Advice for a young man starting out

[Chunk49]

Hi all

Would love some advice / a sense check on my plans. In a nutshell: is buying my first property (to live in) with a chunky 20%-25% deposit the best use of about £60k-£70k? Or whether a buy to let would be best first and then save up again for a deposit for my own flat. Or whether you would do something completely different with the money and why. I'm not from a well to do background so am conscious that if I make the right financial decisions now, it could benefit me and my family in the long term and (vice versa).

Have included everything that I think would be relevant about my other personal circumstances below:

1. 27 yrs old single, no kids, based in London (no this is not the start of a Lonely Hearts ad!)
2. Earning around £67k a year all in
3. only debts are remainder of student loan that will be paid off naturally by spring and a couple of grand on an interest free credit card that will be paid off by DD by the end of the interest free period
4. Currently paying £650 a month in rent in London.
5. Currently paying 4% into a pension which is matched by my employer. My employer will match up to 6% so from the new tax year next year I'm going to increase my contribution to 6% (I tried to do it earlier but our Accounts department said HMRC only lets you alter your contribution once a year - is that right?)
6. If I do buy my own flat my intention is to get a 2 bed for £250k (to avoid the higher stamp duty) and then rent out the second room.
7. My savings are in a mixture of a Cash ISA and market leading easy access savings accounts
8. My risk appetite at this stage is fairly low: my thinking here (rightly or wrongly) is that once I've got my own flat, pension contribution of 6%, maxing ISA out each year (i.e. with a 6 month safety buffer), then from that point I'll switch my risk strategy to higher risk. Basically, I don't have enough money and security yet to be able to take the hit of potentially losing any. Thoughts on that?

I keep changing my mind as to what I think the best course of action is, among the following things:

(a) use my £60k-£70k and put down a chunky deposit on my own flat in London, rent the 2nd bedroom out, and then use the next 12 months to max out an ISA to then have a 6 monthish savings safety buffer, and then [insert suggest of what you would do with spare cash after that]

(b) buy a buy to let for around £200k-£215k (with 25% down) and get that up and running, and then starting maxing out my ISA again to [get 6 months safety buffer] or [to start saving again towards a deposit for my own flat - the thought of having to get hold of that kind of money again kills me!] or [start saving for another buy to let] or [insert your suggestion of what to do with spare cash]

(c) I'm from the North West originally, so buying one or more buy to lets in my home town i also an option I've been considering, as friends and family could help the management of them, and it would mean significantly smaller deposits were required from me.

(d) sit tight, leave my savings in an ISA, continue to rent and hope that any or all of the following happen over next 6-12months: (a) the base rate is lowered to 0.25% and the banks pass this on to customers; (b) house/flat prices in London drop (unlikely in my humble opinion); (c) the economy takes an even bigger nose dive and then properties/repo properties in the North become even cheaper. For me, I get the sense that the next 6 months will probably see the bottom of the market (I don't just mean the housing market, but I mean generally the bottom of the double dip - what do you think looking in your crystal balls?

I haven't been to see an IFA, as to be honest, I think the amounts of cash I'm dealing with currently do not warrant it, and I try and read up and be clued up about things moneywise, but I would love to know your views as to what you would do between now and the next 6-!2months if you were me and (importantly) why, as I am aware that there must be much wiser and more experienced heads than me as a 27yr old just starting out and keen to make the right financial decisions early on to then set me in the right direction.

Thanks for reading.

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[FLGirl]

I don't have a crystal ball but in your shoes I would do (a)

At the middle of your deposit figure (£65k) assuming as you say that is 25% of the total mortgage, you're looking at around £900/month in repayments. Renting a room would earn you circa £600/month (a friend rents a room in a nice, but smallish 2 bed in Balham for that).

If you can find a good tracker mortgage, you'll possibly benefit if the interest rates drop too.

From your post, the option of owning your own home seems to appeal the most, and I can understand why.

In addition to the above, given you pay £650 in rent currently, why not use £2-300/month of your lodger's money to overpay the mortgage? You're still better off and you do have a healthy income with which to save more, or overpay more.

Assuming prices remain static, you'll be building up equity which you can later look to release if you want to pursue BTL. The other option, as it seems you'll be buying a flat, is to remortgage the flat you own as the BTL and upgrade yourself, if you can re-save a deposit which appears perfectly do-able.

I'd get your own place bought first, get settled, get re-saving then think about the next steps

[Chunk49]

FLGirl said:

I don't have a crystal ball but in your shoes I would do (a)

At the middle of your deposit figure (£65k) assuming as you say that is 25% of the total mortgage, you're looking at around £900/month in repayments. Renting a room would earn you circa £600/month (a friend rents a room in a nice, but smallish 2 bed in Balham for that).

If you can find a good tracker mortgage, you'll possibly benefit if the interest rates drop too.

From your post, the option of owning your own home seems to appeal the most, and I can understand why.

In addition to the above, given you pay £650 in rent currently, why not use £2-300/month of your lodger's money to overpay the mortgage? You're still better off and you do have a healthy income with which to save more, or overpay more.

Assuming prices remain static, you'll be building up equity which you can later look to release if you want to pursue BTL. The other option, as it seems you'll be buying a flat, is to remortgage the flat you own as the BTL and upgrade yourself, if you can re-save a deposit which appears perfectly do-able.

I'd get your own place bought first, get settled, get re-saving then think about the next steps

Thanks very much for responding (a) is the option I'm most favouring as the first step (I had done the same calculations as you), so its good to get a sense check. Finding a flat that I would actually want to be buy to live in in London for £250k is proving a challenge...but I'm sure it can be done.

Would also welcome anyone else's views (even if left field)

[FLASHG1981]

My advice would be different and would avoid a UK property at the present time. The only country I would currently but property in is USA as yields are high the market has probably bottomed and the Pound long term is probably going to be weaker than the Dollar. Alternatively wait til the Euro dies and buy flats in Germany. UK property is still overvalued so not worth bothering with for another 5 years as an investment.
If you don't like the idea of overseas property which is understandable then I would put the money into European manufacturing stocks that will profit for the weaker Euro.

[Chunk49]

Thanks for responding Flash - interesting points that I hadnt considered. I don't know anything about the German property market but I will do some googling. I would certainly not be adverse to that for buy to let opportunities.

But you wouldnt advise me to buy my own flat to live in in London first? I would be genuinely interested to hear your thoughts as I just keep coming back to this time after time. If nothing else coz my rent is dead money currently and i can rent the second bedroom out of the flat I buy. I wouldn't be counting on any capital appreciation on that flat for at least three yrs and would likely keep the flat for as long as possible (either me living in it or later convert to buy to let).

Edited by Chunk49 on Saturday 11th August 19:30

[Laughingman21]

FLASHG1981 said:

My advice would be different and would avoid a UK property at the present time. The only country I would currently but property in is USA as yields are high the market has probably bottomed and the Pound long term is probably going to be weaker than the Dollar. Alternatively wait til the Euro dies and buy flats in Germany. UK property is still overvalued so not worth bothering with for another 5 years as an investment.
If you don't like the idea of overseas property which is understandable then I would put the money into European manufacturing stocks that will profit for the weaker Euro.

How and where would one look to do something like this?

[FLASHG1981]

Laughingman21 said:

How and where would one look to do something like this?

To be honest I haven't fully researched this side of it yet as I should be in a position to invest in overseas property early next year so was going to do a bit more research closer to the time. Based on predicted currency movements and long-term values the areas which I have identified are Berlin as I think the Euro will short term take a bit of a hammering but I think the eurozone will also recover quicker due to forced austerity measures so hopefully I can time this right. I was going to take a trip out there firstly to do a bit of research before committing to buying. There are good tax advantages if you keep the property for 10 years or more. Also long term tenancies are in place so you will have less trouble with voids etc.
With the USA my research again is fairly limited but I have family out there and they advise me that the markets is starting to show signs of recovery and property is cheap compared to the long term average which is still not the case in the UK. I am also told that due to a massive oversupply of natural gas is the USA they are going to start exporting it in large volumes and the cheap energy will create 1,000,000 more jobs manufacturing in the USA over the next few years which is bullish for the dollar. Again as I have family out there I may be slightly better placed to go down this route than yourself as they can advise me what areas are like etc so Germany may be the safer option in your case.

[jonny70]

To the OP, you seem to earn a decent wage at 27. what do you do?

I would recommend buying a flat to live in . As you said yourself you woulndt want to have to save 60k again. I might wait a year and see what happen with the economy etc I doubt prices will rise and you can grow your deposit.

Once you have a place to live and a 6 months savings for necessary living expenditure.

Then i would look into putting your spare cash into investments.

[Chunk49]

jonny70 said:

To the OP, you seem to earn a decent wage at 27. what do you do?

I would recommend buying a flat to live in . As you said yourself you woulndt want to have to save 60k again. I might wait a year and see what happen with the economy etc I doubt prices will rise and you can grow your deposit.

Once you have a place to live and a 6 months savings for necessary living expenditure.

Then i would look into putting your spare cash into investments.

Thanks for your response Jonny. Yes I am kind of split between option (a) and option (d) i.e. wait a bit longer until next year in case London prices (for the kind of flats I'd be looking at) "correct" down a touch, while still keeping an eye on rightmove and if I find one that works I can move on it.

Yes I think at the point where I had my own flat, had a 6 months ISA buffer, I would then probably speak to an IFA and do something more "investment-ie" (with a slightly higher level of risk).

[0000]

If you want to live in a flat you can afford for some time, I don't see why not.

Otherwise I'd find a better investment for it and wait as long as you can bear.

[fido]

I know this goes against the grain, but perhaps go for a 1-bed flat in a nicer area (near the station, bars, nightlife) and you won't have to share. What's important to you at this point?

[Chunk49]

0000 said:

If you want to live in a flat you can afford for some time, I don't see why not.

Otherwise I'd find a better investment for it and wait as long as you can bear.

Thanks again for responding The thing is (and this may be through my own lack of knowledge), I just can't see a better "investment" than the combined effects of: (a) not paying about £7,000-£8,400 a year in rent; and (b) having a lodger renting the 2nd bedroom paying about 2/3 of my mortgage for me; (and (c) (as a bonus) any capital appreciation over the years (I am not counting on any))

I have no mathematical base for that and I am not particularly mathsy so I may well be wrong! And that's why I'm throwing it out to you good people who are no doubt more experienced/knowledgeable!

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[Chunk49]

fido said:

I know this goes against the grain, but perhaps go for a 1-bed flat in a nicer area (near the station, bars, nightlife) and you won't have to share. What's important to you at this point?

Thanks for your response Fido I have also been seriously considering this (and it is what a couple of my friends have done/are going to do shortly). But my thinking in trying to get a 2 bed is as follows is purely financial: that I can rent the 2nd bedroom and get someone to pay in the region of 2/3 of my mortgage each month and I have been told that 50% of the expenses of the property (including mortgage interest) would be an allowable expense.

What I'm trying to do is make the right financial moves now (that are low risk) with the resources I have available (I do not have a wealthy family to fall back on) that should hopefully set me on the right path financially for the future.

Edited by Chunk49 on Sunday 12th August 13:40

[otherman]

Chunk49 said:

5. Currently paying 4% into a pension which is matched by my employer. My employer will match up to 6% so from the new tax year next year I'm going to increase my contribution to 6% (I tried to do it earlier but our Accounts department said HMRC only lets you alter your contribution once a year - is that right?)

No, its not right. HMRC will let you change whenever you like, all the admin is done by the company so its neither here nor there to them. Saying this, if your employer doesn't want to do it why make a nuisance of yourself.

[anonymous-user]

Whilst buying a two bed flat and renting it out makes solid financial sense you do need to think whether you actually want to share your living space with a stranger. Living in your own place with a lodger is not the same as living in a shared flat when you're at uni, you will get annoyed if they make a mess or walk dirt into the flat. There also comes a point in your life when you tend to prefer your own space and your own company.

I'm not saying don't do it, just go into it with your eyes open.

[Chunk49]

otherman said:

Chunk49 said:

5. Currently paying 4% into a pension which is matched by my employer. My employer will match up to 6% so from the new tax year next year I'm going to increase my contribution to 6% (I tried to do it earlier but our Accounts department said HMRC only lets you alter your contribution once a year - is that right?)

No, its not right. HMRC will let you change whenever you like, all the admin is done by the company so its neither here nor there to them. Saying this, if your employer doesn't want to do it why make a nuisance of yourself.

Ok thanks for that. Useful to know. It sounded spurious to me but they told me HMRC only let's you change outside of once a year if you have a change of life circumstances e.g. marriage, children etc. To be honest I had the same though process as you at the time: it sounded spurious but no point kicking up a fuss as I can change it come next year and also been saving for a deposit so every extra a month was helpful.

[Chunk49]

Inkyfingers said:

Whilst buying a two bed flat and renting it out makes solid financial sense you do need to think whether you actually want to share your living space with a stranger. Living in your own place with a lodger is not the same as living in a shared flat when you're at uni, you will get annoyed if they make a mess or walk dirt into the flat. There also comes a point in your life when you tend to prefer your own space and your own company.

I'm not saying don't do it, just go into it with your eyes open.

Thanks for the sound advice I'm probably living in la la land but was hoping I'd be able to rent it out to at least a friend of a friend or a friend of a colleage etc which might be a better solution. I completely take your point though - I would ideally prefer to have my own flat/space but my thinking is that the 2 bed I buy is going to be max £250k due to stamp duty, so repayments will be around £900 which I can comfortably cover on my own, so if I ever get to the point where I'm fed up of having a lodger then I know I can handle the mortgage on my own.

I kind of think that even though I would rather my own space, its worth renting the 2nd bedroom if only for the first year or first 2 years, until I've got myself back in a good position financial with the 6 months buffer and am then ready to make some "investments".

[otherman]

Chunk49 said:

Ok thanks for that. Useful to know. It sounded spurious to me but they told me HMRC only let's you change outside of once a year if you have a change of life circumstances e.g. marriage, children etc. To be honest I had the same though process as you at the time: it sounded spurious but no point kicking up a fuss as I can change it come next year and also been saving for a deposit so every extra a month was helpful.

I certainly agree with you plan to push up to the highest matched contribution. You're missing out on money if you don't do it. Are you also aware the if you haven't expressed a preference your money will be in the default fund? There will be lots of options so you may also want to make a conscious decision about how your money is invested. Being young and having many years to go means you should try not to be to risk averse in this.

[Chunk49]

Yes at some point soon I'm going to take a more active role and propably incease the 'risk profile' of my pension fund to high risk, and then gradually lower the risk profile as I get closer to 55 (this is what I always read that people advise).

That brings me to another a couple of questions:

1. I've been reading about SIPPs recently - if you pay into them does your employer match that in the same way as with a personal pension? (assuming your employer would match your personal pension of course). Is the point of the SIPPs that I myself (or someone I appoint to on my behalf) will actively manage the investments within the SIPP rather than let institutional fund managers (who are often constrained by minimum credit rating of certain products, exposure limits, diversificaiton minimum rquirements etc)?

2. Also, I'm obviously aware that stocks and shares (whether an index tracker, an ETF or individual stocks) can be placed inside an "ISA wrapper" (whenever I read it that phrase makes me think of Vanilla Ice! But I digress). Now, once I have my own flat, as I said above, I'm going to start maxing out my ISA as the first thing to do, and if I should be lucky enough to have spare cash on top of that in the future I'll obviously think about things.

I'm clued up on the theory, but lacking any actual experience i.e. I have never bought any shares before (either individual stocks or a tracker). So, what I want to know is (and this may sound like a very stupid question) but how would I actually / physically "place stocks and shares in an ISA wrapper" i.e. are there (presumably broker) websites where I can basically sign-up, and then e.g. buy £500 of Tesco shares one Monday morning through that website and those shares are then within my ISA wrapper? And then all appreciation and dividends would then be tax free? How do you ensure its within the ISA? Or do I need to inform HMRC? I get the theory of it all (i.e. the tax break) but its the experience I lack of literally physically knowing how to do it (and no-one in my family has any financial products other than savings accounts so they don't know to tell me).

Also, can CFDs be placed within an ISA wrapper? If so, is the process the same? (I am not thinking about trying to trade CFDs don't worry!)

Thanks - you have all been really helpful so far and I'm very grateful.

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[CrabDan]

You're 27 and earning 67k?

Is EVERYONE on this forum loaded?

Think I might f*ck off back to the Astra Owners network!