#79 Buy to let, can we?

So having gone through in my last post the investment paths I'm considering and deciding that probably buy-to-let is most suitable for me where do I go from here?

Quite frankly to feel like I am in a position to be able to consider which investment path I head down is delightful having come from £25k in debt and not really being able to see the end of the tunnel.

A couple of things are obvious...

• Purchase price of likely properties.

Granted I haven't done all the research I would need too but having spent some time looking and knowing roughly the areas of interest it seems it would be possible to buy a 1-bed flat for £125k.

• Mortgage options and costs.

Typically it seems LTV for buy-to-lets should be no more than 75%. So for a £125,000 property this would mean borrowing no more than £93k. That would be 74.4%. This is mainly because above this the mortgage interest rates rise dramatically. A £93k loan on an APR 3.6% is £279 per month for interest only or £471 repayment basis.

• Other associated costs when buying a mortgage.

In credit card debt, carpet loan and desire to have £2k in emergency cash fund = £6,300

For solicitor fees, mortgage fee, survey, stamp duty, letting fees = £6,750

Deposit to make up difference (£125k purchase -  £93k mortgage) = £32,000

• Then how long will it take me to have that money available.

I've assumed little in terms of wage growth - assumed that inflation will gobble it up.

I've assumed that I'll continue getting bonuses at the current rate.

I predict I would have the savings to pay off my debt by Jan-2019

Have enough saved to cover all costs associated with the purchase by Mar-2019.

But then not have enough to cover the deposit until March-2021.

Conclusion

In three years so much can change. However, it's clear that by relying on saving up cash to purchase a property we're going to be waiting for many years.

So... is there another way? I've been loosely discussing the prospect of freeing up a slight % of equity in our house. 

Our LTV is currently 72% by releasing £25k we could increase our LTV to 75%. 

Reducing the deposit down to £7k would - according to me predictions allow us to afford to buy a property in Dec-2019. 

Further, I am currenty saving £100 per month into global index fund and have an £8k car loan which I plan to pay off with my bonus in two months time.

If we instead kept the bonus, stopped paying into the global fund and then used that money to pay for the car loan instead we would - theoretically- have sufficient savings to purchase a property next March-2019.

The giant BUT here is if my current provider will allow me to borrow more - my wage hasn't gone up - and if so are there any penalties which would make it unwise.

Having said all of that, the idea that there is even a possibility that we could afford to purchase a buy-to-let next year is pretty damn exciting!!!!!!!!!!!

So next steps...

1. Next post review numbers for how I think it should stack up annually.
2. Run my financial plan again to make sure I'm not fooling myself with a missed calculation.
3. Double check I am not being too optimistic on the purchase price or purchase fees.
4. Wait until March when I will receive bonus and potential pay-rise. Factor this into financial plan.
5. And only then discuss with by bank on the possibilities in release extra money.

#78 Worried about... not planting a seed

So, off the back of a previous post about how I was worried about the impact a rising interest rate would have on us because of our mortgage  here's my other concern. I worry - worry is probably the wrong word, I think a lot about - what decisions we can do now which will benefit us in 5,10,25 years time.

I believe in the next couple of years we are approaching a junction and we should decide which route we want to take. At the moment I haven't decided upon any and so I 'flitter' between them, thinking and planning one way then a week later focusing on another. Not only is this inefficient but it'll mean we end up with dipping our toes into a number of approaches but not really going head on and maximizing any of them.

So at the junction that we're fast approaching what options are we considering?

1. Paying down the mortgage. 
2. Investing in equities. 
1. Global tracker fund.
2. Dividend paying portfolio.
3. Invest in property - buy to let.

Obviously they aren't mutually exclusive however my expectation is that we'll only be 'successful' if we are targeting and putting most of our emphasis on one of these.

The internet is full of financially based advice on the pros and cons of each and against each other, but I am looking at these from a personal perspective.

Paying down the mortgage

Pros

Cons

·         De-risk any interest rate impact. ·         Returns are known and guaranteed. ·         Being mortgage free. Best case end-state. We are mortgage free. So we would keep a far higher % of any and all income received.

·         It’s not investing its debt repayment. ·         If we have a planning time horizon of 25 years an investment would ideally grow whereas our debt in real terms will decrease over time anyway. ·         It’s quite boring. No it is very boring J ·         I think I would struggle to get buy-in from the Mrs as she sees a mortgage as a long term commitment that will be paid back in due course. ·         If investing each month we would expect to see growth month on month and year on year – certainly in the early part of investing journey we’ll keep hitting new and exciting milestones.  However, with debt repayment – starting as high as we are – the difference for the first 1,2,5 years will probably be so negligible that we would struggle to maintain motivation. It’s a silly physiological quandary really. If we were closer to the destination motivation would be higher. But for us I think it would be a very real one.

Equities – Global fund

Pros

Cons

·         Over a long term planning horizon it is very likely to provide a decent return on growth ·         Compared to Buy-to-let there is no set-up fees and minimal on-going fees. ·         I have started. I have a global fund set-up and all it would take would be to tweak the monthly direct debit. Best case end-state. Investment pot grows and we become wealthy on paper. We can then being to look at drawdown options.

·         Boring. I have the time and the importantly the inclination to be heavily involved in my finances. Reviewing them each month etc. This approach to investing is best left alone for 10+ years. ·         Investing in equities is a risk. Albeit a Global Fund is lower risk than Dividend Portfolio. At some point in the future there will be a market downturn. I am not sure how I would cope if my savings I’d built up for the last X years were suddenly wiped in half. I think my tolerance to losing money would be pretty low. ·         The Mrs would not buy-in to this due to the above risk. She makes me feel like a cowboy gun-slinger happy to throw my money around where. On a serious note – having something that she is bought into is important as for me being able to share, discuss and have one common goal is going to be a major contributing factor in making a success out of it. ·         No physical ownership.

Equities – Dividend portfolio

Pros

Cons

·         Fun. I’ve been spending a bit of time lately researching companies yields etc. Have built up a spreadsheet to see what would be required to build up a portfolio receiving dividends most months. It is exciting. There are lots of blogs out there which show how exciting it is and how rewarding it is to see the dividend returns grow year on year. ·         There would be immediately visible returns which I can monitor and graph. ·         Compared to Buy-to-let no set-up fees, minimal on-going fees. Best case end-state. We have an investment portfolio which pays us a separate income.

·         I know nothing about investing. I could be investing in businesses which are 5 minutes away from going bankrupt and I probably would miss the signs. ·         Over time dividend receipts would grow, but based on the above point the chances that this counter acts any capital losses is pretty much 5050. ·         The Mrs would not buy-in to this due to the above risk. She makes me feel like a cowboy gun-slinger happy to throw my money around where. On a serious note – having something that she is bought into is important as for me being able to share, discuss and have one common goal is going to be a major contributing factor in making a success out of it. Interestingly I actually think she would be less against this approach than against the global funds as she would see – or I could tell her about the monthly receipts and see how they re-purchase shares.

Buy to let

Pros

Cons

·         Physical ownership ·         It has always been something I have wanted to do. In fact it’s been on my bucket list probably from the age of 18. ·         I have the time and inclination to support the investment. Often the time involved in a buy-to-let is seen as a con, for me personally, it’s a pro that it would be something I can get stuck into and spend time on. ·         We’ve twice purchased a house and spent a small amount of money and a pretty large amount of time on making it appear nicer. My Mrs has a decorative eye and I am able to work away for many hours to deliver on that. So we’ve got some experience and knowledge. ·         I am a firm believer that property over the long run will always go up. Population is only growing from what I can see. So I see this as a low risk to my investment. Best case end-state. We have a BTL property/portfolio which either we have capital growth in or receive rental as income.

·         Significant set-up cost. For fees alone it’s likely to be in the region of £8k for a £125,000 property. Due to this I cannot start it immediately. It would take a couple of years to have the required capital. ·         In terms of severity of impact this is the riskiest of the options. Worst case scenario: we buy a BTL property, rates rise dramatically and we are unable to sell or rent the property at the same time as our family home mortgage rate rises. We’d be royally screwed.

What's my conclusion?

Undertaking this  -albeit it may be pretty dull reading - has been really useful for me in focusing the mind.

There is one other thing which I have considered. The potential down-side to option 1 - repay the mortgage can be largely mitigated by the fact that in 4 years time when this risk would be realized it would be possible for my wife to go back to work. She may not want too but if the reason for undertaking option 1 was the risk of losing the house then I am pretty confident she would be able to find a job which mean that did not come to pass.

Having that in the back-pocket as it were, I am being drawn between option 3 - dividends and 4 - buy to let. The fact that the buy-to-let would require me to save for a few years to gain the capital but the dividend investing is available now leans me to no.3 However, and I really think these may be the crucial factors, I have always wanted to own a buy-to-let so even the act itself would be a success in my eyes, and secondly the Mrs would be behind it. This would be important as having her supporting it would enable us to be on the same page when it comes to spending decisions etc etc.

What's my next steps... I have pretty much ruled out no.1 mainly because I want time to be on my side for growth and we have the fall-back of the Mrs working int he worst case. Even though no.2 Global fund is the only one of these approaches I am currently doing it feels like it isn't really 'active' enough to satisfy my desire to be involved. 

No. 4 - buy-to-let is a very serious commitment so now I'll go away and run through numbers playing in excel to see what the next 2 or 3 years could hold. But if I can come up with a plan to have several milestones other the next 2 years to enable us to get on the property letting ladder in 3 years time... then I think that's looking like the winner.

It feels a bit crazy to be making such significant decisions, but really it is important that - although it may be vastly different to what other people choose to do - we have a clear goal and plan to get there. Currently it feels a little like we had a goal to buy our first house, then we had a goal to have a family forever house - now we've got that it feels like we've not really got a plan for the next step and if we are not careful we'd just sleep walk putting money all over the place with no strategy.