This is the second part of the 'I have £xk to invest in property, what should I do' question? Last time, we looked at where someone might have around £150k to invest. Today, we shall consider no less than 6 strategies of how we could answer that question where x is a much smaller sum of £20,000. Next week, we will take a look at some of the extremes...virtually none or quite a large property investmemt fund to start with!
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Today’s must do’s
If you have a starting investment pot of around £10,000 to £50,000 then consider which strategies outlined in today’s show may suit your personal situation the best. If you want to discuss some of the possibilities in more detail, then just get in touch.
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
This is the second part of the I have £xk to invest in property, what should I do?
Last time, we looked at where someone might have around £150k to invest. Today, we shall consider how we could answer that question where x is a much smaller sum of £20,000
So, let’s take a look at some options we might consider with a modest sized investment pot.
Property Chatter
As with last week’s question, this week’s came directly from a real person who posed the question:
I have £20k to start, what would you do?
Before answering this, I just wanted to relay the 3 main trade-offs that often need to be made when considering investing in property, they are:
- Money
- Time
- Knowledge
If we have a deficiency in one or possibly two of these areas, then we have to make up for it in the other one or two instead.
I need to be clear that whilst £20,000 is not an inconsiderable amount of money in itself, in terms of some of the traditional ways of investing in property it is not the largest starting fund in the world. I do not wish to create any offence here, just remember that the average price of a property in the UK is now fast-approaching £200,000 and with a typical BTL mortgage requiring a 25% deposit plus fees, then the average starting fund to buy the average UK property is going to be something like £60,000 or more.
So, with £20,000 and looking for average or better results, we need to think a little less like the average to make it work for us!
Where to start
Our purpose & goals - just as with last time when we looked at a larger starting investment fund, the right place to start is not with our investment strategy, but instead with our overall purpose, goals and objectives. Knowing what we want to achieve, in what time frame and what we are prepared to rule in or out will make the decision as to which strategy to adopt a lot more straightforward.
After this, there are some other factors that we will need to considered too.
When - our 'when' we want to achieve our goals by as this will govern the speed of our action plan implementation and the risk trade-off that you will need to consider. Generally-speaking, big gains over short time periods mean more risk and more peddling in terms of our time commitment too.
Cycle - similarly, some strategies lend themselves better to certain stages in the property cycle, so strategy timing is also important
Preferences - finally, don't forget your personal preferences: what you like / dislike, will / won't do - there is no point saying go and knock on the doors of motivated sellers if you can't take rejection say
Once you have all of this in mind you can then set a course...your Strategy.
And once you have your strategy you can then set your Action Plan to achieve it.
Last time I shared 7 possible strategies with a reasonable investment pot and this week I will share another 6 potential strategy ideas to consider using a £20k starting pot:
1. Long-term, modest income goal (similar to a pension, so a 20+ year plan)
Buy an £80k property on a repayment mortgage in a high yield area (to service the repayments), overpay the mortgage once you have an annual income surplus and end up with a fully unencumbered property generating on average 6% pa in gross yield. A slight variation is an interest-only mortgage but saving all excess rental profits to make annual overpayments, providing this is what we actually do with that money. The rental income should be in the region of the equivalent of around £4,800 per year, expressed in today’s purchasing power.
Then, start saving for the next £20k and go again. If you can save at something like £500 per month, then you could buy a similar property to this every 3-4 years typically. Over a 25-year period that would mean about 5 similar properties, albeit that the mortgages would not be fully cleared until 25 years after the final purchase.
This is a steady-as-she-goes long-term, low-risk investment strategy and will lead to us owning each property mortgage-free in around 25 years’ times from purchase.
2. Short-term income maximiser
Can’t wait for 25 years? Then, we could throw ourselves into a rent-to-rent model instead. Here, however, we would probably need loads of time trying to find a suitable property to pay a guaranteed rent to the owner and then sub-let either through HMO or short-term letting arrangement to make an income.
Whilst this probably ranks lower on the up-front cash requirement, it is hard work and will probably require a fair amount of time input, make no mistake.
As a variation of starting a rent-to-rent business – consider alternative ways of working in property.
3. Medium-term investment pot builder
Need more money? Then, we will need to grow the investment pot by as much as we can, as quickly as we can.
Examples include flips & buy-refurbish-refinance 'rinse and repeat' models. However, budget on having c50% of a property's purchase price in cash for it to be anywhere near effective and that £20k is actually quite a low starting pot to realistically achieve this, consider teaming up with a JV partner to accelerate this option.
Alternatively, we can instead apply the same logic to our own home before selling on or refinancing and letting it out instead to release some cash to go again. Many an investor started with a DIY home project.
4. Short-term investment pot builder
Here, the focus is very much on raising additional funds to get the pot up to a bigger size in order to invest personally. Perhaps it could complement / accelerate one of the other alternatives being discussed here.
Here are some suggestions as to how to go about this:
- The budget & save approach – where we ruthlessly cut back on our costs and luxuries & at the same time look to save aggressively. Sky TV, a packed lunch, a takeaway a week, a meal out a month and a couple of weekend breaks could easily add up to £5k a year saved for a couple!
- Fund-raising: sell items of value to raise funds or raise equity from existing property. What’s in the garage or the loft, what can you get for the old mobile phones in the kitchen drawer, have you ever done a car boot sale? I remember selling most of my CD collection, old hi-fi separates, kids toys, and so on for about a thousand pounds or when I did this exercise myself some years back
- Additional income streams from a second job, home business or by renting a room out at home. Ebay and Amazon allow small business operations to be operated from home, drop shipping is possible to avoid the headaches of holding stock and doing the post office runs. I previously operated an online security devices business that turned over £100k a year and also rented out a room for nearly £5k a year to illustrate the point.
- Friends and family – borrowing from the Bank of Mom & Dad, an early inheritance, or joining forces with people we already know and trust could enable us to build a bigger investment fund
5. The ‘Buy now, pay later option’
Another option is to look at another creative financing strategy, such as lease options. Keep in mind though that even if we buy an option to purchase a property later on, that we will be responsible for the repairs, maintenance and operating costs until we can exercise the options. Then, when the option period expires, we need to have the funds available to buy the property, or the deposit at least. Of course, if we had the right provisions included in the contract, we could assign it to another buyer for a fee to extract our return.
We could probably acquire between 1 and 4 properties using lease options depending on the location, costs of refurbishment, type of property and fees involved. So, it is a way to stretch our £20k pot a little bit further.
That all said, lease options are great in theory, finding them, dealing with the legal aspects and making them work all round is a totally different story.
6. Invest elsewhere now and buy property later
To illustrate, if you remember in my first example I said we could buy an £80k property and then pay off the mortgage over a 25-year term. We would then have an asset and by retaining all of the rental income, possibly an income of around £4.8k a year, ignoring inflation and taxes.
However, to arrive at the equivalent purchasing power of £80k in 25 years, assuming a 3% inflation rate, we would need to achieve a net annual return of 5.7%. With this sort of investment pot and a long-term horizon…maybe investing it into a balanced portfolio of stocks and shares through a tax-efficient wrapper like an ISA could derive the same result?
A couple of risks here though;
- a) is if house price growth outstrips the 3% inflation rate, as then we could not buy that £80k property; and
- b) if the alternative investment does not achieve the required annual growth rate; and finally
- c) lots could change along the way to blow our plans out of the water! However, for some this may be the best way forward…particularly if you don’t want a lot of risk, or to spend time on your investment, or learn all about property at all. Just sayin’ 😉
In truth, and not wishing to be unkind, as I said earlier, £20k is not a huge pot for traditional property investment. For many people, accumulating this sort of sum will have cost a lot of blood, sweat and tears. So, to be able to do a little more than average with these funds, we may need to consider an alternative route.
That may mean looking to build the pot, or alternatively, to consider something a little less traditional instead. Personally, I started with £10k only and adopted a combination of many of the items above when I first started.
There will be more options depending on your personal situation no doubt.
Wrap up
There we go then, no less than 6 different alternatives that we COULD adopt if we have a starting investment fund of around £20,000.
However, we should always 'start with the end in mind' with our purpose & goals, as each of these potential strategies will suit some more than others, depending on time horizon, time capacity, skills and capabilities, risk appetite, investment return expectations, tax status, lifestyle preferences and so on.
I hope that gives plenty of ideas to consider should you be asking yourself the question, what should I do if I have a modest starting investment fund along the lines of £20,000.
So far, I have focused on an investment pot of around £20,000. However, as with last time, the reality is that these possibilities may be similar whether the investment pot is somewhere between £10k and £50k say.
I know that leaves a little bit of ‘no man’s land between £50k and the £80K we spoke about last time…in truth we might be able to make some of the strategies from either list work in that situation.
There are a couple of obvious gaps that so far I have not addressed. Below £10k and above £250k…
Next time, we shall tackle the same question but looking at these two apparent extremes in terms of a starting investment pot together.
Once again, that’s all we have time for today. By all means do drop me a line podcast@thepropertyvoice.net if you would like to discuss these options in more detail. The show notes, are over at the website www.thepropertyvoice.net
As ever, I’d just like to say thank you for joining me on the show again today and until next time on The Property Voice Podcast…it’s ciao ciao!