Let’s start from the beginning. Last week I was watching “Loose Women” on TV. The few times I’d flipped past the show whilst I perused what was on, I had perceived it to be an intellectually upmarket show where women discuss pertinent issues of the day. In fact, I watched it for ten minutes and had to change the channel because I couldn’t take the sheer ridiculousness of some of the things that were being said.
One lady boasted proudly that she has never bought an investment property and owned only the property she lived in. She thought buying property was greedy evidenced by the property bubble and the credit crunch.
It may have been the same lady, perhaps not, who stated that she’d grown up on a council estate but because her mother was quite an "aspirational" woman she opted to buy when Thatcher brought in the right-to-buy council housing. She went on to argue that her mother had disadvantaged herself in doing so because as a property owner she now can’t get as much out of the government. I think this was the point when I switched screens.
Fact: most western governments are spending more than they collect in tax each year. It naturally follows that their deficit is widening with every passing year.
The government cannot afford to pay the pensions that it thought it would be able to. Something’s got to give. To make up the difference two things will almost certainly happen:
- They will increase the state retirement age. I personally see it going as high as 70 if enough people start living to 85/90.
- They will cut pension entitlements not only going forward but retrospectively. What does this mean? Those that are in retirement are probably safe but if you’re still working it is more than likely that they will change your pension formula. Subtle changes like adjusting the inflation index from RPI to CPI can reduce pension payments significantly.
I think if well planned, property is one of the best investments for retirement. However, you have to 1) start young and 2) have a portfolio. Paying off the property you live in is part of the plan but because you live in it, it can be hard to earn an income out of it at the same time. If you’re happy to rent rooms out in your own home then obviously that’s great. Most people prefer not to.
WHY DO I THINK PROPERTY IS SO GREAT?
I paid a 5% deposit on the first property I ever bought. This means I borrowed 19 times what I put in. There is no other situation in which a Jane Average such as myself could get that kind of money. That was 6-years ago when I was 22. A good chunk has been paid down already just by making small monthly payments each month.
The average mortgage is 25 years long. If you plan to completely retire at 60 or 65 it means that any property purchased before the age of 35/40 could feasibly be fully or at least mostly repaid.
Property income is taxable but the interest payments and any reasonable costs e.g. estate agent fees and insurance can be deducted before tax. If you’re being taxed at 40% you’ll still be receiving 60% of the profit.
For example, if after interest and other costs you have a £500 profit, the government gets £200, you get £300 which you can use to retire the mortgage or use in any other way you see fit.
Regular repayments of the mortgage using this unearned income mean that over a 25 to 30–year period you could have a solid asset base built almost entirely of other people's money.
If you manage to build up a property portfolio of say four houses by the age of 40, excluding the one you live in, it’s possible for those mortgages to be fully repaid or mostly repaid by age 60-65. If those four properties can be rented out at £500 each, that is an income of £2,000 per month. This is enough for an old couple to live on comfortably. Even with out a capital gain, a pension is insured.
By this point, your home will be fully paid down too so the main expenses are food and utilities (gas, electricity, water, insurances, phone and internet) with plenty left over for a holiday or two.
In addition, the property portfolio will be (almost) 100% equity so you could decide to sell up and put that money to better use. You’re financially flexible.
The interest-only view
I know some people who subscribe to the view that you should never repay a home, just get an interest only mortgage and own the house for capital gains. I have two views on this:
- Owning where you live is emotionally rewarding, it provides security and is the utimtate freedom.
- I subscribe to Robert Kiyosaki’s cash flow view which demonstrates that to gain financial freedom and liquidity, you need to earn more or reduce expenses, given mortgage payments or rent take the largest component of income it’s a good expense to get rid of.
Some of my friends laugh at my shopping at Primark but I tell them, less now for more later…this is my mantra, join me so in retirement we can all be sun bathing in the Bahamas sipping on piña coladas with not a financial problem casting a shadow over our retirement.
If you haven't read Rich Dad, Poor Dad already. Please do get it, it help me to form some of my views on money. Don't just read it, absorb it and digest it. Links to Amazon.com and .co.uk below.
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