Your understanding of money and your friends’ understanding of money are likely to be totally different.
Differing views on money, budgeting, investing and so on and so forth is exactly why some people get rich whilst other stay poor. It’s why some people are able to retire whilst other have to get a job at the checkout counter of their local supermarket once they’re too old to be wanted by anyone else but still need to make ends meet.
Anyhow, I asked my friend, Oscar how he’d spend a million pounds to see if his answer would bare any resemblance to mine and it was completely different.
He said he’d:
Only the investment in the studio is a sure-fire investment here. The money spent on artists is a gamble and of course the gift to his parents would never come back.
I said I’d invest every single last penny on building a property portfolio that produced at least £5,000 of rental income per month.
In my initial answer I said I’d look for about 6 properties that cost c.£100k each and produced £500 of income per month each. In addition, I’d look for 2 properties that cost c.£200k each and produced £1,000 of income per month each.
Having thought about it long and hard I’ve decided I’d go for 5 properties that cost c.£200k each and produced £1,000 of income per month each because the revenue produced by small properties would quickly get chewed up by the fixed costs of managing them.
I’ve invested in the stock market in the past and done quite well. However, I no longer believe that shares are a good investment because you can’t borrow money against them to increase your returns.
The fact is, with property the returns are amazing because you can borrow against that investment and invest in even more property.
After my £1million was fully and carefully invested I could just go to a bank and borrow up to £750,000. I could then invest that in more properties producing even more rental income.
Overall, my goal is to own no more than 10 properties because I don’t want to be have to much debt plus I don’t want the hassle of managing an overly large portfolio so I’d probably borrow £500,000 only and stop there.
That £500,000 would be invested in 5 more properties of £200k each with £100k of released equity and £100k of fresh mortgage debt.
What would I be left with?
Annual costs would be:
That £10,000 set aside for maintenance would allow you to keep the portfolio in tip-top shape. Within that sum you could lease a car and few other borderline personal costs.
Total fixed costs: £13,450
Total interest costs: £4,200 x 12 = £50,400
Total costs per year= £63,850
Profit per year: £120,000 - £63,850 = 56,150
I would use the full profit to pay down the £1million mortgage because I don’t need the income right now which means I’d have mortgage free portfolio in under 18 years, less if I didn’t use all the maintenance budget for maintenance.
In fact, it would be much less than this because the interest costs would fall every year as I pay down the mortgage debt.
At that point profits become £120,000 - £13,450 = £106,550. Probably more because rents tend to rise with time. Could the good husband and I live on this? Like kings!
I’d generally let my properties out unfurnished because I’ve found that tenants that bring their own furniture are in it for the long haul.
As for taking care of my parents, once the £1million was fully invested I’d take them on a huge holiday. My parents make very good money from their own property investments so they don’t need money from me. But, of course, it’s always great to get gifts from your children so I would send them amazing treats and gifts regularly. I’m good with money because they gave me all the money skills I need so that would be my thanks.
Job done -
Heather on Wealth
I enjoy helping people think through their personal finances and blog about that here. Join my personal finance community at The Money Spot™.