As I have mentioned before, as part of our ultimate dream, we require a passive income per year of approximately £25,000. In that post, I talk about having enough money in savings to just withdraw money as and when we need it, but recently I keep thinking about different options to make our dream a reality.
I have read some blogs which focus on real estate and, in particular, renting houses to tenants. They talk about the 1% rule and some of them have multiple houses that they rent out, and it has got me thinking about that aspect of income.
I ran some figures through a mortgage calculator online, just to see what they came up with. If I bought a house worth £40,000 and put down a deposit of £10,000 down, then I’d need a mortgage of £30,000. If I got this over 25 years, with unlimited overpayments, then the payment would be around £160 a month. The property could be rented out for approximately £380 a month, which means that each month, there would be a surplus of £190 which over 12 months equates to £2,280. Looking at the start of the post, we want to create an income/having enough in savings to live on £25,000 a year. Judging by those maths, we’d need 11 properties to do that. That suddenly seems like an awful amount of work to do!
But what happens if we look at slightly more expensive properties to begin with? So, I ran the numbers again with this in mind. This time, we’re looking at an £80,000 property with a deposit of £20,000. If this runs for 25 years, then the mortgage payment would be around £300 a month. The property could be rented out for approximately £520 a month, which leaves a surplus of £220 which over 12 months equates to £2,640. Again, using the £25,000 figure as a baseline, we would need 10 properties to do this, which isn’t much less!
There are also lots of things to consider, as I think there are both positives and negatives to do with real estate and renting. The positives are:
– you own a property, which means that (hopefully) once the mortgage is paid off, you get another slice of property ownership.
– income – the best part! You can paid every month (again, hopefully) and this is passive.
– You don’t actually pay the mortgage, as the rental income covers it.
– You can sell the property at a later date for income if necessary.
Negatives:
– Nightmare tenant – this is definitely one of the big things holding me back on this. Either someone who is really dirty, unclean, or who doesn’t pay.
– Property maintenance – another building where things can (and will) go wrong. More expense, especially if something needs doing in an emergency.
– Non-paying tenants – this is also a nightmare thought; you’ve got people living in your property that don’t pay the rent. Then what?
– The tenants cause damage to the property – yes, there’d be the deposit but what happens if it costs more than that to repair?
– Saving for the deposit – it took us quite a while to save for our own house deposit and you’d need to do it again!
So, definitely another avenue to think about in terms of our long term aims. I know that my husband is even less keen on the idea of becoming landlords, but I will keep that option open for now. I keep thinking that maybe, in the very long term, 5 rental properties would be a good income source, but would not be too over the top. Having said that, I can’t even imagine one at this point, never mind five!
Are you a landlord? Any tips on how to avoid nightmare tenants? I’d love to hear from you!
I think it’s a good option to keep around. We’re paying off our mortgage now, but are thinking of investing in rental properties after. We’re not sure we want the hassels that go along with them, so we’re also just thinking some REITs might be a good option.
I am interested in owning rental property someday, but the negatives can be hard to get over! I’ve heard of some horror stories from Brian at Luke 1428, and I know Paula Pant from Afford Anything has invested in many properties. It can be a nice way to get passive income, especially if you have good luck with tenants.
I think the horror stories are hard to ignore – they can be truly horrendous!
We were landlords in our twenties … I had purchased a duplex and lived in half. Later, we bought a house and rented both units. Upkeep and getting renters to pay became a nightmare and we decided to sell. I kind of wish we hadn’t though simply because it would be a nice income now!
The cheapest houses, near to where I could manage them are around 200k for a starter home, buy to let’s need higher deposits and pay higher interest. After reinvesting monies for up keep and maintenance, there’s little left. We top up our work based pensions. Without a mortgage, most retirees, live better than we do now.
Yes, it’d be tricky I think and the money flow might be tight. Something to consider though 🙂
I have a place in Surrey which is cash flowing nicely and with good tenants, but nowhere near the returns you talk about. Where does a £40,000 house rent for £380? Also I’d be worried about maintenance on such a cheap house, changing the roof could be 20% of the house price, meaning 2 years’ rent. That said, I love real estate and it is a great way to leverage a loan to make more money quicker.
In the north there’s some quite good properties on right move at the moment – of course, this could all change!
The thing that is holding me back to rent out some properties are bad tenants. I really don’t want to have to deal with that.
Also, don’t forget property taxes and other sort of taxes that can eat into your profit margins!