Fully understand your figures

MORTGAGE CALCULATOR

My background with the figures

In my 1st 16 years as a Landlord, I didn’t do any property calculations. The truth is, I didn’t know any property calculations.

You could say I was like the proverbial rabbit caught in headlights, that you sometimes see on dragon’s den. That person who has a really good idea but doesn’t understand the figures. They get asked about profit margins and they are clueless. That was me.

If you are interested in getting into property investing, read a couple of property books. I will recommend a couple at the end of this week’s blog post. You will learn basic calculations like Gross yield, net yield and return on investment:

Gross yield is the annual rental income generated by an asset, divided by the price of acquiring it. Using a recent purchase (rental No.5) as an example: £6600 / £80000 = 8.3%

Net yield is the annual rental profit (rather than income) generated by an asset, divided by the price of acquiring it. Using my recent purchase (rental No.5) as an example: £2400 / £80000 = 3.0%

Return on investment (ROI) is calculated as the annual rental profit divided by the money you put in: £2880 / £24500) x 100 = 11.76%

For more information on how I got these ROI figures, refer to https://duffmoney.com/2020/11/20/rental-no-5-and-legal-compliance/

Finally understanding the figures

The other day, I was asked how much the mortgage would be on a house purchased for £80,000.

About £150 on an interest only mortgage. This is based on an interest of 3%. Currently you can get a product for about 1.5%: https://www.comparethemarket.com/mortgages/buy-to-let/

The reason I told my friend (Ian) the figure based on 3%, is because I have started buying through a limited company and the rate is higher. Look at the £150 broken down:

  • LTV (Loan to value) of 75% so mortgage of £60,000
  • 1% of £60,000 = £600
  • 3% = £600 x 3 = £1800 pa
  • £1800 /12 = £150 pcm

If you are buying rental property personally, you will benefit from the 1.5% rate:

  • LTV (Loan to value) of 75% so mortgage of £60,000
  • 1% of £60,000 = £600
  • 0.5% of £60,000 = £300
  • 1.5% of £60,000 = £900
  • £900 /12 = £75 pcm

Cashflow

From my experience, £500-550 is normal for BTL properties. This is in the North East where properties are cheap, and rents are cheap. This is compared to other parts of the country.

When my friend Ian gets his next rental property, he will probably get £550 pcm in rent. He is going to buy it personally, so from the figures above, that is £75 pcm (mortgage).

I am basing this on a 2 bed property purchased at £80,000. It is in a decent area and should get £550 in rent.

Ian want’s to know what his cashflow will be per month:

  • Mortgage on interest only = £75 pcm
  • House insurance = £30 pcm
  • Maintenance = £55 pcm (10% of rent)
  • Management = £55 pcm (10% of rent)

If we ignore tax (just to simplify things), the costs add up to £215. That is cashflow of £335. Not bad at all.

Ian is a good saver and has some decent savings. He is planning on buying 5 properties like this over the next few months. That is a total of £1675 pcm. This sort of cashflow means he is quickly headed for FI (financial independence).

Working out your figures is important. It enables you to buy property based on your cashflow expectations. Ian wants cashflow of at least £1500 and this is his short term goal. Now Ian is aware of the calcs, he knows what to bid for houses he is currently looking at.

Property books to help with the calcs:

Essential property investment calculations by Robert Heaton.

The complete guide to property investment by Rob Dix.

Picture:

https://www.moneysupermarket.com/mortgages/mortgage-calculator/

 

Rental No. 5 and legal compliance

Rental No.5 

Rental No. 5

Legal compliance is something that I have been preaching in DUFFMONEY. So, with rental No. 5, I have tried to practice what I preach.

Before getting a tenant moved in, I had to get some work done. If I wasn’t aware of my legal obligations as a landlord, this work might have been ignored. This could have led to pain for me and the tenant.

For more information on what needs to be in-place before a tenant move in, see below:

https://duffmoney.com/2020/06/05/make-sure-your-properties-are-legal/

The log burner

From a safety point of view, this was a disaster.

The log burner had been installed for well over 10 years and had never been serviced or cleaned out.

It needed a new flue liner installing. There was no data plate. To be honest, I had no idea they needed a data plate.

You normally have a register plate kit which seals the bottom end of the chimney. This had what looked like plaster board sealing the bottom end of the chimney. It ended up being fire board but still a fire hazard. The builder replaced the fire board with the required register plate kit.

Another fire hazard was the fact that the wooden beam was touching the enamel flue. Again, the builder pulled the beam forward, so it wasn’t touching the flue. And it was the correct distance away from the flue.

The builder charged £890 for parts and labour. Now I know the log burner is legal and it is a feature of the property.

Electricity certificate

Landlords and agents will need to ensure electrical installation inspections and testing are carried out for all new tenancies in England from 1 July 2020 or from 1 April 2021 for all existing tenancies.

What this means for Landlords is that they must ensure every fixed electrical installation is inspected and tested every 5 years by a qualified Electrician.

For any new tenants moving in after the 1 July 2020, us Landlords will have to provide an Electrical Safety Certificate.

Whilst reading ‘The Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020’ something grabbed my attention under the ‘Enforcement’ section. Proven breaches of the Regulations can result in the local housing authority imposing a financial penalty of up to £30,000.

https://www.landlordtoday.co.uk/breaking-news/2020/6/new-rules-to-ensure-landlords-meet-electrical-safety-standards

Despite being an electrician, I got the professionals in. 1) I am not NIEIC registered 2) I am more industrial – just an excuse if I’m honest 3) I am a poor electrician who struggles to install a light fitting in his own home.

The professionals came in. They installed x6 smoke alarms hard wired to the distribution board; moved some outside lights; replaced x10 spotlights with energy efficient lights; and carried out the testing and inspection that brought with it the all-important electrical safety certificate.

This cost £700 and was well worth it.

Gas certificate

This wasn’t needed as there was still 3 months left on the existing certificate.

Now I am an anal landlord, I got a plumber in to check the boiler out and do some repairs on the toilet.

The plumber I normally use, wasn’t happy with the boiler and wasn’t convinced it had been properly serviced. So, he serviced it and I had a gas certificate valid for 12 months.

Gas certificate and repairs, total cost of £125.

ROI (Return on investment)

Now that I have spent the required money on legal compliance, I can work out the ROI of rental No.5.

With a few other jobs like painting, the total spent after I got the keys was £2000.

ROI:

  • Annual profit /  Total investment
  • Profit per calendar month = Rent – (Mortgage + Management + Maintenance + House insurance) x 12 to get the annual profit
  • Rental No.5 profit = 550 – (175 + 55 + 55 + 25) = 240 profit (we will ignore tax to simplify things)
  • The management is normally 10% of the rental income
  • The maintenance contingency is normally 10% of the rental income

The 240 is now x by 12 to get annual profit of £2880

  • Total investment = Deposit + Legal fees + renovation costs
  • Deposit is £20,000 (25% of £80,000 purchase price)
  • Legal fees where £2,500 (stamp duty, solicitors etc)
  • Renovation work required came to £2000

The total investment came to £24,500

ROI = (2880/24500) x 100 = 11.76%

From property networking over the last few months, it is clear that this isn’t the best ROI. Many investors who are further down the line than me, regularly achieve 20% and above.

Nevertheless, I am looking at rental No. 5 as a win. That 11.76% is better than any interest I would get by keeping money in a high street bank.

Even with the added costs of legal compliance, your ROI is still likely to be high. If you are interested in property investment, learning how to stack the deal is a must.

If you can do some basic calculations, you will quickly identify the interest you will earn. This will help you decide on how much you are willing to bid for a particular property.

 

The current state pension

State pension

What you get from your state pension

It might seem a million miles away. But you need to be aware of what you will get from your state pension.

According to Which, the new state pension is worth £175.20 a week (or £9,110.40 a year).

The rules (as you would expect) are complicated. What you are entitled to depends on your National Insurance contributions and other factors. For more information on your state pension see below:

https://www.which.co.uk/money/pensions-and-retirement/state-pension/your-state-pension-and-benefits/how-much-state-pension-will-i-get-aukgp6n9jkcz

Why bother?

The majority of the people I have met, don’t really have a financial plan in-place. They are all about living for today. Which I totally get. But you need to find some balance.

Living month to month is risky. Relying on 1 source of income is risky. Trust me I know.

I have had long periods out of work. Spent my savings and then went £15,000 into my overdraft. And this was only April 2019. It brings stress and anxiety.

But YOLO (you only live once). When someone tries to talk to you about pensions, please don’t make statements like YOLO.

You might be on good money now and think I will worry about my pension later. You are doing yourself no favours at all with this mindset.

Look at me and learn from my mistakes. Around 4 years ago, I had no plan and was terrible at personal finance.

I had 3 rentals with a total negative equity of approx. £50,000. Not only that, I didn’t have any pension. To be honest, I didn’t even know what a SIPP (self-invested personal pension) was.

What I was focusing on was the money I was earning at the time. I was spending what I was earning and had no financial plan in-place. I was heading for a lot of pain!

Imagine

Imagine the regret in your late 50s. You look back and think you could and should have invested years ago:

https://duffmoney.com/2020/02/07/i-should-have-invested-years-ago/

You have got to your late 50s and have earned decent money. You have become accustomed to a certain lifestyle. Trips to London, nights out with friends and regular holidays in the sun.

The problem is that you have no pension. You are looking at that state pension of £175.20 per week and are worried.

This might lead to chasing money abroad to build your pension pot. 8 weeks on 2 weeks off for example. The last thing you want to be doing is spending time away from your family in your late 50s.

Imagine the pain in your late 60s. You have nothing apart from your state pension. With the cost of living, you are officially poor.

Not only that, you are past your best and can’t get any work. Please don’t do this to your older self.

To do

Have a good look at that state pension. Make sure it’s not your only source of income in your late 60s.

Live for today and plan for tomorrow. Like anything in life, it’s all about balance.

What I want you to know is that I care about you and your financial future. What really matters is that you care!

I have written a book to raise financial awareness. The book Learn the hard way, teach the easy way, is almost complete. Once I am ready to upload it onto Amazon/Kindle, I will let you know how you can get your free copy.

My book will help you avoid the state pension.

Picture:

https://www.gov.uk/government/publications/new-state-pension-resources-for-stakeholders-and-employers/bullet-points-about-state-pension-changes

 

 

 

 

 

 

 

 

 

 

 

RESET your personal finances

RESET is my book of the week

RESET with my book of the week

RESET is a book you have to read. This is if you are interested in personal finance.

Most of the personal finance/self-development books I have read are American. And are written mainly for Americans. RESET, is written for us Brits.

Spend less than you earn and invest the rest. This (I have read) is the foundation of personal finance.

But this might be the hardest part of personal finance. Especially, when you consider the current difficulties imposed by COVID.

What you will learn

The book is broken up into 6 parts:

  • Part I: What matters to you
  • Part II: Going Digital – How to future-proof your career
  • Part III: Declutter your life
  • Part IV: Getting F.U. Money – a Plan
  • Part V: Core Principles to Guide You in Work and Life
  • Part VI: 12 Do’s and 12 Don’t’s

You will learn some skills that will help you in the digital/information age. Information is coming at us thick and fast from our various devices. The more efficient you become with a computer or smartphone the better.

You will be reminded of the dangers of the internet and social media. Smart phones are a brilliant tool that we have come to rely on. But try not to react to every ping. Phones are very addictive, so we need to limit our usage if possible.

You will learn some budgeting skills. This isn’t exciting I know. What is exciting is getting to a point where you can invest.

The author will help you to save 100s of pounds each month. Then he will help you invest it.

He talks about going to Liddle, Aldi and Home Bargains. Or the LAHs as he refers to them – a Liverpool band from the 90s, I think.

Read this book and your financial literacy will massively improve – it’s important!

A case study

There are many ways to save each month. Quite a few are covered in RESET.

We will focus on the LAHs for now. The author claims that by going to the LAHs, his family saved £300 pcm. I don’t doubt it.

There is a new ALDI close to my house. Many of the items are half price compared to TESCO. For example, a decent bottle of red wine is £4 instead of £8 – this will save us a lot!

Let us say the Duffy’s save £300 per month with the LAHs. Let us go back a few years and imagine me and Mrs Duffy are 30.

We are going to put that money into a stocks and shares ISA. Based on research, we can achieve 7% interest per year. This will go up and down, but we are going with a set and forget strategy.

For more information on my set and forget strategy, visit: https://duffmoney.com/2020/03/13/1666/

The Duffy’s want to retire at 60. How much of an impact will that £300 have?

If we invest £300 every month, for 30 years, we will get £368,126.25. This is based on achieving a yearly interest of 7% (average).

We have invested £108,000 over this period. This means that the compound interest would be £260,125.25 – compound interest is worth understanding!

This £368,126.25 will massively help our retirement. It will take serious discipline to invest every month for 30 years. But no one is going to help you in retirement.

We are no longer in the industrial age. Final salary pensions don’t exist. And we need to learn about money.

What RESET has done for me

My financial literacy has improved.

I decided to write a blog because of RESET. This has given me an on-line presence. Writing a blog has made me realise how much I love writing.

My digital skills are improving all the time. This helps me at work to be more efficient. Even with my new digital skills, my head is often up my a**. Without these skills, I would probably need to find a new job.

It added to my index fund knowledge. This helped me choose my set and forget Vanguard index fund.

It made me look at my spending habits differently:

For instance, did you know that the cost of a four-dollar-a-day coffee habit over 20 years is $51,833.79.

This has forced me into stopping my daily Starbucks. I love Starbucks americanos. But I will have to stick to free coffee at work. It will be worth it when I’m in my late 50s.

Overall, RESET had made me realise I can retire early. I might not want to retire but it would be nice to have the choice.

Please get yourself a copy of RESET. We need to learn about money. And we have to look after our own futures.