial
Revolution brought multitudes of people from life on the farm to work in the
burgeoning mills and factories. Exchanging labour for an hourly rate was
foreign to country people who were used to living from harvest to harvest. In
the 21st century the first question we are asked on more on making a new
acquaintance is, “what do you do?” more than ever we are defined by our job.
I’m
a great fan of the BBC dramatizations of Jane Austin’s novels. Did you ever wonder
what Mr. Darcy and his friends did for a job? They were part of the “landed
gentry”. This means they lived off the rents generated by the properties on
their land. That's why they had so much time to gad about and drink tea with
the ladies. For many years only the wealthy could afford to invest in property.
Now, thanks to the buy-to-let mortgage, which was only introduced in the
1990’s, an income from property is within the reach of most people.
Some
investors have completely replaced their employment income with income from
their portfolio. In his book, “Wage Slave to Financial Freedom,” Neil Mansel tells
how he was able to leave the corporate world thanks to the generous passive income
provided by his portfolio.
The
private rental sector accounts for around 17% of housing in the UK. It is now
about to overtake the stock of council owned houses. Yet it remains largely
unregulated. Who can tell what legislation will be passed in the future and
this could make it more difficult for the average person to become a property investor. So now is the time to take the opportunity.
Provide
a pension nest egg.
A
good property investment can supplement or even replace traditional pension
provision. As we have seen in the previous chapter, UK pensions are failing
many people. Through property investment you can provide a nest egg which will
enable you to retire when you choose. How would you define retirement? Is it
the age at which the government says you can retire? Does it mean stopping work
altogether? I define retirement as:
“The day when you can live on an income which
is not generated by your employment.”
This
is known as “passive income” and it comes from income producing assets such as
property, shares, cash in the bank, or royalties. Of all income producing
assets, property is the most powerful.
You
can retire on the day that your passive income is equivalent to your
expenditure. Won’t that be a wonderful day? You will get up when you want to,
have breakfast and stroll down to the newsagents to pick up your paper. The sun
will be shining and you will be on top of the world. This book is written to
help prepare you for that day.
Pay
off your mortgage early.
The
market can pay off your mortgage many times faster than you can. We bought our
first house in 2003. It was a seller’s market in those days and I hadn’t a clue
about property anyway, so we paid the full price asking price of £99,950.
Incidentally, brother-in-law had bought exactly the same house several years
earlier for £16,000, under the local authority rent right to buy scheme but I
couldn't think about that too much as it made me ill! We had a mortgage of
£75,000 on a repayment basis (interest plus capital) and the monthly payments
were £410.76. As an employee at the time I was taking home £304.00 a week.
In
2007 the house was valued at between £170,000. In this 4 year period we had
paid off around £7,000 of the capital, leaving £68,000 on the mortgage. However
the property had increased in value by at least £70,000, so the market had
risen 10 times faster than I could repay the mortgage. If I had been able to
buy another property at the time with interest only mortgages on both houses, I
could have sold it off and paid the mortgage on my own house, leaving me
mortgage free in four years! In
addition, I would have had a lower mortgage payment (interest only) for four
years and some cash flow from my rental property.
Of
course in those were years of high growth in the property market. Also I know
that in the early years you pay off more interest than capital on your
mortgage. But it serves to illustrate that the market can work a lot harder
that you can. As house prices double on average every 7-10 years it should not
take more than this to pay off your mortgage.
Help
your children onto the property ladder.
In
2007 the average age of first-time buyers in the UK was estimated at 33. This
rose to around 40 in 2012. The number of adults in the UK returning to live
with their parents is now over 3 million, four times what it was in 1979. These
are now known as the “boomerang
generation.” The average first-time buyer now spends over £80,000 on rent
over 16 years before becoming a homeowner.
You
can use property investment to help your children get onto the property ladder
sooner. You can do this by using some of the equity in your house to serve as a
deposit for your children’s first property. This needn’t cost you any more per
month as your son or daughter can pay the interest on your extra borrowing plus
the interest on the buy to let mortgage. Together these will usually be less
than the market rent for this property.
Get on to the property ladder.
Perhaps
you’re not in the position where your parents can help you. If you cannot
afford to buy a property in the area where you want to live, you can buy one
elsewhere and rent it out, then use the accumulated equity as a deposit for
your own house later.
In
his book, “Wage Slave to Financial Freedom,” Neil Mansell explains how he began
investing in property and become the owner of several HMO’s (House of Multiple
Occupancy) while still living in rented accommodation. He says, “The house that
we bought in 2008 was much bigger, more expensive and nicer than we could have
bought if I’d jumped in a few years earlier.” He also left the corporate rat
race in the process.
Buy the house you need, not the
house you can afford.
When
you’re starting out a one bed flat can be all you need to be happy. When you’re
married with a growing family, especially when your children are now nearly
adults, even a three bed house can feel a bit tight. I’m a great believer in
owning the house that suits your need at a given time. I know who people get
attached to their house or who say they can’t downsize because they wouldn’t
have room for all their stuff.
By
investing in some buy-to-let properties, you can provide enough equity through
time to pay off the mortgage on your own house. So this will enable you to
switch to an interest only mortgage for your residence. The monthly repayments
will be greatly reduced and as a result you will be able to borrow more and
afford the house which you need. We will explain how to do this later.
Pay for university costs.
Tuition
fees are now £9,000 per year at many universities in England. Living costs can
easily total £7,000 per year. It is estimated that an average student debt on
leaving university will be in excess of £50,000. This represents a crippling
debt with which to begin your working career and will only serve to increase
the age of the first time home buyer.
Some
parents are now buying a property near their children's university to provide a
room for them instead of renting. They then let out the other rooms in the
house to other students and the rent collected pays the mortgage on the
property. In some cases the excess rent can also provide an income. They
therefore have free accommodation for the family student and help with living
expenses.
The
mistake such temporary landlords often make is to sell the property as soon as
their child finishes his or her studies. Its better instead to keep the house
as an investment and use the use the rental income to pay off the student loan.
Or wait till the equity is sufficient to pay it off in a lump sum. Imagine your
child leaving university with no debt and perhaps even a lump sum to put
towards his or her first property. This is perfectly achievable and makes good
sense.
Help a charity which is close to your
heart.
You may be involved with a charity in the UK or
abroad. You can invest in a buy-to-let property and use the profit to provide
regular funding for the charity. In addition the property could be left to the
charity in your will or sold and the equity used to fund a large project. You
may even buy a property which can be used as an office by the charity and the
rent for the flat upstairs can cover the mortgage cost. The Church of England
is one of the largest property owners in the UK.
Leave a legacy.
Whenever I look around a stately home such as
Longleat or a National trust property I always ask the guides where the money
came from to build this fine house. In the case of Tyntesfield near Bristol, it
was built by the Gibbs family who made their fortune from the trade of guano, a
fertiliser made from South American sea bird droppings. You may not have a
monopoly on bird poo, or you may not leave behind a sumptuous mansion, but it
would be nice to think you could pass something on to the following
generations.
After the frantic years of raising your children you
have a right to look forward to a peaceful retirement. Perhaps you haven’t
given any thought to what comes next and you may wish to enquire at your local
place of worship in this regard, but what will you leave to your children after
you’ve gone? You could be sitting on an asset worth over £200,000, but if you
live till you’re 90, your children could be well into their 60s before they
benefit from their inheritance. A problem for many thousands of people is that
their houses have to be sold to pay for their care in a nursing home, so very
little is left to share out among the children.
Wouldn't it be more sensible to make provision for
your children before this happens? You could help them onto the property ladder
as we have seen, or you could leave them a portfolio of income producing
properties.
Property is different from a pension in this
respect. Once you have bought an annuity with your pension pot you receive an
income for the rest of your life. But if you pass away soon after retirement
the company keeps the money. Property however is yours to pass on to whomever
you choose. It’s an asset that you control, not some unknown fund manager. It’s
not a piece of paper, like a share certificate, which can lose most of its
value in a very short time. It’s bricks and mortar which you can see and touch.
A sound property investment will go on producing income even after you’ve gone.
In my work as an electrician I often find myself
climbing over the contents of someone's loft. One day I was in the loft of a
family who had lived in the house for many years. The whole story of the family
was laid out before me; the toddler’s toys, the Lego, the train set, the old
computers. Now the children had grown up and were making their own way in the
world. Life goes by so quickly and it reminds us to focus on what is really
important.
Olivia Lupton Middleton belonged to a business family
in Leeds. She used some of the proceeds of the business to set up a trust fund
to be used for the education of her children and grandchildren. The legacy of
the family business allowed her descendant, Catherine Elizabeth Middleton, to
attend St. Andrews University in Fife. There she met Prince William and the
rest you know. What legacy could you leave?
