Property

When I talk to new investors about property and what they hope to achieve more often than not they will refer to “making a million” rather than achieving financial freedom. Nothing wrong with that – for many people, a million quid IS financial freedom.

Why a million? Well it's just a number that people seem to get off on when they talk about making money. It could be any number that you are comfortable with.

We have looked at this model several times over the past few years and I think its success lies in the fact that the strategic plan is relatively simple.

The average football game on television would have roughly ten times the amount of dialogue that I am going to use explaining this strategy.

Many people, no, millions of people, feel a lot more comfortable spending ninety minutes analysing the kicking of a piece of pigskin by twenty two men mincing around a football pitch than they do challenging themselves to achieve a bit more over the next ten years.

OK, making the most of my analogy, let's kick off.

The first and most fundamental question is “can we ever make a million pound if we continue to do our usual forty or fifty hour week "working for the man"?

If we managed to save ten thousand pounds a year, remember that's AFTER tax, it would take us 100 years to get a million pound bank balance.

Just check those numbers before I move on.

You save ten thousand pounds every year, and after 100 years you will have a million quid. Yep - the numbers are definitely right. Clearly we need to save more or we will never get there before we die.

If we could save twenty thousand pounds a year, after tax deductions, it would take us fifty years.

If we could save fifty thousand pounds it would take twenty years.

It isn't working is it?

This isn't me being clever, this just isn't working.

But you are already worth, what, two hundred thousand pounds net and you work for the man, don't you, so I must be wrong.

No, the two hundred grand you already own didn't come from your savings, it came from the fact that you own some property and that property has gone up in value.

And if you talk to the bloke next door, and your best mate, and your uncle, and your aunt Flo, and the guy at the bookies, and that nice lady at the florist, and the bloke that delivers your ….( oh can't do that one because no-one delivers anything these days), what do you discover?

That's right, you discover that the only way anyone has accrued any money is from some property they bought. And don't tell me that you inherited a hundred grand because you only got that when they sold the house.

Now this is all very fine and dandy but the property you are living in isn't really an investment at all.

"Oh yes it is", I hear you say "It's going up in value all the time".

Well, that's as maybe but since you pay the mortgage every month you have to go out to work every day or the building society will come around and explain that you need to get out pronto because part of the house belongs to them.

But maybe lady luck is with you and you never lose your job and you, or a close loved one, is never so ill that you can't go to work so the building society never annoy you.

Fine, but you still can't sell it because where are you going to live?

Oh, you are going to down-size are you?

Nice!

Now that's what I call success. Work your backside off for forty years and then down-size because that's the only way you can get your hands on your filthy money.

And this is your financial plan?

Oh you can take out a bigger loan. Trouble is you are the mug who pays the loan off so now you have got to work for the man even longer.

It is for all these reasons (and a lot more but this is physically and mentally exhausting me so I need to move on), that quite a few of us have been looking at a new idea, still using property as a way of making money but without some of the risks and without some of the downsides.

What we have been doing, and I really do want you to keep this to yourself, is buying what we call a "buy-to-let" and then getting someone else to live in it as a way of paying the mortgage.

It really is dead cute, because we still get the capital gain but we don't have to worry about paying the mortgage each month.

We have also discovered that unlike the property we live in, where the building society kick us out if we can't pay the mortgage, with buy to let, it is us that do the kicking if our tenant suddenly falls on hard times.

Some of us found this heartless and uncaring in the early days but most of us have come to terms with this as the years have passed and the capital gain has racked up.

We have also discovered that over the long term rents invariably rise just as much as the capital gains do and so all in all we have found this a really good way of making money.

Without doubt our biggest problem is that we worry about losing all our gains when the market collapses. So far economists have forecast twenty seven out of the last two recessions and we have spent many a night tossing and turning unnecessarily.

But we have been cautious just in case.

We haven't borrowed too much money.

We have kept a bit on one side to cover voids or bad tenants.

We have taken fixed rate mortgages so we are not caught short, and most important we have bought extremely carefully.

OK, not all our deals have come up trumps but, like a bad haircut, even the bad ones have grown out eventually. We have also spread our risk by buying in different parts of the country and, indeed, in different countries altogether.

So here is our ten-year plan, and again I ask you to keep this to yourself.

Our plan is to acquire a one million pound property portfolio in areas we believe we can achieve a ten per cent increase in capital values, or better, each and every year. Now I know that ten per cent doesn't sound a lot.

And in fact it isn't but a ten per cent increase every year means that due to the power of compound interest our little portfolio will increase in value by one hundred per cent in just seven years giving us a cool one million pound profit.

We could of course call it a seven year plan but being a cautious bunch we allow three years extra in case we don't make our ten per cent.

Will it work over the next ten years?

We really don't know, but what we do know is that it has got a damn sight better chance than we ever have of saving twenty grand every year for the next fifty years.

And do you know what? When the ten years are up, whether we have made a million, or half of that, or double that, we don't have to lift a finger to do the same thing all over again.