Wow! Thanks for writing about this so quickly. This looks set to be a great series.

While buying a property to let and then cashing out when you want to retire is what many folks do, there’s another option too.

My current thinking is as follows:
1) Carefully source small properties (under £120k) at 80% of the market value
2) Pay a 15% deposit and fund the rest with an interest only mortgage
3) Spend a minimal amount on refurbishment
4) Refinance the property immediately after completing (4-5 months later) with an 85% mortgage at the new value
5) Take the cash that’s released and do the same again!

This effectively gives you property for free, and only ties your cash up for 6 months each time.

I got the idea from a chap called Andy Shaw, who uses this example: You buy a house for £100,000 with an 85% mortgage. You’ve put in £15,000 deposit plus legal costs of £1000 and refurb costs of £4000. So you’ve spent £20,000 acquiring property worth £100,000.

You get the property re-valued at £130,000, with a new mortgage for 85% of that, which gives you a mortgage of £110,500. Once you’ve taken your investment of £20,000 and paid off the original £85,000 mortgage, you’ve actually made £5,500, and you no longer have any cash invested in the property.

You’re then free to use the same £20,000 to buy another. The whole thing works on buying small property under the market value, and then never selling it - if you can do that, it seems like a good way of investing to me.

I REALLY wish my key board had that funny little “L” or pound symbol.

This is great work, sometimes the owner of a rental property only makes money when his property is sold. He simply tries to break even while owning and letting.

I missed the post on pension vs ISAs (doh!), but the ‘alternatives to pensions’ is a topic close to my heart.

Obviously, I’m not a fan of the pension straitjacket, but anyone whose thinking they can choose between a pension or property needs to think REAL close, particularly when they’re sold on a message from dime-a-dozen property pundits. Plonkee didn’t mention costs of maintaining or re-furbishing a property, but this particularly applies if you think you’re going to profit from a quick turnaround of property (love the term flip; wish it was used in the UK more).

Of course there are still people making money on property, but they’re generally v. experienced, or have a lot of capital behind them (probably both). It’s not a game for novices.

Still, as someone who has a big stake in property (as part of a diverse portfolio which does include some pension), the more people that can be suckered into that market, the better .. (actually no, impact on overall economic conditions has turned that message on its head these days)

Really interesting. Makes me want to go back and look at this given the changes in real estate pricing here!

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@Pippin - I completely agree with you on the danger of trying to ‘flip’ property by buying, refurbing and selling it (why sell an asset that is likely appreciating faster than most savings accounts?). Buying well, holding onto your assets, and refinancing if necessary (which is tax free!) seems like a better long-term plan to me.
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Unfortunately, I’ve learnt the hard way that careful buy to let investing has better long-term potential than the more speculative buy to flip strategy glamourised on UK TV. (I’m only just switching tactics myself.)

Look forward to seeing how buy to let compares to a more traditional pension, though.

It is certainly possible to make money by buying cheap property and refurbishing it. But that’s more or less separate from whether you choose to then sell the property on, or rent it out.

If you refurb and then remortgage at a higher rate and rent the place out, you’ve still got the investment situation I’ve described above. The only difference is that you’ve come about the initial money (£30k in my example) more creatively.

Buy to flip works well when you buy cheaply. Which is actually pretty hard to do when everyone else is trying to do the same thing. Because you’ll have some not very savvy newbie paying over the odds, driving up the price of the houses that flippers want.

Yes - your point about the initial money and flipping vs letting being a separate issue is well made.

I made the mistake of investing too much emotion in the property at purchase time, and ended up in a mini bidding war with a first time buyer.

Now I’m coming to sell, I’ve realised I paid too much in the beginning. I’ll still make money, but as a pension plan I suspect it would work out pretty rotten compared to the safer alternatives.

I guess that’s one of the main reasons people opt for pension schemes/savings over property: the risk of getting it wrong is probably much lower.

It’s certainly easier to be more sensible about funds. I mean, I like my investment portfolio, but I can’t imagine falling in love with it.

Ha! I see what you mean. Perhaps I need to learn to stop looking at houses as property buying decisions (which invariably tie-in emotion) and start looking at them as investment decisions.

Along with Pippin’s comment, I think it is a good idea if you can swing it for the long term, but in my experience owning a rental is like having a pet, particularly if that rental is a little older.

The maintenance costs (particularly surprises, like unexpected plumbing disasters that can cost thousands to repair), updating costs over the long term, the time and effort spent to maintain and repair after old renters leave and before new ones move in, all add up to a lot of inconvenience for many.

That being said, if you are willing to either hire out much of the work or view the maintenance and management as a part time job, investment-wise I would say its a good bet. Particularly if your loan amount, including principle+, is paid by the let fee.

Thanks again for a great post!

I’d also point out that there are a couple of different ways to approach the rental aspect, depending on the amount of work you want to put in, and geographical location.

I own a pretty cottage next door to where I currently live. Having rented out a property previously, only to have it comprehensively trashed by a defaulting tenant, I was unwilling to do the same again.

What we now do it holiday letting. Obviously, there is a LOT more work needed (advertising, turnarounds, keeping everything perfect etc.) as well as more investment (furnishing, linens etc.), but the payback is *much greater*.

In the right place (and really, only research can tell you that), a holiday let will garner almost three times the long-let rental income.

There are a LOT of factors involved in this decision, and you do need to see it as an active business, not a passive investment, but it can be a good strategy…

Hi Annie, I would like to add that I thnk it is very important to attract the right sort of tenants to maximise the rental income. For instance, most young professional couples will be looking for convenience and a clean rental property.  They will expect a high quality standard of interior decor, as well as a well-kept and well maintained exterior.  Think through what you’re prospective tenant market is likely to expect, depending upon the property and the local area.  Students will have lower expectations than professionals, families more space orientated different needs than single people.  Most landlords tend to choose neutral colours which are cheap and easy to obtain, such as magnolia.  This ensures that after a few years, when the property needs redecorating, the colour is easily re obtainable. Most ‘hint of something rather’ colours tend to be rebranded after a few years by paint manufacturers for obvious reasons. Never try to decorate a property based on your own tastes. Instead, keep the average needs of your target market in mind. Neutral and clean colours throughout the property likely to attract prospective tenants during the viewing process.  Freshly painted walls will impress prospective viewers and a more likely to help you achieve your higher desired buy to let income.