What’s your Vote? Strategy Options for 15 yr Plan

by Readers Question

3 years ago

What’s your Vote? Strategy Options for 15 yr Plan

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What’s your Vote? Strategy Options for 15 yr Plan

Firstly, can I say what a great website this is – full of really useful content and discussion, especially for us newbie’s.

Over the last two years I have read most of the articles at least twice! I am really keen to hear your views on our current situation and get your best advice… Property Investment strategy Options for 15 yr Plan

Our objective is (to be in a position) to retire in 15-18 yrs with modest property income of circa £25-30k p.a.

In the last 2 years, we have purchased x5 houses at a total purchase price of £436k. Mortgages are all interest only and properties are 2-3 bed houses targeting mainly the young/professional market.

Total outstanding mortgages is £322,625.

Total mortgage cost pcm is £1,116.

Total rental income pcm is £2,675.

Ave gross yield 7.35% ranging from 6.86% to 8.14% across the portfolio.

I am a 40% taxpayer. My partner is a low-rate tax-payer. The houses are in both names.

Two properties are managed, three are self-managed.

I invest into the portfolio by using personal income to pay for tax/maintenance bills/void periods where possible. I have used spare funds for deposits and have not re-mortgaged.

So far, we have accumulated £7k in a bank account from the property overpayments (profit) – as we have just completed on 3 properties (now are rented out). We have £55k additional savings. £15k personal loan. I expect to have £15k from shares in next tax year. Our own house is worth approx. £400k, £95k mortgage outstanding, interest free approx. £100 pcm, 17 years left outstanding. No significant funds in pensions.

Strategy options – what’s your vote and best advice?:

1. Do nothing – Let the overpayments build-up in an ISA account (however the overall cost of interest over the term would mean the overpayments would not pay-off the mortgages in 15 years’ time). Payoff personal loan with shares. Revisit the situation when have more savings from personal income.
2. Consolidate – Pay-off existing properties over next 15 years with the overpayments instead of putting into an ISA (this would increase tax position and require my current contribution from income for repairs & maintenance etc. however, the drip affect would enable 15 yr pay-off plan – subject to the current interest rates)
3. As above but pay-off properties using snowball method (focus on paying one-off at a time – subject to mortgage conditions). Pay off our own home (but v low interest rate) or highest BTL mortgage?
4. Expand portfolio – Buy another property with share funds and keep £50k ish in savings as emergency fund.
5. Buy 2-3 additional properties in the next year, which would mean less emergency funds.
6. Expand aggressively. Keep buying for next 5 years and do not plan to pay-off all outstanding balances in 15 years time.
7. Diversify – keep the current position but save for another investment e.g. commercial property or non-property related investment (this is hard for people to comment on)
8. Any other options?

Your expert opinions would be greatly appreciated!

Regards

John Hart

Comments

Mark Alexander

3 years ago

Hi John

As of today there is no right or wrong strategy in your list. That's because none of us can predict the future and because we are all different and have different attitudes to risk.

If you think property values are unlikely to grow much and you think rents are also likely to stagnate then you might prefer the snowball method of reducing the mortgage balances, starting with the most expensive interest rate first of course which is the whole point of the snowball method.

However, it you anticipate significant rental inflation and growth in property values then a more aggressive acquisition strategy will appeal to you.

Whichever you chose I would urge caution in respect of keeping a decent level of liquidity. It's only ever easy to raise money quickly when you don't need it.

On the other hand you might feel that both rents and property values will fall and if that's the case you should cash in now.
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If you might be interested in some one to one consultancy please see >>> http://www.property118.com/consultancy-mark-alexander/61522/
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John Hart

3 years ago

Reply to the comment left by "Mark Alexander" at "15/02/2015 - 18:44":

Thank you Mark. I agree there is no right and wrong strategy in the list as no-one (unfortunately) has a crystal ball and we all definitely have different attitudes to risk.

Reaching the objective should be measured and as you say maintaining a decent level of liquidity will be required especially due to the increasing level of uncertainty in the market.

Selling-up is not an option for me as I’ve only just bought and decided to join the club!

I also believe that the BTL investment isn’t for the short-term. In my personal view, rents and house prices will remain at a similar position – no major growth in the short term but hopefully no major hiccups either over a medium term.

Latest research (Belvoir) implies that rents will grow by an average 1.8 per cent over 2015 which is below the Bank of England’s target inflation rate of 2 per cent. According to Property Wire “Year on year average rents have increased for all property sizes with the smaller properties leading the way. One bedroom properties see the greatest increase in rent up 2.7% to £688, followed by three bedroom properties up 2.2% to £875, two bedroom properties up 1.9% to £768 and four bedroom plus properties up 1.3% to £1,328. The data also shows that arrears have decreased year on year in all regions apart from the North of England where they have stayed the same.”

However, you can easily find conflicting research out there on the Web just to confuse us all!

Liquidity, will therefore be important to hedge risk and support progress (according to a recent article by BRDC - Landlords report that they could cope financially for 17 months on average with their current exposure to voids and arrears before it became a serious enough issue for them to consider divesting the impacted property(ies). Not something I am keen to experience!

Further, if interest rates increased by just 2% (on a portfolio total BTL mortgage of £322,625k at say 4.2%) it would increase the monthly outgoings by an additional £538 (more than the total income of one of the buy-to-lets).

Equally, by paying just £900 overpayment (from profits) on the same mortgage at 4.2% would decrease the outstanding debt dramatically by £225,929 in just 15 years (although this would include a higher tax bill during that time and not complete the target - and does not take into consideration inflation).

Perhaps the original objective is unrealistic!

So I guess an obvious question (although simplistic) is, in such an uncertain market what loan-to-value rate would you feel “ideal” and less exposed (again a personal choice - but it is a vote after all!)? (Not only to protect against future interest rises, but also to consider the best mortgage and tax position)… pay-down to 60% before reinvesting in further portfolio growth? In my case that would be an overpayment of 61k before reinvesting in portfolio growth (without eating into an emergency fund).

I believe, other articles on 118 suggest a stress-test of 7% interest rate and retaining £20k per £100k mortgage outstanding (for my situation that would currently be £65k).

Mark Alexander

3 years ago

Reply to the comment left by "John Hart" at "15/02/2015 - 22:04":

Hi John

The perfect LTV can only exist for each and every property and certainly not across the board. For example, one property could stress test at a 15% break-even interest rate at 85% LTV whereas another might not even break-even at a 2% interest rate at 20% LTV.

Personally, I think the bomb proof strategy right now is an interest break-even point at 5% base rate (plus margin payable) after deducting all costs PLUS a liquidity fund equal to 20% of mortgage debt.
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Sam Addison

3 years ago

Reply to the comment left by "John Hart" at "15/02/2015 - 22:04":

Hi John,
I assume you mean income of 25 - 30K in current money terms which is what you are actually receiving at the moment.
I think your target is eminently reasonable and achievable - either by paying off all the mortgage in the next 15 years or by increasing your portfolio to be able to continue paying off some mortgage while retaining desired net rental income.
Some things to consider :-
paying off debt increases your tax bill - is it possible for the property with the highest m/g rate to be transferred to your partner, thereby only paying lower rate tax on the saving?
Pay off or invest? The initial obvious calculation is m/g rate lees tax to pay v other investment possibilities e.g. pay off 10k on 5% m/g = 500, less tax 100 =400 return or 4%. If you can consistently achieve better than this under ISA (no tax) then ISA is better. With 40% tax you need to achieve 3% or better from ISA.
Inflation - While you can work in current money terms for simplicity remember that rental income will generally keep place with inflation but m/g loan amounts will not - try setting up a basic spreadsheet over 15 yrs and increase rental income by say 2% p.a. to see where that takes you. try this with both paying off and investing scenarios.
Liquidity is important but I wouldn't worry too much over interest rates. Apart from inflation rent rises with interest rates (albeit after a lag) as most landlords are in similar positions.
Wait to see election results. They may affect your views of the future. As long as you keep liquidity and do nothing too drastic you can always change your strategy as situations develop.

Barry Man

3 years ago

Hi John

My first post....

First of all pay off the loan with the share proceeds. Then put 25k into rainy day fund with the 30k going onto FTSE index tracker, in 17 years time the proceeds should easily pay of the 95k on your own home. Meanwhile I anticipate over same period it will have doubled to over 800k

Average price of each of the five property's is £87,200 so I would sell two in 15 years when they should have doubled in value to £348, 800 comfortably paying off the outstanding £322,625 mortgages. This leaves you with three BTL's owned outright & rents should have doubled paying 25k PA

Happy days.....

Mark Alexander

3 years ago

Reply to the comment left by "Barry Man" at "17/02/2015 - 22:41":

Excellent first post Barry, welcome to Property118 😀
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John Hart

3 years ago

Reply to the comment left by "Barry Man" at "17/02/2015 - 22:41":

Thanks Barry for your views. Definitely 'food for thought'. I like the perspective of mixing pay-off, tracker, review market conditions in 15 yrs to consolidate plan. Many thanks!

John Hart

3 years ago

Reply to the comment left by "Sam Addison" at "16/02/2015 - 22:06":

Thanks Sam. You're right about ISAs at the moment. Top Cash ISAs are a mere 1.5% (Post Office, NS&I). Club Lloyds pays 4% on £4,000 - £5,000 (for higher-rate payers it's 2.4%). So considering a level of drip-feed pay-off will make a lot of sense, whilst keeping liquidity (I like Mark's formula of £20k per £100k borrowings, albeit very 'chunky'). Mark's point on stress-testing each property also makes sense - i will keep a watch, especially for the next couple of years, to see how that pans out and we learn the ropes!. Thank you for your input.

Tim none

3 years ago

Yield is important, but cash flow and ROI are much more valuable when trying to achieve your goals.

I routinely get 14% yield, but much more importantly, I ensure I am getting large cash flow of about £1,400 per month from each property.

The properties I buy are usually about £190,000 and so I am about to make about £17,000 per year on a £40,000 outlay. I always spend an additional £30,000 to add value and then refinance, but that it a separate issue.

So to conclude, I think maybe you should be looking at buying less properties but those which provide higher income. I only buy historically sound freehold town houses, but I convert to HMO to increase the income.

Hope that helps.

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