Building a Rental Property Portfolio to Fund Retirement
I've said in an earlier blog about income that rental property is our favourite investment. It is what will provide the majority of our retirement income.
I suspect that there are other investments that can give a better return, but rental property is something that I feel very comfortable with, which is really important for me. I think it's quite a safe investment - it physically exists and I understand it, which is something that I can't say for many of the other investments out there.
In this blog post, I'll tell you about our property rental portfolio, to show that we're actually "walking the walk" and, based on our experience, my thoughts on how to build your own property rental portfolio.
Our Property Rental Portfolio
We have 12 properties, albeit they are mostly small properties and not in expensive areas:
6 houses in the town where we used to live. Five of these are 2 bedroom houses and we have one 3 bedroom house. The logic is that, in this town, there is more demand for 2 bedroom houses so they rent well, and the tenants stay longer than in one bedroom properties. We found that larger houses are harder to rent and also don't get a proportionally higher rent to compensate for the higher purchase price.
1 house (5 bedrooms) near a university which we rent out to students. The idea is that you get a higher return on investment, but I'm not convinced as there may also be higher costs. We've only had this for one year, so we don't have enough data yet to make a judgement.
4 houses in a lower cost area, where we don't have local knowledge. We're just finishing buying these (three 2 bedroom and one 3 bedroom terraced houses). The purchase price is about 30% of our other properties. We purchased these from a company that gives us a 7% rental guarantee).
1 apartment in a ski resort in Morzine in the French Alps (this is currently under construction). We will only take possession of this in the second half of 2018. It's not a pure investment property, but part investment and part lifestyle as we will use it ourselves at times, and will rent it out as a holiday apartment when we are not using it.
Excluding the Morzine apartment, the other 11 properties should give us an income of £66,000 ($81,433) after costs but before tax. Gross income is around £87,000 ($107,344) and then we have costs of around 24% to get to the £66,000 ($81,433) figure. Just under half the costs are for managing agents who find the tenants and manage the properties for us (as we are not living locally) and the rest is for maintenance and repairs plus a few other things such as annual gas safety checks and the like (the costs on the student house are higher as we provide utilities, WiFi etc). We could probably reduce the costs if we lived locally.
I think the Morzine apartment should conservatively give us £10,000 ($12,338) income a year, even if we use it quite a bit ourselves. Including this, the total income after costs will be around £76,000 ($93,771) a year (before tax) which should be more than enough to live on (my target is that a before tax income of £50,000 ($61,692) should be enough to cover our costs to retire).
A good thing about a property rental portfolio is that the income should increase in line with inflation each year, and you'll need that because your living costs will also increase with inflation.
How to Build Your Own Property Rental Portfolio
Based on our own experience:
Start as early as possible, to give yourself the most time to grow your property portfolio before you retire.
At least to start with, I would recommend buying property in an area that you are familiar with, for example, so that you don't inadvertently buy a property in a bad area simply because you didn't know any different. An added benefit is that you can save some costs by doing some of the property management yourself if you are living locally,
Talk to local letting agents to find out what types of property are in demand, what are the best type of tenants to target, which type of properties the tenants stay longest in, what the rental values you can expect for different types of property.
Calculate the costs that you will incur by renting the property. Things like agents fees, repairs etc. Know which costs you have to pay as the landlord, and which costs the tenants are responsible for. Again, you can ask a letting agent to help you with this.
Consider newer properties as the maintenance costs should be less.
Find out what tax you may have to pay on your rental income, and what costs are allowed to be offset against the income.
Once you know your expected rental income, costs and tax, decide whether you still think this is the right investment for you. What you are trying to achieve is a positive cash flow, so that your rental income is greater than all of your costs including mortgage (and the amount of income you would have earned from the deposit money if you had invested it elsewhere).
If possible, a great time to buy is during a downturn when prices are lower. We purchased our first rental property when prices were low after the global financial crisis.
Although I said in my recent how to retire early blog post that I don't like debt, having a mortgage to buy property can be an exception. This is because you effectively get your tenants income to pay the mortgage for you which means that at the end of the day your tenants have bought the property for you. We purchased our first rental properties with a mortgage, but paid extra off the mortgage when we could.
Use any surplus cash generated from the property to put towards your next rental property purchase (don't spend it on other things).
And I'm going to say it again, starting early means that you can have any mortgage paid off before you retire, so that you maximise your retirement income i.e. you have the rental income but no mortgage cost.
I should also say that you must make sure that you can afford the purchase, and that you can still afford it if you have an empty period for a month or so, the mortgage rate increases or you have an unexpected repair to make.
It's really not complicated, but you do have to do the math to make sure that you can afford it and to make sure it is going to give you the return that you want. The great thing for me is that the income from the tenant can cover the mortgage and property running costs, which means that your tenants effectively buy the house for you over time. Provided you start early enough, by the time you retire young, the mortgage can be paid off and you can just get the rent money each month for your retirement income. It has worked for us (and I don't even count the increase in the property values, that's just a bonus if we ever decided to sell any of the properties)!