If you want to retire early, here’s how property can help
An investor recently asked me why I thought residential property investment was a better retirement vehicle than the stock market. He had been speaking to a financial advisor, who had advised him to put his £40,000 savings into a pension plan. A friend of his (and a successful Gladfish client) had suggested he give us a call before he made a decision he might later regret. Here are five of the reasons why so many investors have turned away from stocks and are now investing in property to fund their retirement.
Control
When you invest in stocks, you have little to no control of your investment capital. You select what you invest in, but, whether you invest directly or into an investment fund, there is nothing you can do to make your investment perform better. You’re left to hope that the company’s management takes the business decisions needed to increase profits and increase the value of the company’s shares. Or you must hope that the fund’s manager makes good investments, and doesn’t buy shares that fall in price. And even if the company whose shares you have bought does well businesswise, if the market falls out of bed it’s likely that your shares will, too.
When you invest in residential property, you are in control. For example, you could invest in off-plan property and benefit from a potential discount from today’s market value. If the property market continues to rise before completion, you’ll benefit from the higher property value, too. You decide who to rent to, and what upgrades you make to increase rental value. You decide how to manage a buy-to-let property, or if you will hire an investment property management company. With property investment, you have more control over your future.
Cash flow and longevity of investment
You’ll need to live off the cash flow created by your investment. It is provided by dividends on the stocks you own. If the economy goes into recession, companies may reduce the dividends they pay. If this happens, you’ll probably have to sell some shares to make up the shortfall between your income and outgoings. When you do this, you reduce the ability of your shares portfolio to make money in the future. Do this too often, and eventually, your money runs out – this is why you have to estimate when you’re going to die.
With buy-to-let properties, rent is paid every month. You don’t have to guess how long you will live. Also, rent will increase over time – protecting you from inflation. Increasing and never-ending cash flow.
Ease of calculation
When you buy shares, investment bonds, or investment trusts, you have to do a lot of guesswork. For example, you have to guess when you will retire, how long you will live, and what rate of increase your investment will benefit from. You then plug all this information into a retirement calculator, and it will tell you how much you must invest every month to retire when you want to. If you live longer than anticipated, you could run out of money in retirement. If shares don’t rise as fast as you thought, you might have to retire later than hoped. If dividends are lower than estimated, you’ll have a lower income in retirement.
Rental properties provide monthly cash flow, and because of that cash flow, you don’t have to guess any of the above. You figure out how much money you need per month in retirement and you buy enough rental properties to provide that monthly cash flow.
Property investment protects you against inflation
The income you receive in retirement when you have invested in shares depends upon how much in dividends the companies in which you have invested pay. They can cut dividends at any time. That’s no protection against inflation at all.
Rent tends to increase at least with inflation over time. You could also reduce your costs, and if you pay off any mortgages used to invest in property, your cash flow will increase.
You decide when you want to retire
When you invest in shares in a pension fund, you are told when you can take benefits. Though the rules have been relaxed recently, if you want to take your retirement benefits too early, you may have to pay a tax of up to 55%.
When you have invested in property, you could retire as soon as your property portfolio is paying the cash flow you need to retire. Some of the most successful property investors have fully retired from the job in as little as ten years from their first property investment. If you know how many properties you need to retire and set out to achieve this goal, you may be able to do the same.
How many rental properties do you need to retire?
Here’s where things get interesting. If you’ve read my award-winning book, The 3+1 Plan, you’ll know how investing in just three properties could be your key to an adequately funded retirement. However, what if you want to ramp up your retirement income?
The calculation appears easy. Just multiply the average monthly cash flow per property by the number of properties you own in your portfolio, and you have the amount of monthly cash that will be available to you every month.
But here’s something that many investors don’t consider: Before you retire, your cash flow on property investments will rise as you increase your rents. If you save this cash flow, you could use it to either pay down debt or buy more properties. Either way, your cash flow should increase – bringing your retirement date even closer.
Some investors deliberately set out to build a reasonably sized positive cash flow portfolio, and then repay their mortgages one by one using the positive cash flow the portfolio produces. As each mortgage is repaid the cash flow increases, and subsequent mortgage repayments are made faster.
Steve’s story
Steve started investing in property ten years ago, using a £40,000 inheritance as a deposit on his first property. He now owns 12 properties, which produce a gross rental income of £11,000 per month. After all his costs, he nets around £5,000 per month. To date, he has paid off the first three of his buy-to-let mortgages. He could retire today but has decided to continue to live off his earnings as a self-employed electrician and use his cash flow to pay off his remaining mortgages as quickly as possible.
He expects to repay the fourth of his mortgages next year and increase all his rents by 3%. If he achieves this aim, his cash flow will increase by around £900 per month, to £5,900 per month. His current plan (he reviews his property portfolio in detail every year) is for his property portfolio to be clear of debt within 10 to 15 years. At that time, he plans to retire with a projected gross monthly income (after costs) of more than £10,000.
In the meantime, he knows that he could afford to retire at any time, but is quite happy to continue working for a few more years. I’m not surprised really… Steve is only 32.
Start investing for early retirement today
The sooner you start investing in property, the sooner you can start to plan your retirement. Contact one of the Gladfish team today on +44 (0)207 923 6100, and make an appointment to come in and chat about your aspirations, lifestyle goals, and retirement plans. We’ll help you create a plan to get you to the retirement of which others can only dream.
Live with passion,
Brett Alegre-Wood
