"We are all clicking away online 24/7 furiously buying Le Creuset pans and Ninja air fryers like our existence depends upon them"
Let’s not beat about the bush here, January and February must surely rank as the most god-awful months of the year, am I right?
The party season is over and has been replaced by the sober, cold, and drizzly days of winter, threatening to upend even the most positive of souls. They should be made illegal. That’s right, throw them into jail and let us go from December straight to March, please.
As January expires with the sending of funds to the HMRC, I creak into February presented with a small cake and a gift by my wife and children. This annual ritual serves only to remind me that I am indeed another year closer to the grave, adding to the drudgery of these terrible months.
At the same time, the Christmas credit card bill lands on the doorstep and this year it neatly combines itself with higher interest rates and large fuel bills, completing a holy trinity of misery for many people who are already just scraping along. Battered Brits have only been back to work a few weeks and are undoubtedly already yearning for their next holiday.
Getting more downtime
The single greatest achievement of the last two years for me was this: since I exited my company to concentrate on family, my kids now come to me as much as they came to my wife for cuddles, snacks, help with reading or anything else they might need. Prior to me being around 24/7, they would head to Mum by default while looking at me with suspicion, despite my open arms and well-meaning coochie-coos.
Had I not had a passive income, I would not have been able to step back from my job, and I am not sure that newfound connection with my kids would have ever happened so naturally.
Creating passive income
This brings me neatly to property investment and the benefits thereof. Getting more of that elusive family time requires you to be able to earn money passively. It is only possible with a razor-sharp focus on saving money to build investments while keeping down your monthly costs. Not easy right?
That is because we’ve all been spun a bit of a yarn our whole lives. We’ve all been taught that working hard, day in, and day out for life is how you earn money. And what should we do with it? Spend it of course.
It is what keeps the economy moving. Car finance, credit cards, plastic stuff from China, big screen TVs, sparkly things that catch your eye and so on. Spend it all, go on. Then get back to work on Monday and earn the money to pay for it, sucker. Get a promotion, earn more money, trade in the car for a bigger one, and start looking for a house with more room too, because we are going to need it to store all that useless crap we keep buying. It’s called the rat race my friend, and the chances are you are stuck in the middle of it.
Crap you don’t need
It is a sad fact that we are all so materialistic today. Just look at that Christmas credit card bill. Ask a kid what they had for Christmas and the chances are that they will cock their head and look at you for a while before finally remembering one or two of the fifty items delivered overnight by the big fat man with the long white beard. Conversely, you will know all of them because you can log in and look at your statement.
It is not just the kids though. We are all clicking away online 24/7 furiously buying Le Creuset pans and Ninja air fryers like our existence depends upon them. It’s all crap that we just do not need, and we do it to give ourselves a little dopamine hit that provides momentary relief from the greyness of the season.
Here is an idea – why don’t we stop buying crap and start investing?
Most people will spend an entire lifetime working their fingers to the bone to be able to continue purchasing stuff - liabilities. Just head up into your attic and then to your garage and shed. Take a calculator with you and add up the cost of all that stuff you longer use, the items you will soon be throwing out to make way for a truckload of new things you do not need. Bezos has a lot to answer for. Just imagine if we only bought the things that we needed and invested all the spare money?
Look at rich people and see how they do it. Firstly, most of them do not ‘work’ a day job. Secondly, they rarely buy anything that does not make them money. Finally, and most importantly, they spend their money and time accumulating assets, not liabilities. They prefer ones that generate income. Not only do they increase in value over time, but they also spit out cash monthly, quarterly, or annually, forever.
Rich people teach their kids the importance of accumulating incoming-earning assets and compounding the results, not endlessly purchasing liabilities. This difference in the way their children are educated about money, and how to use it, is why the rich get richer and the poor get poorer.
But I love my job I hear you say. Well done. Have you considered how long you would be able to survive if you could not work? A week? A month, 6 months? You feel indestructible. Good for you. What happens if one of your family becomes sick and needs you full-time. You cannot work and you have little to no savings to fall back on. How will you keep your family in the way they are accustomed to living? You need to start building passive income my friend. Today.
Get ‘match-fit’
Getting onto the rental property ladder will require capital. There are no ifs or buts about it. There are many ways to come by capital. You can save it, borrow it, marry it, inherit it or steal it. Do not do the latter, please. But if you can get/have a deposit together, you can buy a ticket and get on board the good ship ‘Buy to Let.’ But first, you must reduce your costs. You must become financially ‘match fit.’ No point in going to the trouble of building investments to throw it all away again.
Know exactly what is leaving your bank account and on what day. Renegotiate every contract you have, utilities, phones, Sky, etc.. Pay off any outstanding short-term debt like credit and store cards etc. Sell your bread maker, air fryer and sound system.
Trade in your gas guzzler for an electric car and get rid of unwanted jewellery. eBay the things you and your kids no longer need. Do whatever you need to do to get match fit. Once you are free of irrelevant clutter and have fewer outgoings, you will feel good, and you will be ready to save and invest your money wisely.
How many properties will you need? It depends on how much income you need to replace. Around half of all UK landlords have only one rental property. But that will not be enough. Acquiring more will take time and additional capital. Be patient because it will not happen quickly. You cannot build a pension pot overnight and you will not build a property portfolio overnight either. Remember what your grandma told you - all good things come to those who wait.
The price of comfort
According to Google, to live comfortably in the UK with some financial freedom and luxuries, a family of four with two children needs £67,554. You may earn a lot more or a lot less than that. In 2022, the average UK adult income was £31,500 so you can draw your own conclusions. The great part about getting match fit and reducing those monthly outgoings is that you need to replace less income.
When I buy an investment property, I always aim for £500 net profit per month. That is after I have accounted for the mortgage, maintenance costs and insurance. Quite often it is a lot more than that. Any less and I walk away from the deal. There will be 2 more just around the corner. According to my figures then, the average person would need to purchase 5 properties over a period to ensure they can one day replace their existing income.
Personally, I only invest in single-let properties because I want my portfolio to be as passive as possible. It means I can be available for family at any time, travel, cycle, go to the gym and not have to think about my business for any more than a few hours a week. I run everything from just an iPhone.
But that is my format. If you want more cash flow, and you want to be more involved, investigate HMO or holiday-let properties as you could earn 2 or 3 times more. But be prepared to put in the time to manage lots of people coming and going. You may be able to replace your earned income faster though, as you will get more return for your capital. I would certainly recommend seeing what works for you before you take the plunge.
On a final note, remember that when you buy an investment property, you are in control. It is the pension fund that pays today. You do the challenging work once and aside from a little maintenance once or twice a year, you will get paid every month forever.
So, stop buying crap you do not need and instead start investing today, and then tell me all about it.
Matt Cottle offers Property Investment Advice to new and fledgling investors. Get in touch here
