This is the first in a series of interviews with people who have already reached financial independence and are ready to retire early. Geoff has a portfolio of properties which currently provides enough income to support him without needing to work, so I asked him how he had got to this stage.
Please use the comments if you are interested in any of the points mentioned and I’ll do my best to get in touch with Geoff and reply.
None of this constitutes advice, as property investing can still be risky!
- How long ago did you start planning your property business?
I bought my first property about fifteen years ago and toyed with the business idea around eight years ago, but it wasn’t really tax effective until I got over three properties and also the interest relief and second home tax changes forced my hand. This was about three years ago.
- What is the overall aim of the property business?
To minimise tax and create a brand and credibility. Then moving on to creating a fully self-managed letting arm to run the business, leaving me totally passive from all the day-to-day running.
- What would you call your approach?
Currently it’s recycling cash through refurbishment and then letting high yield HMO properties.
- What do you think of the current market and is it worth investing in property?
The current market is about to enter a mid-cycle blip that will seem like the start of a crash post-Brexit, but I think it’s going to crest a buyer’s market with prices rising swiftly from 2018 for about 5 years. Then it will burst again. We are at the mid-point of the 14-18 year property cycle right now. So it’s actually a great time to invest in property, outside of London that is. London is growing slowly now, the ripple effect is spreading out.
- What does your current portfolio look like?
I’ve got a personal portfolio that keeps me just below the high rate tax threshold for me and my partner. The rest is in a limited company. The idea is to not draw any income off the company and let the profits roll up to buy more property.
Limited company buy to let mortgages are quickly gaining in popularity and thus are getting very competitive. A year ago they were expensive. In a year they will get to parity with personal products. HMO mortgages are at about 4.5% right now but can be 80% loan to value. Some at 85% loan to value are coming into the market this month. So there is fantastic leverage opportunity to be had. Especially if you add value and remortgage using the equity you have created to buy more property.
- What about needing an indemnity to guarantee your ability to cover the mortgage cost on a limited company mortgage?
You do not need to guarantee the full amount of the mortgage, but you do need to sign an indemnity that covers the lender for a portion of the loan – this does add to your personal risk slightly, but is a small price to pay for the overall leverage.
- How do you value a property and decide whether it is at a fair price?
Rightmove and Zoopla will price the area you look in for sold prices and will map the value rises and the rent value. All you need to do is calculate the return on investment to work out the property value. Gross yield on a property doesn’t mean much as it’s how much cash you put in that’s relevant. A combination of historic research, knowledge and looking at things like demographics and crime figures will give you a good background. Capital values are not so important provided the rental return makes it a worthwhile investment.
- What about other asset classes as an alternative to property, such as Shares, Managed Funds, or P2P lending?
Read Rich Dad Poor Dad, The Cashflow Quadrant and the 3 + 1 Plan – you have to be an expert in your field and really love the area. I’ve done that in property. You can make money anywhere, but have to be a student of it. I’m only a student of property. In all the other areas I’ve lost money because I didn’t properly understand it. I’d like to think I would put my spare money (profit from rent) into a safe managed fund to keep it at bay from inflation when I’m old, but I’m not gambling it in the hope of beating the market on shares. I’m interested in some P2P lending schemes that use money for property (e.g. bridging loans) as this is a business model I can understand.
- How will you know when it’s time to stop reinvesting the profits and when to take some out to put in a ‘safe managed fund’ or pay off some of your own home mortgage?
Conventional wisdom is to set a figure and to say that ‘when I get to £x income I will stop’ but I haven’t done this and I’ve already exceeded the income from my last job. When I’m no longer in ‘growth mode’ and the business has settled down, then I might look into taking money out of the company and paying off some of my own residential mortgage.
- What about the tax advantages to contributing to your personal pension from the property limited company? While the return may not be as big as the money being left in the company, surely it would spread your risk and give you a small backup income and a useful tax free lump sum?
We already take a small amount out of the limited company into a SIPP each year as employee contributions to increase our higher rate tax threshold. Another option is to look into taking out a larger portion as employer contributions, moving this into a SIPP and then using the SIPP to invest in mortgaged commercial property as another ‘arm’ to the business.
- Where did you gain the knowledge to start investing in property?
I bought my first property because I had to do something with my cash. I learnt it on the job for 6 years before thinking about trying to learn about it properly. My parents had a buy to let property so they helped me manage in the early years but they are not business people. Property Ladder was a big inspiration.
- Where do you go now for information about property investing?
The Property Hub. Any property book. Property podcast, Property Investors Network (the local meetings are very useful), my mortgage broker and my accountant give me good ideas. The market evolves so fast that I learn new stuff every week. The most important thing to keep on top of is the area you invest in and the mortgage products that are available.
- How did you fund your first three properties and then the remainder?
I worked hard at my job to get good bonuses and saved that and all my overtime in funds for four years. Then I cashed them in 2003 to buy the first one for a £20k deposit. Second and third were from releasing equity from my own home as my wages went up. Those were the hardest as it seemed risky to basically sell my house to the bank.
- I know you worked in IT and had a limited company – did you lend from the IT limited company to the property company?
Yes I did and this is covered in a Property Hub podcast. Simply put, the IT company lends money to the property company which the latter uses as a mortgage deposit, then uses some of the rental profit to repay the loan back to the IT company.
- What would you do with £20k to invest in property today?
If I was starting out now I’d use that money to head lease HMO property off people who are tired of the work, then refurbish it and let it out at a profit. I would then use the proceeds to save up to buy my own properties. I’ve met guys that have replaced their £60k income doing that in three years. But that takes time and effort and knowledge.
- How much have recent tax changes affected your property portfolio and are you planning to transfer any personal property into a limited company?
It was worth doing this before the stamp duty changes, but not any more as you have to pay the stamp duty and capital gains tax. It depends on your personal tax situation, but the break even point can be several years. However, for a first time investment property it is worth setting up a limited company, funded either by remortgaging your own home or from another Ltd. Co. (such as IT contracting – see 14).
- How much time do you spend managing your property portfolio?
I spend two or three days a week on average, working on training a property manager so
that I can become ‘hands off’ and it becomes a true passive income.
- What is the exit plan?
There’s no exit plan: the rental income is the pension, the assets are the legacy. I think selling the assets is a mistake and if you need cash, you should remortgage the asset.
- Is there anything you wish you’d done differently?
I wish I had learnt more, sooner and taken better advantage of the crazy property market pre-2007, where you could buy investment property at 100% loan to value with self-certified income. I would have bought more and remortgaged more quickly. But I had no idea what I was doing or the true power of property. I could have retired by 2008!
- Any suggestions for someone starting out in property?
Learn everything you can before buying, and do not be afraid to take risks. No risk normally means no big reward. The risks in BTL property are mostly only perceived. If you are not planning to sell don’t worry about short term trends in the markets. If you want to retire on property early you need to push it and yourself outside your comfort zone. You have to work hard and you have to believe it’s going to work out for you. The fundamentals are so strong you will win in the long term if you keep at it. Inflation and leverage are incredibly powerful tools to make money . Once you get going the gains and the gearing really snowball like nothing else can. I read a quote that 90% of the world’s wealthiest people keep their wealth in property.
Many thanks to Geoff!