70k to invest, buy to let?
Discussion
Pat H said:
Quick, genuine question.
How do you know that it will grow ahead of inflation?
We don’t How do you know that it will grow ahead of inflation?
But there is a fair arguement that U.K. land will continue to become more valuable and the population continue to grow or stay put so a few good quality, strategic BTLs held over 40 years + should outstrip inflation. And likewise a blue chip equity portfolio that is made of of US, EU and Asian exposure.
You’d expect plenty of periods when inflation outstripped capital growth but plenty when it didn’t.
DonkeyApple said:
We don’t
But there is a fair arguement that U.K. land will continue to become more valuable and the population continue to grow or stay put so a few good quality, strategic BTLs held over 40 years + should outstrip inflation. And likewise a blue chip equity portfolio that is made of of US, EU and Asian exposure.
You’d expect plenty of periods when inflation outstripped capital growth but plenty when it didn’t.
Fair comment.But there is a fair arguement that U.K. land will continue to become more valuable and the population continue to grow or stay put so a few good quality, strategic BTLs held over 40 years + should outstrip inflation. And likewise a blue chip equity portfolio that is made of of US, EU and Asian exposure.
You’d expect plenty of periods when inflation outstripped capital growth but plenty when it didn’t.
Thought I might have been missing something pretty fundamental!
Phooey said:
Always enjoy reading your posts DA.. but if you don’t mind me asking - why would you not buy the BTL/s outright if you had that pot of cash? Cheers
Generally because I don’t believe that 50% gearing increases the risk significantly. The danger of significant gearing at first glance is from a loss of income through voids or tenant default but a real risk is from the lending increasing their margin requirement suddenly. But at 50% LTV your still ‘arguably’ as safe as you are at 100% especially as your overall fund has the monthly income to cover voids or defaults etc. Ultimately, you’d need to run the numbers to compare the increased yield from gearing up versus the increased costs from running the loan and the tax position. And also look at the market to see whether, for example, 3 £300k on 50% have a better long term outlook than 3 £150k fully funded properties. There are Stamp levels at £125 and £250 and these levels skew values of properties that are hovering around them, or you may estimate that the running costs of a £150k rental are almost identical to a £300k so your yield is hit less with the larger property, or you’re in an area where the quality of the tenant changes dramatically at a certain price point or doesn’t improve at all. £150 may mean flats only whereas £300 gets houses and with the former, over a long term strategy you may have to start factoring the cost of lease extensions.
I think the key is to secure the right type of properties in the right area, to diversify with multiple holdings and if that means a bit of leverage then I generally don’t see it tipping the risk profile when it’s at or below 50%.
DonkeyApple said:
Generally because I don’t believe that 50% gearing increases the risk significantly. The danger of significant gearing at first glance is from a loss of income through voids or tenant default but a real risk is from the lending increasing their margin requirement suddenly. But at 50% LTV your still ‘arguably’ as safe as you are at 100% especially as your overall fund has the monthly income to cover voids or defaults etc.
Ultimately, you’d need to run the numbers to compare the increased yield from gearing up versus the increased costs from running the loan and the tax position. And also look at the market to see whether, for example, 3 £300k on 50% have a better long term outlook than 3 £150k fully funded properties. There are Stamp levels at £125 and £250 and these levels skew values of properties that are hovering around them, or you may estimate that the running costs of a £150k rental are almost identical to a £300k so your yield is hit less with the larger property, or you’re in an area where the quality of the tenant changes dramatically at a certain price point or doesn’t improve at all. £150 may mean flats only whereas £300 gets houses and with the former, over a long term strategy you may have to start factoring the cost of lease extensions.
I think the key is to secure the right type of properties in the right area, to diversify with multiple holdings and if that means a bit of leverage then I generally don’t see it tipping the risk profile when it’s at or below 50%.
cheers DA, makes sense - thank you. As you say - the point about securing the right type of property in the right area is vital to it working. Property rents very well round my (local) area but yields aren't that great. If we're talking easy (as hassle free as you could hope for!) modern houses (not flats) then the choice is either a 2 bed for approx 160-180k that'll rent all day long for £650-695, or a 3-bed for 200-220k that'll get you £795-850. I have noticed there is a lack of 4-bed properties to rent, and when they come on the market they generally rent quite quickly for upto £1000 and can be bought for 250k. There's a lot more houses due to be built around here too. I've looked at the sums many times over but it's always had me scratching my head..Ultimately, you’d need to run the numbers to compare the increased yield from gearing up versus the increased costs from running the loan and the tax position. And also look at the market to see whether, for example, 3 £300k on 50% have a better long term outlook than 3 £150k fully funded properties. There are Stamp levels at £125 and £250 and these levels skew values of properties that are hovering around them, or you may estimate that the running costs of a £150k rental are almost identical to a £300k so your yield is hit less with the larger property, or you’re in an area where the quality of the tenant changes dramatically at a certain price point or doesn’t improve at all. £150 may mean flats only whereas £300 gets houses and with the former, over a long term strategy you may have to start factoring the cost of lease extensions.
I think the key is to secure the right type of properties in the right area, to diversify with multiple holdings and if that means a bit of leverage then I generally don’t see it tipping the risk profile when it’s at or below 50%.
DonkeyApple said:
JapanRed said:
I don’t know why all the hate for BTL. I’ve had 1 BTL in Barnsley since 2012 and am considering buying a few more properties.
I’m not sure whether I’ve been lucky or not with previous tenants. I’ve had one that I asked to replace the flooring in the kitchen and also replace the bath (melted a tea light candle into it ??) which they did. Also had the odd call out due to white goods not working (all I do is call a plumber or electrician etc - doesn’t take up much more of my time than a phone call and a couple of texts). Can’t say I’ve ever been woken up at 2am but they wouldn’t get through anyway as I have my phone on silent. I don’t use an agent. I’ve never had a tenant not pay (one sometimes asked for a couple of days grace which was fine but always paid within 4-5 days of the due date). The house has never been empty. It consistently nets 5-6% which isn’t huge but allows me to overpay the mortgage on the place.
I will have £120k to invest in April 2019. Where else can I get a guaranteed 5-6%. Ive got a small amount of money in the stock market (Nutmeg level 10 risk) but this isn’t making me anywhere near 5-6% and is in my opinion higher risk than BTL.
Im willing to listen if anyone has a convincing argument for me to put my money elsewhere other than BTL...
Edit: I’m 33. Married with 1 child but will have more children soon. Plan to retire at 55. Higher rate tax payer.
There’s not hate for BTL. What people are doing is questioning the suitability in given circumstances. I’m not sure whether I’ve been lucky or not with previous tenants. I’ve had one that I asked to replace the flooring in the kitchen and also replace the bath (melted a tea light candle into it ??) which they did. Also had the odd call out due to white goods not working (all I do is call a plumber or electrician etc - doesn’t take up much more of my time than a phone call and a couple of texts). Can’t say I’ve ever been woken up at 2am but they wouldn’t get through anyway as I have my phone on silent. I don’t use an agent. I’ve never had a tenant not pay (one sometimes asked for a couple of days grace which was fine but always paid within 4-5 days of the due date). The house has never been empty. It consistently nets 5-6% which isn’t huge but allows me to overpay the mortgage on the place.
I will have £120k to invest in April 2019. Where else can I get a guaranteed 5-6%. Ive got a small amount of money in the stock market (Nutmeg level 10 risk) but this isn’t making me anywhere near 5-6% and is in my opinion higher risk than BTL.
Im willing to listen if anyone has a convincing argument for me to put my money elsewhere other than BTL...
Edit: I’m 33. Married with 1 child but will have more children soon. Plan to retire at 55. Higher rate tax payer.
Edited by JapanRed on Thursday 26th July 09:45
For example you say guaranteed 5-6% return in £120k.
But it’s not guaranteed for starters. Secondly what is that 5-6%? What’s it net or gross of?
The simple truth is that when you drill down on the numbers of a BTL professionally, not using man maths the ‘winning’ element isn’t so winning in comparison to alternatives.
PH has a very long history of man maths BTL where proponents ignore the risks and costs and quote gross figures. It’s that aspect that people are negative on not the underlying investment principle.
I suppose I feel more confident doing BTL as I’ve done that for 6 years whereas I only started investing in stocks & shares in January of this year. I’m genuinely interested to hear of anywhere where I’d be pretty confident of getting 4-5%+ with little to no risk of losing the initial investment. I’m not massively clued up on pensions as I have a good NHS pension (as does the wife) where we contribute approx 10% and 7% respectively, plus the BTL is worth about £170k and will be paid off by time we retire. Would welcome anyone pointing me in the right direction for a beginners guide to pensions.
Cheers guys. Great discussion so far.
Edited by JapanRed on Thursday 26th July 20:12
JapanRed said:
Thanks for all the messages. Current rental income is based on £50,000 invested (the equity) gaining £9000 per year income. After all deductions and tax the profit is just over 5%. I know I said it’s guaranteed; it’s obviously not guaranteed but it’s been pretty consistent over 6 years. I’ve not got the figures to hand but I’d hazard a guess that it’s not dropped below 4% in that time (and certainly wouldn’t lose me money as it’s got an almost 0% chance of standing empty for a significant period of time).
Can properties not fall in value?JapanRed said:
I suppose I feel more confident doing BTL as I’ve done that for 6 years whereas I only started investing in stocks & shares in January of this year. I’m genuinely interested to hear of anywhere where I’d be pretty confident of getting 4-5%+ with little to no risk of losing the initial investment. I’m not massively clued up on pensions as I have a good NHS pension (as does the wife) where we contribute approx 10% and 7% respectively, plus the BTL is worth about £170k and will be paid off by time we retire. Would welcome anyone pointing me in the right direction for a beginners guide to pensions.
Cheers guys. Great discussion so far.
Risk free rates are 0.5% (short-end) to 2% (long-end), if you want to achieve 4-5% you're going to have to take some capital risk.Cheers guys. Great discussion so far.
Remember a pension is just a tax-efficient wrapper, not an investment asset. However, if you already have good NHS pensions, then the lifetime limit maybe an issue for you.
DonkeyApple said:
In short, yes. You’d just be able to diversify better. But it really does depend on some key factors such as how old you are, what wealth you already have and what you earn. And other little factors also come into play such as your health, size of family and aspirations. Ie you may have two children and such an amount of money would allow for them to be privately educated etc.
If we take a very basic set of fixed parameters such as someone who earns around the national average of about £30k a year, is in their 30s, already owns a family home, has a wife and a couple of children and lives a pretty normal life with normal expenditures and would expect to be working until around 70 then what you would typically look to do is invest all of it into a secure, sensible, blended portfolio. The key here is the long game. You are 35 and have another 35 years of working and possibly another 20 years of not afterwards. You have a wife to support and children to raise, even parents to protect in their dotage. Invest for this 50+ year horizon and £1m is a huge amount of money that will shelter and raise your entire family and wine you a quality of life you never dreamt of, do what most people do and buy a larger house, maybe a once in a lifetime holiday and maybe a nice car and bang, it’s all gone in an instance. The reason being that they have not increased their personal income at all but have just increased their living costs massively. They will be living well beyond their means with the running costs of the house and car ripping through what’s left of the money and be back where they started in just a few years but probably divorced and in a soiled bedsit paying rent to a PHer
The key is to create a stable ‘income’, yield, while leaving the capital growth well alone to ebb and flow with economic cycles but to keep pace with inflation. It is this ‘income’ that is key along with the recognition that this income will continue long after you retire so it also will be your pension so not needing to invest in a pension will give you increased spending power today, along with the additional ‘income’.
With £1m you’d probably look to do something really very simple such as split it evenly between a blue chip equity portfolio and a few sensible and secure property investments. You aren’t looking for megabucks, you don’t want to take excessive capital risk in exchange for higher yield as you’re in this for the long haul. Likewise you don’t want to go hunting for high capital returns. It’s just all about being boring, average, hugely tax efficient and cheap to maintain.
You’d probably buy 2/3 solid BTLs with maybe up to 50% gearing, which would probably yield you around 5-6% net of running costs, gross of taxes? And invest in blue chip, global indices as tax efficiently as possible which would probably generate a yield of around 3% net of costs, gross of taxes.
As you can begin to see the yields are rather low and we can probably estimate that the whole portfolio would generate between £30-40k income a year. Forget about the capital growth. That could be up 20% or down 20% but over the 50 years it’ll grow ahead of inflation to keep you fully protected and secure. It is your rock upon which your security is secured.
£30-40k a year gross does not sound very exciting at all but in reality it is absolutely immense. It’s a doubling of your annual income but more importantly you don’t have to save for the future which means your spending power has gone through the roof. From your original income of £30 odd k you probably had very little spending power and we having to save a significant % into your pension. Let’s guess that overall you probably had barely £5k spending power after bills and in reality possibly nowhere near that. You now have that £5k, plus the £3+k pulled from pension investing, plus £30-40k income (gross) from your investment portfolio.
It is that spending power that transforms your life, not Mickey Carrolling the capital. You suddenly have the spending power equivalent of someone earning well over £100k and it is that that gives you your freedom. You can chose to pay to educate your children or invest on their behalf, or let your wife stop working, or retire early, or indulge your hobbies, or give more to charities, pay to have your neighbour smacked every Tuesday at 4pm, lease a silly car, save a deposit for a larger home, whatever makes you and your family happiest. Sit down each year together and plan how to invest that extra income as a family.
£1m is nothing if you spend it but it is an absolute fortune if you invest it really boringly.
bloody brilliant post If we take a very basic set of fixed parameters such as someone who earns around the national average of about £30k a year, is in their 30s, already owns a family home, has a wife and a couple of children and lives a pretty normal life with normal expenditures and would expect to be working until around 70 then what you would typically look to do is invest all of it into a secure, sensible, blended portfolio. The key here is the long game. You are 35 and have another 35 years of working and possibly another 20 years of not afterwards. You have a wife to support and children to raise, even parents to protect in their dotage. Invest for this 50+ year horizon and £1m is a huge amount of money that will shelter and raise your entire family and wine you a quality of life you never dreamt of, do what most people do and buy a larger house, maybe a once in a lifetime holiday and maybe a nice car and bang, it’s all gone in an instance. The reason being that they have not increased their personal income at all but have just increased their living costs massively. They will be living well beyond their means with the running costs of the house and car ripping through what’s left of the money and be back where they started in just a few years but probably divorced and in a soiled bedsit paying rent to a PHer
The key is to create a stable ‘income’, yield, while leaving the capital growth well alone to ebb and flow with economic cycles but to keep pace with inflation. It is this ‘income’ that is key along with the recognition that this income will continue long after you retire so it also will be your pension so not needing to invest in a pension will give you increased spending power today, along with the additional ‘income’.
With £1m you’d probably look to do something really very simple such as split it evenly between a blue chip equity portfolio and a few sensible and secure property investments. You aren’t looking for megabucks, you don’t want to take excessive capital risk in exchange for higher yield as you’re in this for the long haul. Likewise you don’t want to go hunting for high capital returns. It’s just all about being boring, average, hugely tax efficient and cheap to maintain.
You’d probably buy 2/3 solid BTLs with maybe up to 50% gearing, which would probably yield you around 5-6% net of running costs, gross of taxes? And invest in blue chip, global indices as tax efficiently as possible which would probably generate a yield of around 3% net of costs, gross of taxes.
As you can begin to see the yields are rather low and we can probably estimate that the whole portfolio would generate between £30-40k income a year. Forget about the capital growth. That could be up 20% or down 20% but over the 50 years it’ll grow ahead of inflation to keep you fully protected and secure. It is your rock upon which your security is secured.
£30-40k a year gross does not sound very exciting at all but in reality it is absolutely immense. It’s a doubling of your annual income but more importantly you don’t have to save for the future which means your spending power has gone through the roof. From your original income of £30 odd k you probably had very little spending power and we having to save a significant % into your pension. Let’s guess that overall you probably had barely £5k spending power after bills and in reality possibly nowhere near that. You now have that £5k, plus the £3+k pulled from pension investing, plus £30-40k income (gross) from your investment portfolio.
It is that spending power that transforms your life, not Mickey Carrolling the capital. You suddenly have the spending power equivalent of someone earning well over £100k and it is that that gives you your freedom. You can chose to pay to educate your children or invest on their behalf, or let your wife stop working, or retire early, or indulge your hobbies, or give more to charities, pay to have your neighbour smacked every Tuesday at 4pm, lease a silly car, save a deposit for a larger home, whatever makes you and your family happiest. Sit down each year together and plan how to invest that extra income as a family.
£1m is nothing if you spend it but it is an absolute fortune if you invest it really boringly.
Croutons said:
This is turning into the "if I win the lottery" thread...
How's the purchase progressing op?
And is your agent quoting 10%, 10% + vat, or 10% + vat + tenant finding fee?
Doh err hmmm sHow's the purchase progressing op?
And is your agent quoting 10%, 10% + vat, or 10% + vat + tenant finding fee?
t didn’t ask that. I’ll get back to you
Update soon things are progressing.
Work is wry busy at the moment so leaving most of the arrangements to other half.
A quick fag packet calculation when I saw this property I’m spending 19% more than the origional 70 I was proposing ( the shogun I was mulling over will wait terracan is fine) but this will increase ‘ yield’ is that the right word? Anyway rent for that extra 19% down goes up 38% over the 400 that I would have got from that other property
That wasn’t the main reason as I said above it’s a lot nicer area higher rent meaning less likely to see the issues mentioned earlier in the thread hopefully. But mainly I’ll have a property in my name only. This gives me a quite a lot of peace of mind. This is a long term investment
Prices may go down but as I won’t be selling this it’s shouldnt effect me. Eventually it will pass onto my children. That’s the plan anyway.
Edited by Pesty on Sunday 29th July 00:00
On a BTL a good area to buy in is paramount. My focus was on each property gaining a healthy value. The better the area the better the rent premium too.
Sold mine the passed couple of year and took the profit. Had to deal with some tenant hassle’s but it is part and parcel of the game.
Would I go back to it, not in a hurry and certainly not within a couple of years. Properties are starting to hang around now. Buyers seem to be holding tight at the mo.
Good luck Pesty with your investment...
Sold mine the passed couple of year and took the profit. Had to deal with some tenant hassle’s but it is part and parcel of the game.
Would I go back to it, not in a hurry and certainly not within a couple of years. Properties are starting to hang around now. Buyers seem to be holding tight at the mo.
Good luck Pesty with your investment...
Edited by throt on Sunday 29th July 10:46
Despite everything I dont buy the argument for a BTL, or at least not how I've ended up doing it - as an 'accidental landlord' if you. Basically rented my place out when I moved for work.
Property worth £270k.
Approx 50% repayment mortgage (£500/m) with 33 years remaining.
Rental income £950/m.
Agent fees 8% + VAT.
Income tax 41% (Scottish tax rate)
Once you take all that into account the rental income is basically just covering the costs. Yes, one day the property will be paid off, but 33 years is a long time to wait for that! And its still on a cheap residential mortgage, not a BTL product. Once the end of year figures and some interest allowance is taken into account it might show a small profit, but not much considering there is £130k of capital tied up.
It just appears to be a vehicle to pay tax to the government - when you buy it, when the rent arrives, and then when you sell it.
What seems to make more sense to me is to invest the money in a pension (saving 41% income tax etc), and then take 25% out tax-free at retirement age. Invest that in a BTL and you've basically bought an annuity for life returning 5%. Not sure why more people dont do that instead.
Property worth £270k.
Approx 50% repayment mortgage (£500/m) with 33 years remaining.
Rental income £950/m.
Agent fees 8% + VAT.
Income tax 41% (Scottish tax rate)
Once you take all that into account the rental income is basically just covering the costs. Yes, one day the property will be paid off, but 33 years is a long time to wait for that! And its still on a cheap residential mortgage, not a BTL product. Once the end of year figures and some interest allowance is taken into account it might show a small profit, but not much considering there is £130k of capital tied up.
It just appears to be a vehicle to pay tax to the government - when you buy it, when the rent arrives, and then when you sell it.
What seems to make more sense to me is to invest the money in a pension (saving 41% income tax etc), and then take 25% out tax-free at retirement age. Invest that in a BTL and you've basically bought an annuity for life returning 5%. Not sure why more people dont do that instead.
People do. A couple of years ago I tried to buy another little cottage in the Cotswolds but couldn’t compete against the over 55s who were suddenly taking their 25% out and purchasing an investment holiday let.
The issue at that point though is that from around 60 onwards getting a mortgage becomes much harder so you have to have the cash so as a strategy not everyone can participate. But I agree that in the current climate where we are facing rising rates possibly within the next decade and it’s accompanying overshoot, I would prefer to fill up the pension wrapper and invest in the general market and instead of following the traditional path of then buying bonds in your 60s would consider BTL as you suggest.
The issue at that point though is that from around 60 onwards getting a mortgage becomes much harder so you have to have the cash so as a strategy not everyone can participate. But I agree that in the current climate where we are facing rising rates possibly within the next decade and it’s accompanying overshoot, I would prefer to fill up the pension wrapper and invest in the general market and instead of following the traditional path of then buying bonds in your 60s would consider BTL as you suggest.
My first thought is that if there is a comfortable pension income then the primary focus would just be on making sure the property is right older age and being prepared to move to somewhere appropriate, if necessary, just before you need to do so? Ie not risk getting trapped by infirmity.
trowelhead said:
DonkeyApple said:
In short, yes. You’d just be able to diversify better. But it really does depend on some key factors such as how old you are, what wealth you already have and what you earn. And other little factors also come into play such as your health, size of family and aspirations. Ie you may have two children and such an amount of money would allow for them to be privately educated etc.
If we take a very basic set of fixed parameters such as someone who earns around the national average of about £30k a year, is in their 30s, already owns a family home, has a wife and a couple of children and lives a pretty normal life with normal expenditures and would expect to be working until around 70 then what you would typically look to do is invest all of it into a secure, sensible, blended portfolio. The key here is the long game. You are 35 and have another 35 years of working and possibly another 20 years of not afterwards. You have a wife to support and children to raise, even parents to protect in their dotage. Invest for this 50+ year horizon and £1m is a huge amount of money that will shelter and raise your entire family and wine you a quality of life you never dreamt of, do what most people do and buy a larger house, maybe a once in a lifetime holiday and maybe a nice car and bang, it’s all gone in an instance. The reason being that they have not increased their personal income at all but have just increased their living costs massively. They will be living well beyond their means with the running costs of the house and car ripping through what’s left of the money and be back where they started in just a few years but probably divorced and in a soiled bedsit paying rent to a PHer
The key is to create a stable ‘income’, yield, while leaving the capital growth well alone to ebb and flow with economic cycles but to keep pace with inflation. It is this ‘income’ that is key along with the recognition that this income will continue long after you retire so it also will be your pension so not needing to invest in a pension will give you increased spending power today, along with the additional ‘income’.
With £1m you’d probably look to do something really very simple such as split it evenly between a blue chip equity portfolio and a few sensible and secure property investments. You aren’t looking for megabucks, you don’t want to take excessive capital risk in exchange for higher yield as you’re in this for the long haul. Likewise you don’t want to go hunting for high capital returns. It’s just all about being boring, average, hugely tax efficient and cheap to maintain.
You’d probably buy 2/3 solid BTLs with maybe up to 50% gearing, which would probably yield you around 5-6% net of running costs, gross of taxes? And invest in blue chip, global indices as tax efficiently as possible which would probably generate a yield of around 3% net of costs, gross of taxes.
As you can begin to see the yields are rather low and we can probably estimate that the whole portfolio would generate between £30-40k income a year. Forget about the capital growth. That could be up 20% or down 20% but over the 50 years it’ll grow ahead of inflation to keep you fully protected and secure. It is your rock upon which your security is secured.
£30-40k a year gross does not sound very exciting at all but in reality it is absolutely immense. It’s a doubling of your annual income but more importantly you don’t have to save for the future which means your spending power has gone through the roof. From your original income of £30 odd k you probably had very little spending power and we having to save a significant % into your pension. Let’s guess that overall you probably had barely £5k spending power after bills and in reality possibly nowhere near that. You now have that £5k, plus the £3+k pulled from pension investing, plus £30-40k income (gross) from your investment portfolio.
It is that spending power that transforms your life, not Mickey Carrolling the capital. You suddenly have the spending power equivalent of someone earning well over £100k and it is that that gives you your freedom. You can chose to pay to educate your children or invest on their behalf, or let your wife stop working, or retire early, or indulge your hobbies, or give more to charities, pay to have your neighbour smacked every Tuesday at 4pm, lease a silly car, save a deposit for a larger home, whatever makes you and your family happiest. Sit down each year together and plan how to invest that extra income as a family.
£1m is nothing if you spend it but it is an absolute fortune if you invest it really boringly. [/quo
I agree, excellent post DA.If we take a very basic set of fixed parameters such as someone who earns around the national average of about £30k a year, is in their 30s, already owns a family home, has a wife and a couple of children and lives a pretty normal life with normal expenditures and would expect to be working until around 70 then what you would typically look to do is invest all of it into a secure, sensible, blended portfolio. The key here is the long game. You are 35 and have another 35 years of working and possibly another 20 years of not afterwards. You have a wife to support and children to raise, even parents to protect in their dotage. Invest for this 50+ year horizon and £1m is a huge amount of money that will shelter and raise your entire family and wine you a quality of life you never dreamt of, do what most people do and buy a larger house, maybe a once in a lifetime holiday and maybe a nice car and bang, it’s all gone in an instance. The reason being that they have not increased their personal income at all but have just increased their living costs massively. They will be living well beyond their means with the running costs of the house and car ripping through what’s left of the money and be back where they started in just a few years but probably divorced and in a soiled bedsit paying rent to a PHer
The key is to create a stable ‘income’, yield, while leaving the capital growth well alone to ebb and flow with economic cycles but to keep pace with inflation. It is this ‘income’ that is key along with the recognition that this income will continue long after you retire so it also will be your pension so not needing to invest in a pension will give you increased spending power today, along with the additional ‘income’.
With £1m you’d probably look to do something really very simple such as split it evenly between a blue chip equity portfolio and a few sensible and secure property investments. You aren’t looking for megabucks, you don’t want to take excessive capital risk in exchange for higher yield as you’re in this for the long haul. Likewise you don’t want to go hunting for high capital returns. It’s just all about being boring, average, hugely tax efficient and cheap to maintain.
You’d probably buy 2/3 solid BTLs with maybe up to 50% gearing, which would probably yield you around 5-6% net of running costs, gross of taxes? And invest in blue chip, global indices as tax efficiently as possible which would probably generate a yield of around 3% net of costs, gross of taxes.
As you can begin to see the yields are rather low and we can probably estimate that the whole portfolio would generate between £30-40k income a year. Forget about the capital growth. That could be up 20% or down 20% but over the 50 years it’ll grow ahead of inflation to keep you fully protected and secure. It is your rock upon which your security is secured.
£30-40k a year gross does not sound very exciting at all but in reality it is absolutely immense. It’s a doubling of your annual income but more importantly you don’t have to save for the future which means your spending power has gone through the roof. From your original income of £30 odd k you probably had very little spending power and we having to save a significant % into your pension. Let’s guess that overall you probably had barely £5k spending power after bills and in reality possibly nowhere near that. You now have that £5k, plus the £3+k pulled from pension investing, plus £30-40k income (gross) from your investment portfolio.
It is that spending power that transforms your life, not Mickey Carrolling the capital. You suddenly have the spending power equivalent of someone earning well over £100k and it is that that gives you your freedom. You can chose to pay to educate your children or invest on their behalf, or let your wife stop working, or retire early, or indulge your hobbies, or give more to charities, pay to have your neighbour smacked every Tuesday at 4pm, lease a silly car, save a deposit for a larger home, whatever makes you and your family happiest. Sit down each year together and plan how to invest that extra income as a family.
£1m is nothing if you spend it but it is an absolute fortune if you invest it really boringly. [/quo
I have a question re practicalities; when investing the blue chip and other global indices part of the fund how would you choose which financial institution to invest your money with?
With a larger amount of money is it safer to spread it between institutions - is there a limit that it protected in a financial crisis like in each UK bank account?
Thanks
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