Could property in Blackley save you from a Pension blackhole?
Those of us who were born in the 1960's or early part of the 1970s really should be thinking about our pensions as retirement is closer than we think. A frightening but true fact is, the number of years you have left in work is less than the number of years we have worked so far. As is stands at the moment the basic state pension is worth £155.65 a week for a single person in 2016/17 (or £8093 a year) and £237.55 a week for a couple (£12,352 a year) assuming you and your partner have both paid your stamp
Could your family live on just over £12k a year?
Could a property in Blackley maybe save you from pension poverty when you eventually reach your golden years? We are all aware that a regular income is vital in retirement, and the house you own in Blackley could provide a way for you to continue to finance your lifestyle when you retire.
Let me explain how this could work for you.
Assume you bought a house in Blackley during the sunny Spring of 1983 for £21,000, using a 75% mortgage and 25% deposit, (meaning your deposit would be £5,250). Today, that same Blackley property has risen in value to £149,950, a rise of 714% and your mortgage has been paid off. The past 10 years have told us that on average we should expect an average 3% growth on property prices year on year when viewed as a long term investment.
Owning a property can provide a nice lump sum as and when you sell the property, however one of the biggest plus points of buy to let is what is known as leverage. Say you have a deposit of 25% and the value of the property rises by 3% a year, your gains in fact multiply to 12%.
You can invest your 25% deposit, let the tenants rent pay the mortgage and then rely on capital growth to provide you with a lump sum when you sell the property and retire.
The capital released by one 3 bed Blackley property, could fund the deposit for 6 buy to let properties in the M9 area. If you were to look at 6 x 2 bed properties in M9, they would stand you at around £90,000 each, requiring a deposit of £22,500 each. But, the tenants would cover each of the 4 mortgages and earn you around £200/m each in profit a total of £1200/m or £14,400/year.
Looking to the future, if you were to retire in 25 years, you'd have the ongoing benefit of your rental income or a projected lump sum of £1,128,000 in property values (£188,000 each) all with no mortgages
There is always the risk that if property prices drop, 'leverage' can be catastrophic, as losses will also be multiplied. Property values have dropped a number of times in the last 50 years, but they always seem to bounce back ... property must be seen as a long term investment.
It is important to remember that buy to let is not only about capital growth and, as mentioned at the start of this article, in retirement, income is more important than capital growth, and rent is the key to a steady income.
So surely the best strategy is to buy those Blackley properties with the high rents (when compared to the value of the property). These are called high yield properties in the buy to let world because the monthly return is so much greater. So surely they are the best in Blackley? Possibly, but the properties that offer these higher yields (in the order of 8% to 10% per year) tend to be in such areas as Harpurhey or Moston in North Manchester, historically they haven’t offered such good capital growth when compared to the town average, have a higher tendency for void periods and such properties tend to attract tenants that have a greater propensity to be high maintenance.
Therefore, if a high maintenance rental portfolio wasn’t for you, another strategy could be buy a property with relatively smaller rental returns of 6% to 8% per year (i.e. lower yields), but in a more up market area such as Blackley. Properties such as these tend to suffer from less void periods (i.e. when there is no tenant in the property paying you rent) and they historically have had better long term capital growth when compared to the town average.
Every landlord is different and every property is different. All I suggest to you is do your homework.