Considering Property Investment and My FI plan – Part 1

Recently, I’ve been toying with the idea of investing in a property primarily as a way of growing my passive income in ‘old age’, something not exactly pleasant or exciting to think about but would probably be foolish for me to dismiss given that if we’re lucky enough, we’re likely to live to a ripe, old age.

Securing later retirement gives a sound foundation for FIRE (arguably overlooked by many FIers in their rush to FIRE), yet my key motivation is that I want us to stay in our own home for as long as possible without burden to Little Firelite (read my thinking on this here). This is less about “early retirement” than it is about maximising quality of life deep in retirement. However, there are definite repercussions for my current financial independence plans.

This post covers my online search for potential buy-to-let properties in the UK market, calculations on potential costs and returns using real examples, and I ask if it’s all worth the change in investment (or life design) strategy for me.

As well as being the best bet for financial security in ‘old age’, if it works well, property could be a source of income in early retirement too, as well an appreciating asset. I could alternatively sell it or downsize to in once the mortgage term is complete. In other words, it gives options and, looking at the bigger picture, a truly diversified portfolio would include property.

The UK property market has stalled somewhat, what with the B word an’ all, which may offer some relatively good deals to those willing to take the leap. A buy-to-let mortgage also offers a form of financial leverage not offered with equity investment. And as the old adage goes, people are always going to need housing.

And what of my ‘original’ FI plans?

However, this flies somewhat in the face of my original plan, which is that I’m saving (and investing) a pot for taking a year out of work (which I called Life 1.2), intending to leave my time-intensive career, and then later, early retirement (which I called Life 2), which could happen as early as in 7-8 years’ time. (For the fuller back story, you can check out here and here). This entailed maxing out my saving over the next year (now 10 months, eek) to build enough to cover the ‘gap’ to live on before more guaranteed income ‘comes through’ (a mix of work pension{s), savings and index funds, and downsizing to a cheaper location).

The change in plan would mean that the money I intend for ‘financial freedom’ would then be tied up in relatively illiquid property. Sure, there may be rental income, but it wouldn’t be enough to cover my cost of living (current estimate needed is £18k a year, though with a growing child). And since I need to have a job to be eligible for a buy-to-let mortgage, unless I find something really soon and get the cogs of the buying process rolling (and we know how fast solicitors are known to be [do I detect sarcasm? – Ed]), then it’d mean staying in my job for longer which I had committed to quitting! So, a major rethink may be in order – Essentially, what are my priorities?

The key time-dependent consideration forefront of my mind is that if I want to buy AND still leave my job next summer, I need to act SOON. I need to be in work to get the mortgage. I would not spend time managing the property, yet I might need to spend time doing up the property (minor sprucing up, no projects, please!). If I don’t act soon, the risk is that I end up using my year out on this task, which is definitely not my intention as I wish to take up more creative or rewarding pursuits (and I can imagine getting consumed by my investment if I’m not careful).

To buy or not to buy? That is the calculation.

So, to help me decide, I excitingly delved into two hypothetical house purchases to consider against my original plan and equity (index fund) investment. I basically did a Rightmove search to find houses that I may be able to afford (one more expensive than the other) in a town near where I live – see their pictures below.

Both are 3-bed homes, a semi and end terrace, relatively well presented and seemingly without any major work needing doing to it (you may be able to just about make out in the small pics). The lack of front garden makes it lower maintenance, they both including parking space and are less than a mile from the train station.

My target market is a family, partly because we’re a family too so I feel I know that market more, and because they may take care of the house better (though I wouldn’t rule out non-families). For this reason, I like these properties also because they have a bath (not just a shower), a seemingly reasonable kitchen (not horribly dated, cosmetically at least), and a family-home feel to them. I definitely am not up for a ‘project’ aka a new job (sorry, Mr Early Retirement Extreme, I’m no Renaissance Woman).

I’ve had to make a number of ‘educated guess’-type assumptions in the comparison table below; do let me know if you’ve spotted anything wrong. Basically, I imagine I paid the asking price (160k) for the end terrace, and an optimistic £128k on the ‘offers over 125k’ semi. A few key points came to light in considering these costs and comparisons…

First of all, although I’d planned to do a repayment mortgage (the thought of paying it off ‘as I go’ along sounds attractive), it became apparent that an interest-only mortgage may be my only viable option. Paying off the original cost of the house purchase 20 (or 25) years later also seems pretty attractive as we’d expect the asset to appreciate (meanwhile I can use the money I’d have been using to pay back on other investments). However, the most reliable capital growth may be made for more expensive (desirable) properties – one point that may bias me toward the more expensive option.

Second, it got me asking how quickly can I get a deposit together for each of these options? Answer: 4 months for the £32k if I cash in just some of my equities (£5k) or 2 months if I cash in more-than-I-really-want-to (£10k) – or beg/borrow/steal from family? A 40k deposit (the more expensive house) would take longer – I’d cash in £10k of my index funds, and it would take 6 months including what I’ve currently saved and have accessible. (If you’re new to my blog, we had focused on paying off our home mortgage so active saving and, more recently, investment only truly started last year.) This whole timing thing biases me toward the cheaper option, as the more expensive one may commit me to stay in my job beyond what I had hoped and planned. Either way, I’m not going to be buying this particular £160k house since I don’t have a £40k deposit readily available. Some savings are tucked away in fixed term savings, unfortunately.

Third, and a crucial point, is that by giving up 2.5 years’ of non-work (i.e. how long £40k (the more expensive deposit) buys me, based on 16k cost of living a year), the 40k could potentially grow to 275k (based on average historical growth of property) on an interest-only mortgage. After paying off the original house cost (£120k), that’s a £155k return (subject to capital gains tax, and based on historical growth, which is perhaps not likely to be seen in future). Plus potentially £4500 income per year (based on £450 monthly rental income after costs/repairs and 10 months’ per year occupancy – just a rough guess).

Fourthly, it’s very hard to compare ‘bricks and mortar’ investment with equities, even index funds, because past averages don’t necessarily tell us about the future at least for our specific situation (e.g. where you buy your property, and which index funds you’ve invested in). Both have their uncertainties. I guess the question is: which kind of headache do you prefer to have? 🙂 I estimated a 6% growth in equities (and you see the 7% figure commonly bandied around for US equity growth), but I found this an interesting read. If we’re playing the long, long game then property probably ‘wins’. Of course, I intend to retain some index funds and add to them later, so diversification is the name of the game. What are your thoughts?

A potential £155k return + £4.5k a year income indefinitely? Really?

Lots of assumptions made (just to reiterate) but yes, really! So, while I really have some yearning to ‘live in the now’, which is why I want my midlife gap year, 2.5 years’ work seems a relatively small cost for added peace of mind. Sure, money can’t always give peace of mind, but in 20-40 years, I may think differently. This is partly a bit of a check-in that I’m not simply being drawn in my the sound of money. The kinds of scenarios I am thinking of are:

1. Contributing toward independent living for as long as possible in our old, old age, and freeing our child from financial and mental burden (the kind we may sadly have to confront in due course). Of course, this will have to be in combination with other investments. Who knows where social care may be at in our old age, but I bet my bottom pound it’s not going to become more generous and humane. As Vicki Wuche says, I want to avoid the ‘stinky chair’. <- Her book has contributed a lot to my thinking here, and it’s on offer on Kindle for 99p.

2. Helping make ‘treatment’ options – both medical and preventative – available.that may not otherwise be available. The elephant in the room is that NHS reform will need to happen as so many of us are living longer and better treatments become available that prolong life. To be frank, one in two of us will get cancer, for example. A preferred treatment may (even now) set you back £3000 per treatment if given a private option or otherwise wait for a long time (when time is critical when you have a mass growing inside you). While no FI approach will give you limitless funds, property is the best bet for continuous income flow and asset appreciation.

3. If the options above won’t apply, Junior will be ‘set up’ financially. We can sell it to help pay for university tuition or to pay toward a new home etc. We currently have nothing especially set up for his future, so the property could act as some kind of asset we can pass on.

Furthermore, if the property purchase goes well, we can consider developing a property portfolio that’d eventually give us enough monthly income to live on. In future, Mr Firelite could be involved as his financial situation will allow it, and we could also consider downsizing into one of our rental properties which would save on purchase costs. I imagine it wouldn’t be either of these two house options though based on discussing the area with a relative who said she wouldn’t buy there (but then, she’s not a property expert).

Finally, I do have a desire to live 6 months a year in warmer climes when I’m older, so maybe a foray into property would give us the confidence to buy abroad. But at the moment, we’re talking a long way off since Mr Firelite doesn’t want to retire for near 20 years. Hopefully, the dust might even have settled on Brexit by then (not joking).

What are my next steps?

All up in the air really, but as of this moment, my plan now is to:

• View houses and the areas these houses (and similar) are in
• Get a better picture of the rental market in this and other areas (are houses really on the market for 268 days? Alarm bells are ringing…
• Check mortgage eligibility and conditions (so far, I’ve received 1 online quote)
• Estimate the cost of buying and getting the property ready for renting out (especially if not already a rental property)
• Consider the tax implications with rental income

As well as these ‘hard’ action points above, I need to think about how important it is for me to quit my job next summer. I’ve lost focus on my Life 1.2. preparations of late and need to do a bit of reflection on that.

In some ways, work has been incredibly busy but more focused, and I have felt that with another year’s experience, I am now managing certain roles better and therefore feel better in my job. However, when the going gets tough, no doubt thoughts of (1) holiday and (2) permanent escape come to mind. Having said that, I’ve recently been toying with the idea of requesting part-time for an additional year (beyond next summer) or a formal career break, since thoughts of leaving also lead to feeling that I’ll lose out on certain work stuff I have built over my 17 year career thus far. But of the various options, my head is still set at ‘quit next summer’ most probably as it’s what I have most control over.

Watch this space!

Is moving into property a good idea, financially? Or am I foregoing my “dreams” yet again in a bid for financial security?

This is a two-part post as I’ll update once I’ve moved a bit further on in my journey. Meanwhile, any comments very welcome….

If you’re thinking of investing in a buy-to-let property, where are you up to in your journey? If you’re already a bona fide landlady or landlord, I’d be very interested in any advice you wish you’d heard when you were in my position. And if you’re not investing in property, why not? Thanks for reading.