If you want to build a property pension you need a strategy. A strategy is a method to achieve an objective. So in this scenario the objective is to:
‘have an income sufficient enough to meet all your needs in retirement’
This is what a pension aims to do but often fails. This is why there are so many charities to help pensioners such as Age Concern and Help The Aged. So to achieve this objective you need a strategy! The first stage in constructing a strategy is to really think about the objective. The objective throws up some obvious questions you need to ask yourself. The obvious questions that need answering, why and how to answer them are:
|Question||Why||How To Answer|
|How much do you need?||You have to know how much you need! If you don’t spend the time to think about it then you face the possibility of not having enough. Setting a target income means that you have something to aim for.||On the face of it it seems a difficult question to answer. Your retirement age may be 25 years away and you will have no idea what £1 is worth in 25 years time. The fact is you don’t need to! What you can do is ask yourself what will you need in today’s value of money. Because rental income rises with inflation then all we have to do is express our desired retirement income as rental income at today’s value. So if you earn £25,000 per anumn now and would like to keep the lifestyle you have then you require £25,000 rental income at today’s rental market value.|
So how much will you need? Think about your likely monthly expenses of living and what you would like to do in your retirement. So don’t forget the obvious expenses such as food, bills and clothing and don’t forget to omit your mortgage expense if you plan to pay off your home by the time you hit retirement. If you wish to travel in retirement then allow for that expense. So you should be able to come up with a monthly figure.
|When do you want it?||You need to know when you wish to retire so you can put a timescale to the objective. You can then set mini-targets within the timescale so you can monitor how well you are doing. If mini-targets are not being met you can adjust your strategy to bring you back on track.||So when do you want to retire? Answering ‘tomorrow!’ is neither helpful nor practical. Consider your age now, how long you would like to work and what you want to do in your retirement. Remember, retirement can be boring for some people, as many early retirees have admitted. Set a realistic timescale which takes in to account your target retirement income.|
So an example of someone’s objective would be:
|Target Retirement Income at today’s value|| |
What’s Needed From You To Achieve Your Objective
Your objective is not going to land in your lap! It requires the following from you:
- Acceptance Of Risk
All these factors are correlated. That is to say if you don’t have much money to put in then be prepared to put in more time and accept a higher degree of risk. If you increase the time you put in then you won’t have to put so much money in or accept so much risk. Lets look at exactly whats expected from you.
Your time is needed in the following ways with ways to reduce them:
|Needs From You||Ways To Reduce Your Time Input|
|Acquisition||You need to find the properties that will deliver you an income! This involves researching suitable areas, looking through the local press, speaking and dealing with agents, visiting prospective properties, arranging finance and whatever else is needed from you to acquire a property.|
|You can approach a property buying company that will do all this for you based on your criteria. This costs! These companies can charge up to 5% of the purchase price so they can work out expensive.|
I offer this service. If you don’t have the time and require this service then contact me. My details are in the front of the book.
|Find a tenant||You have to advertise, do viewings, credit check and take up references of prospective tenants.||Use a letting agent. They charge a fee of around 10%+VAT on the rent collected.|
|Legal documents||You need to prepare the legal documents to bound all parties or to evict tenants.||Use a letting agent. They charge a fee of around 10%+VAT on the rent collected. Or use my documents detailed in the Appendix.|
|Rent Collection||You need to arrange for the rent to be collected. This may be face to face collection from the tenant’s doorstep, collection from the benefits office or through your bank.||Use a letting agent. They charge a fee of around 10%+VAT on the rent collected. Or you can use my standing order set up form detailed in the Appendix.|
|Repairs||You need to either repair the problem or instruct someone to do the repair.||Use a letting agent. They charge a fee of around 10%+VAT on the rent collected.|
|Tax Return||You need to declare what you’ve earned during the financial year in order to pay tax. This requires accounting for all receipts and expenditure associated with the property.||Use an accountant. Or you can subscribe to www.propertyhotspots.net to manage your finances.|
You need money to buy a property! Here is why you need money and ways to minimize the amount needed:
|Needs From You||Ways To Reduce The Cost|
|Initial investment||You need a deposit to buy a property. At a minimum it will be 15% of the purchase price. You will also need the associated fees that come with buying a property. These are valuation fees, solicitor costs, arrangement fees, finder fees, initial void period and essential repairs required before letting the property.|
You need to save for a deposit if you want to buy a property.
|You can borrow the deposit and fund the repayments to the loan from the rent achievable once the property has been bought. This increases your risk due the increased borrowing.|
You can find a property yourself thus eliminating a finders fee to a property agent.
You can buy a property in a good state of repair thus avoiding any essential repair costs.
|Monthly contribution||You may have to contribute over and above what is received in rent if you get hit for a large repair bill, interest rates rise, the tenant defaults or you wish to pay off the mortgage early.||Take out insurance on tenant default or any large repairs. This means the insurance company pick up the bill. The cost of this is the insurance premium.|
Fix your interest rate so fluctuations are not a concern. Thus if you have chosen a property that returns a rental income in excess of the fixed mortgage payment then you are assured that you do not have to contribute.
Take out an interest only mortgage. This keeps the mortgage payment at its lowest possible point so the margin between rent and mortgage cost is at its highest.
Go for a higher yielding property. The higher the yield the higher the profit margin. Please note – the higher the yield the higher the risk!
- Acceptance Of Risk
In chapter 1 we dealt with the risks in property. There are always risks of owning an asset but there are also benefits! You can mitigate against these risks and they cost but there will always be a residual risk remaining. So you will always have to accept a degree of risk.
You need to decide what risks you are willing to take as this will determine the strategies open to you.
The Relation Between What’s Needed From You & Your Objective
Now these three factors, time, money and acceptance of risk have to bear some relation to your objective.
- If your objective is to have a retirement income of £100,000 p.a. at today’s value in 5 years and you earn £20,000 p.a., have no savings, no time and willing to accept a very low level of risk then it won’t happen!
- If your objective is to have a retirement income of £100,000 p.a. at today’s value in 5 years and you earn £20,000 p.a., have no savings, willing to contribute, little time and willing to accept a high level of risk then it might happen!
- If you wish to earn a retirement income of £20,000 p.a. at today’s value in 15 years and you earn £20,000 p.a., have no savings but the discipline to save, have a bit of time, and willing to accept a medium level of risk then it probably will happen.
So how do know what won’t, might or will happen? This is best explained by looking at two extreme cases and what’s in between.
|Target Retirement Income At Today’s Value||Timescale||Time||Money||Risk||Outcome|
|Double income being earned today||Less than 5 years||None||No savings and not willing to contribute||Acceptance of low level risk||Won’t happen|
|Equal or more than income being earned today||Greater than 5 years||Have some time||Have some savings and ongoing contribution||Acceptance of medium risk||Might happen|
|Same as income being earned today||Greater than 15 years||Willing to put time in over all aspects||Has savings and willing to contribute ongoing||Acceptance of medium level of risk||Will happen|
So, in my professional opinion, as long as you are willing to earn a retirement income that is what you are earning now, that is 15 years away, have the time, can save and have savings, accept a medium level of risk then it WILL happen.
Deriving Your Profile
Based on the above you should be able to build a profile of yourself and your aims. Your profile should follow the answers to the above prompts. A profile would be made up of the following:
|Profile||Range Of Answer||Considerations|
|Target Retirement Income at today’s value|
|0.5 – 5 times your actual income now||How much do you want based on today’s value. Do you think you will have expensive tastes in retirement? Do you want a simple life in retirement? Or do you just want what you have now?|
|5 – 30 years||How soon do you want to retire? Is it soon, next decade or next millennium!|
|TIME||Low/ Medium/ High||Are you willing to be involved in the buying process, rent collection and repairs? Or do you work full-time (and overtime!) and want zero involvement?|
|MONEY||Low/ Medium/ High||Do you have a deposit? Are you good at saving? Are you willing to contribute month to month? Or do you have no savings and require a monthly profit from the properties?|
|ACCEPTANCE OF RISK||Low/ Medium/ High||Are you willing to borrow significantly, accept fluctuations in interest rates, take interest only mortgages and go for less desirable properties that yield highly? Or do you want minimal borrowings, fixed rate borrowings, repayment mortgages and nicer properties near your home town?|
So a typical profile may be:
|Target Retirement Income at today’s value||£30,000|
|ACCEPTANCE OF RISK||Medium|
Based on this profile we can match it to the strategies available. What’s your profile? Take your time to really think about what you want. Is it realistic? Will it be enough? Do you earn enough to save and/or contribute? Can you take a higher level of risk?
Based on your profile we can match a strategy or even a number of strategies based on your profile. Chapter 3 has all the answers.