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562: How do I become financially independent?

03-02-2016 team


Financial Independence: The key reason why you are reading this Newsletter because you are keen to increase your personal wealth with a view to becoming financially independent, through property investment. You can then set your own agenda and take control of your life. With this in mind, we thought we would give some guidance and insights into expanding your personal wealth, which we hope you find helpful.



Types of Wealth Creation: There are two key ways to increase wealth – by:


·         Capital value increase – where asset values go up.

·         Positive cash-flow – e.g. making a profit – the higher the better.



Cashflow: Whilst asset prices have risen strongly in the UK for many years, many investors have merely aimed to “break-even” – meaning, their monthly costs such as mortgaging, maintenance, tax and professional fees equal rental and other income from a property. However, when prices are flat or falling, or rental income falls and/or mortgage costs rise, this becomes a very precarious business model – is not sustainable. In fact – it is not a business. A business is commonly described as an entity that makes a profit. So if you don’t make a profit, an accountant would say you have a liability and not a business.


Maximise: With this in mind, taking a disciplined approach, you should aim to maximise your cash-flow and profitability. This is particularly relevant with the new punitive taxes being instigated against buy to let landlords by the government. Maximising profits is commonly done by purchasing high yield rental property with good rental demand, low mortgage costs and low maintenance and service charges. Of course you have to follow the laws, regulations, provide a good service to tenants and be a respectable landlord. If you are very efficient, you will maximise your profits.  


Regenerating Areas: Purchasing property in an “up and coming” area will benefit both the rental income growth and capital value (or asset) growth. So properties close to rail, tube, road and other infra-structure links in areas with lowering crime rates and unemployment, and areas with increasing earned incomes levels (e.g. close to major business service centres) should reduce your risks. An example is purchasing a 2 double bedroom flat within five minutes walk of Stratford station in East London, at say 10% below true market value. The rental yields with two sharing couples is likely to be high and you will probably find void periods are minimal, the area is improving all the time and capital values in the 5-10 year timeframe should rise – probably outperforming the average UK area. Hackney, Whitechapel and Borough also fall into this bracket – areas with good prospects for capital value increases and high rental demand.                


HMOs: To get the highest rental income, you need to consider entering the “Homes of Multiple Occupancy” market. This is purchasing say 5-8 bedroomed houses and large flats – and renting them per room. You need to make sure you have all the relevant authorisation to do this, and get loans from a mortgage company that agrees to such lending. Skipton Building Society are particularly good with this type of property. Your yield, that is – the gross rental income divided by the price you paid for the property, could rise from say 8% for a two bedroom flat to 13% for a home of multiple occupancy. Yields higher than 15% can be found in some parts of northern England and Scotland – albeit the risks of high void periods are probably a bit higher in these areas, because in many cities the populations are not rising very strongly (some are declining), and there is not such a big housing shortage as in the south of England.


Shared Facilities: Bedrooms in houses with shared facilities will become increasingly popular because of the:


·         Increased number of single men – divorced and separated from their partners – the women usually keep the family home if the family has kids.

·         Increased costs of renting one bedroom and studio flats – many single men simply cannot afford £400-600 a month for such UK flats, particularly with recent increases in council taxes, utilities and other taxes.

·         Increasing amount of professional women and men who need to stay mobile for their work – and prefer a lower commitment in getting a room in a house rather than a longer tenancy on a flat – they also might need a “crash pad” for daily working from a city centre, before a weekend commute their family homes in the country. This is in part because commuting is getting more difficult with increasing congestion, traffic jams and slow progress in improving rail links.

·         Increasing numbers of students – who would like to share a large house with other student friends – who have expensive student loans. Most students cannot afford their own studio or flat. After college, they take years paying off their student loans and prefer to stay in low cost rental accommodation to help clear student debits.

·         High number of key workers, clerical and manual workers who cannot purchase their own home because of affordability constraints.

·         The housing crisis means far too few properties are being build – and the population is booming especially in London – meaning more people need to live in fewer properties.


Community: Providing such accommodation can help communities as well as being profitable for landlords – the key is to provide good quality, safe and secure accommodation for tenants. Also, be careful which tenants you allow into the house – you have a duty to the other tenants to make sure troublesome tenants do not live in their home. Of course, be prepared that such property can be more management intensive – either for yourself or your letting agent. You can normally persuade a smaller letting agent to take on such property – but the fees are likely to be higher reflecting perceived (and probably actual) greater risk and time/management required.


Be Close To Your Properties: Also consider that - for example in the USA - about 90% of millionaires live within 10 miles of where their business is located. This general model is also true for property investment. The bulk of the best investments are made locally to where you live for the following reasons:


·         You have the option to manage the property yourself from short range – thereby achieving savings of some 15-20% of rental income per year (if you have the time and management system to do this)

·         You will be able to study local papers and get a better feeling for the local market, so when a bargain comes up – you can react quickly and snap it up (or monitor before putting in a “low-ball offer”).

·         You will have the inside track with local estate agents and contractors if you develop good relationships with them

·         You will be able to spot opportunities – e.g. land deals, empty properties, up and coming ex-council property, areas with improving communications, lower crime and areas with improving rental demand.

·         You can easily attend local auctions and view properties quickly and easily when a good opportunity arises.


Lower Risk: All the above criteria make investment in your local area lower risk. In essence, wherever you live, you should be able to turn a profit by selecting the correct micro-area, type of property, investment opportunity and price you would like to bid.


Managing Properties: If you have an investment portfolio which focuses on a particular area, when you come to retire, you might find it easier to manage either yourself or by out-sourcing to one or two local letting agents. The downside of this focused strategy is:


·         You will miss opportunities in better improving/changing areas in other parts of the country or world

·         Your portfolio will be less balanced – and hence if the market in your local area is impacted by a closure of a large employer or an increase in crime rates for instance, it leaves you more exposed.


This brings me onto general planning and goal setting. We advise the following:


·         Describe what you would like to be doing in ten years time – how much money you would like to have made?

·         Then calculate how much cash-flow and how much asset value you would like to have achieved.

·         Now describe how you are going to get there – what actions do you need to take to achieve your goal?


Growth Plan: You will find it fascinating when you then started doing a financial spreadsheet – calculating how many properties you need to buy a year and how much rental income they would need to produce. You will rapidly come to the conclusion that “cash-flow is king” (as they always say) – the more cash or income you make, the faster you will be able to buy the next property and then the more cash-flow you will earn on top. The numbers speak for themselves – try it and see. The curve does NOT rise like a straight line, instead it goes up exponentially. So the higher the income, the more income you will make in the future because you will be able to buy more high income properties. And it won’t even matter too much if the house prices fall – in some respects, this will help since you will be able to purchase property at lower prices and get an even higher yield and earned income. As long as the local and/or national economy is doing well, you should benefit as well.


Considerations: You might have noticed I have restricted this discussion to the local market (UK as an example) so far. International property investment is very different – and you need to consider these issues before entering:


·         Quality and reliability of tax and legal issues and advice

·         Rental void periods – for holiday letting or for year round letting 

·         Currency risks

·         Interest rate risks

·         How well you know the rental and sales market

·         Political stability

·         Improvements in communications – certainty

·         Local economy – how robust is it?

·         Potential off-plan oversupply in rental sector

·         Popularity of second hand or older property in the country

·         Commission, fees and charges

·         Local demographics and future prospects for international market development

·         Is it a holiday home, retirement home or true (pure) investment you are making?


Most people believe the rewards – mainly increasing asset values – out-strip the risks. But please note, if you buy off plan in Spain for instance, you need to see a capital value of at least 13% to pay for taxes and fees – then find a buyer to sell on to. You need to be weary of investing in far off places – where you will have little control and you may also struggle if the UK leaves the European Union. Long term, places like Greece and Italy have declining populations particularly in rural areas, so you will likely find depressed rental demand and capital value increase.


Vision and Strategy: The final point I think one should consider is – your vision and exit strategy. Do you want to hold the properties well into retirement – manage them or outsource and pull on the earned passive income? Or do you want to sell up one day and cash in. If you wish to sell up one day, you need to consider tax planning up-front. If you sell up, but have mortgaged up to gearing of say 80%, you might find a capital gains tax bill of 30-40% means you cannot afford to sell (it would make you bankrupt!).  I understand for instance if you move to Spain before exchanging contract on your UK investment property, you will not be liable for capital gains tax in the UK. In Spain, they have different rules and you might find your tax liability reduced significantly if you migrate at the right time (note, you will not be able to spend more than 90 days a year in the UK if you are resident in Spain for tax purposes). These tax planning considerations are important to think of well in advance, otherwise you might get an unexpected bill from the Inland Revenue that is high enough to fold your business. You need to take it very seriously and of course abide by the law.


Financial Independence - is not just about making serious money (value and income) from property investment – its more holistic than that.


Some key principles to financial independence are:


Stay alive! You cannot increase you earned income and asset value without being alive – so staying healthy and leading a healthy existence will help your family (and yourself of course!). Do you have a duty to your family – yes!  If you increase your personal wealth by say 20% a year (this is of course compounded), and you live for another 30 years instead of 15 years – your ending family wealth will be 15.4 times more! So healthy eating, lots of exercise and positive thinking is an economic family concern! Avoid physical accidents that will disable you – set you back – and look after yourself mentally and physically – you will be more robust in a high stress property investment environment. It pays to keep healthy and fit!


Stay together! If you are a male or female, do not get divorced – at best this will commonly reduce your immediate value by 20-40%. If you are a woman, you will miss out big time on the value increase and income of your husband in future years, unless you are the property investor and earner and he is the spender! Happily married families are normally far more wealthy than divorcees. If your marriage is in trouble – try and repair the damage quickly – not only for any kids, but because it can lead to financial ruin!


State a goal, plan and action! Be action focussed and plan to get wealthy. If you do not write down your financial and personal goals and discuss these with your partner, the chance of achieving financial independence and high net worth is dramatically reduced. You need to write it down, make a commitment to yourself, or to yourself and your partner, and then action the plan to achieve your goal. No pain, no gain as they say. The plan should of course include staying married (if you are married), staying healthy as well as (probably?) making serious money!


We hope this Special Report has been helpful. If you have any queries, please contact us on  at



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