How would you achieve positive passive income with £150,000 and a 1 bed property?

[zockedi]

Due to a bereavement I am set to receive £150,000 as gift from my mother who has inherited some money.

I feel incredibly lucky and want to make the most of this opportunity; we are not a family that tends to have much money.

I also feel incredibly stupid because I have this windfall and seem utterly unable to turn it into a positive cashflow.

I currently own and live in a South London 1 bed property worth £360,000 (I had it valued). I still have £107,000 left to pay on the mortgage and have a fixed rate mortgage (ends in 3 years) where I pay £495 per month.

I am 38 and have an extremely stressful job as a IT contractor (think 12-14 hour days) and would love to own a property portfolio so I can generate passive income and do something else with my life.

I think buying a buy-to-let in London makes sense because the shortage of housing in London means it would be less likely to stand empty than other parts of the UK. I also know the different boroughs of London well (good and bad) which helps make it easier to decide on which area is one that tenants would like to live in.

I had planned to pay off my home mortgage with the £100,000 and a bit of my own money, and then rent out that property - and use the £50,000 as a deposit to buy a new home for myself.

However, although this sounds sensible - is it? The kind of property I want to live in (circa 550 square foot in a nice area of South London, e.g. Dulwich) costs £425,000. A £50,000 deposit would result in a sizeable mortgage payment each month of circa £2000.

However I'd also be renting out my current home, and judging by similar properties in my area, renting that out would get me £1200 per month. So, my mortgage would be paid off and I'd be paying £800 p/m rather than achieving a boost in income. And that's not including repairs or vacant periods.

I can easily afford it if I continue as a contractor but I don't think it will help me to achieve my goal of being financially free. And I am not confident that this is the best use of the money - the best use is to make the money make more money, right?

(I know I'm being simplistic, that's why I need your help.)

So then I started thinking - what if I didn't pay off my mortgage. What if I bought TWO properties in a cheaper area that is still quite decent, like Beckenham? There are nice two bedrooms on the market for £350,000 so it's not unreasonable to be able to get an offer accepted at £330,000. Based on a mortgage rate of 3.90% (using Rightmove's calculator) would mean each of those two properties would cost me £1300 in mortgage repayments, a total of £2600 in costs per month. My research shows me that circa £1300 is also what they tend to rent for.

So, with renting out my current home, and renting out a Beckenham property I would be making £2500 per month, from that money I would need to pay my home mortgage of £495 (let's call it £500) AND the mortgage for two Beckenham properties (one of which I would live in) each costing £1300 (total of £2600) resulting in a cashflow of MINUS £600 per month.

So, that seems like the better option. But it seems riskier. It assumes I will rent out both properties, It assumes that repairs will be small. Let's face it, it will probably end up MINUS £1000 p/m all things considered, and while I can afford that I don't know if I'm doing the right thing. Of course half of it will be lost to taxes anyway!

I feel like I should be able to achieve a POSITIVE cashflow out of this situation. Another person would be able to, but I haven't figured it out. I don't want to squander this money. Any advice gratefully appreciated.

I am not a fan of flipping properties - I prefer steady passive income. If I flip a property what could I buy with it? Well, just another property of equal value. Plus, post Brexit I feel that house prices will continue their decline.

 

[Gordon - Commercial Finance]

Whatever you do, don't buy in London.
What you're looking to do, Manchester is probably more well suited.

Don't pay off your mortgage, buy two or three places in Manchester (or somewhere), and rent out your London place and find a place to live that you can rent for a similar amount as what your current mortgage is.

 

[Mr D]

Positive passive income?
Cash into investment, property rented out. There you go, positive passive income.

 

[dan19900]

Rental yields are low in London, if you can cover the mortgage payments with the rent then you're doing well.
As above if you want positive cashflow then it's better to rent in a cheaper area.

 

[zockedi]

It's true that rental yields are low in London, but my worry is that in other areas there will be long periods of vacancy.

 

[Mr D]

It's true that rental yields are low in London, but my worry is that in other areas there will be long periods of vacancy.

Don't have to be - people look for properties in places other than London.

 

[Gordon - Commercial Finance]

It's true that rental yields are low in London, but my worry is that in other areas there will be long periods of vacancy.

That's a bit of a myth really. I've been a landlord since I turned 18 and I have always found without exception that periods of vacancy come in the flats in cities that I owned. I had a number of houses in rural areas which were significantly cheaper than the flats in cities, and yet rented at a premium, and with no vacancy, because there isn't a surplus of supply.

If you think about it, you've got a flat in London to rent, but there are a million other flats available to rent in London.
Put up a house to rent in a small town or a wee village, its the only one available and there are still people needing a place to stay. They have notifications set up on Rightmove and as soon as you list they get an email and are on the phone to the estate agent as soon as they open.

 

[zockedi]

I guess my assumption is based partly on the fact that I used to rent out a room in my South London home and was always able to immediately get a tenant and had to turn a lot of people away, despite renting it out for the top price end for that area.

Because I was renting out the living room as a bedroom there was only a shared kitchen and bathroom - yet people were very, very keen. I really got the sense that there must be an urgent need for rooms to rent in South London from those experiences.

I hear what you're saying, however. Is there any way I can check which rural areas are likely to rent out easily? Cambridgeshire is considered desirable but it is such a student town and I feel that a professional person/couple would be more likely to treat the property well - and have the money to pay the bills.

Everywhere outside of London feels like a risk unless there is some way of determining which areas have a higher amount of people looking for a rental than those offering one.

 

[UrbanRetail]

@Gordon - Commercial Finance do you use a management company for your properties?

 

[Jamie Monumental]

Have you considered turning it into a FHL? I found a useful article but am not able to share a link!

 

[Gordon - Commercial Finance]

I guess my assumption is based partly on the fact that I used to rent out a room in my South London home and was always able to immediately get a tenant and had to turn a lot of people away, despite renting it out for the top price end for that area.

Because I was renting out the living room as a bedroom there was only a shared kitchen and bathroom - yet people were very, very keen. I really got the sense that there must be an urgent need for rooms to rent in South London from those experiences.

I hear what you're saying, however. Is there any way I can check which rural areas are likely to rent out easily? Cambridgeshire is considered desirable but it is such a student town and I feel that a professional person/couple would be more likely to treat the property well - and have the money to pay the bills.

Everywhere outside of London feels like a risk unless there is some way of determining which areas have a higher amount of people looking for a rental than those offering one.

Look at an area and see if there are places available. There is always a demand for rental property everywhere, so if there's a lack of supply, you will have good liquidity.
Another way is before you buy any place, call local letting agents and ask what they need, what they're short of. They will tell you straight away that they have people lined up waiting for 2 bed semis or whatever.

 

[Gordon - Commercial Finance]

@Gordon - Commercial Finance do you use a management company for your properties?

I've actually just sold all of my rental property, but yes I always had a management company. I did one rental self-managed in the early days and vowed never again. Getting calls at 9pm on a Saturday about a leaking washing machine is not something I want to deal with again.

 

[UrbanRetail]

I did one rental self-managed in the early days and vowed never again. Getting calls at 9pm on a Saturday about a leaking washing machine is not something I want to deal with again.

I'm currently looking at property in Largs and toiling with self-managing to cut costs, but perhaps I need to reassess.

 

[zockedi]

Look at an area and see if there are places available. There is always a demand for rental property everywhere, so if there's a lack of supply, you will have good liquidity.
Another way is before you buy any place, call local letting agents and ask what they need, what they're short of. They will tell you straight away that they have people lined up waiting for 2 bed semis or whatever.

That is a fantastic idea. I will call local letting agencies and check with them. I don't know why I didn't think of that. Thank you so much.

 

[Gordon - Commercial Finance]

I'm currently looking at property in Largs and toiling with self-managing to cut costs, but perhaps I need to reassess.

They don't do much for their money, but their shop has opening hours. Its a call screening service basically.

 

[Financial-Modeller]

A few thoughts, none of which should be construed as Financial Advice:
Firstly, you have forgotten to include tax in your original note. Assuming you buy personally rather than through an SPV, you will be paying tax on that rental income.
Secondly you need to be a bit more specific about what you want to do and where you want to do it. Do you want to earn sufficient passive income to give up work, and live in a cheaper location, or do you expect to continue living and working in London?
Third, do you have a pension? Depending on your tax situation, employment status etc, and on the advice of your accountant, putting some or all of the money into a SIPP could be the best investment that you could make, but you would have to wait until you're 55 (under current rules) to spend it.
Fourthly, forget Buy-to-Let. Many of the attractions of it no longer exist for a small investor with a small portfolio.

Finally, if you particularly want to increase your exposure to London property - and I would recommend that you consider diversifying into other asset classes - just buy shares in one of the many large listed property companies or REITS. They pay our rental income as dividends, they will manage the portfolio more cost-effectively than you will, and if you use an ISA, your returns will be tax-free. You can invest GBP20k before 5th April and GBP20k just after and then GBP20k annually.

 

[jrwatson]

Make sure to stay away from London. Go or manchester.