USING PROPERTY TO BUILD YOUR PENSION

Table of Contents

2 – YOUR PROFILE

Objective

If you want to build a property pension you need a strategy. A strategy is a method to achieve an objective. So in this scenario the objective is to:

‘have an income sufficient enough to meet all your needs in retirement’

This is what a pension aims to do but often fails. This is why there are so many charities to help pensioners such as Age Concern and Help The Aged. So to achieve this objective you need a strategy! The first stage in constructing a strategy is to really think about the objective. The objective throws up some obvious questions you need to ask yourself. The obvious questions that need answering, why and how to answer them are:

Target Retirement Income at today’s value	£25,000
Timescale	18 years

So an example of someone’s objective would be:

Target Retirement Income at today’s value	£25,000
Timescale	18 years

What’s Needed From You To Achieve Your Objective

Your objective is not going to land in your lap! It requires the following from you:

Time
Money
Acceptance Of Risk

All these factors are correlated. That is to say if you don’t have much money to put in then be prepared to put in more time and accept a higher degree of risk. If you increase the time you put in then you won’t have to put so much money in or accept so much risk. Lets look at exactly whats expected from you.

Time

Your time is needed in the following ways with ways to reduce them:

	Needs From You	Ways To Reduce Your Time Input
Acquisition	You need to find the properties that will deliver you an income! This involves researching suitable areas, looking through the local press, speaking and dealing with agents, visiting prospective properties, arranging finance and whatever else is needed from you to acquire a property.	You can approach a property buying company that will do all this for you based on your criteria. This costs! These companies can charge up to 5% of the purchase price so they can work out expensive.

		I offer this service. If you don’t have the time and require this service then contact me. My details are in the front of the book.
Find a tenant	You have to advertise, do viewings, credit check and take up references of prospective tenants.	Use a letting agent. They charge a fee of around 10%+VAT on the rent collected.
Legal documents	You need to prepare the legal documents to bound all parties or to evict tenants.	Use a letting agent. They charge a fee of around 10%+VAT on the rent collected. Or use my documents detailed in the Appendix.
Rent Collection	You need to arrange for the rent to be collected. This may be face to face collection from the tenant’s doorstep, collection from the benefits office or through your bank.	Use a letting agent. They charge a fee of around 10%+VAT on the rent collected. Or you can use my standing order set up form detailed in the Appendix.
Repairs	You need to either repair the problem or instruct someone to do the repair.	Use a letting agent. They charge a fee of around 10%+VAT on the rent collected.
Tax Return	You need to declare what you’ve earned during the financial year in order to pay tax. This requires accounting for all receipts and expenditure associated with the property.	Use an accountant. Or you can subscribe to www.propertyhotspots.net to manage your finances.

2. Money

You need money to buy a property! Here is why you need money and ways to minimize the amount needed:

	Needs From You	Ways To Reduce The Cost
Initial investment	You need a deposit to buy a property. At a minimum it will be 15% of the purchase price. You will also need the associated fees that come with buying a property. These are valuation fees, solicitor costs, arrangement fees, finder fees, initial void period and essential repairs required before letting the property.	You can borrow the deposit and fund the repayments to the loan from the rent achievable once the property has been bought. This increases your risk due the increased borrowing.

		You can find a property yourself thus eliminating a finders fee to a property agent.

	You need to save for a deposit if you want to buy a property.	You can buy a property in a good state of repair thus avoiding any essential repair costs.


Monthly contribution	You may have to contribute over and above what is received in rent if you get hit for a large repair bill, interest rates rise, the tenant defaults or you wish to pay off the mortgage early.	Take out insurance on tenant default or any large repairs. This means the insurance company pick up the bill. The cost of this is the insurance premium.

		Fix your interest rate so fluctuations are not a concern. Thus if you have chosen a property that returns a rental income in excess of the fixed mortgage payment then you are assured that you do not have to contribute.

		Take out an interest only mortgage. This keeps the mortgage payment at its lowest possible point so the margin between rent and mortgage cost is at its highest.

		Go for a higher yielding property. The higher the yield the higher the profit margin. Please note – the higher the yield the higher the risk!

3. Acceptance Of Risk

In chapter 1 we dealt with the risks in property. There are always risks of owning an asset but there are also benefits! You can mitigate against these risks and they cost but there will always be a residual risk remaining. So you will always have to accept a degree of risk.

You need to decide what risks you are willing to take as this will determine the strategies open to you.

The Relation Between What’s Needed From You & Your Objective

Now these three factors, time, money and acceptance of risk have to bear some relation to your objective.

If your objective is to have a retirement income of £100,000 p.a. at today’s value in 5 years and you earn £20,000 p.a., have no savings, no time and willing to accept a very low level of risk then it won’t happen!
If your objective is to have a retirement income of £100,000 p.a. at today’s value in 5 years and you earn £20,000 p.a., have no savings, willing to contribute, little time and willing to accept a high level of risk then it might happen!
If you wish to earn a retirement income of £20,000 p.a. at today’s value in 15 years and you earn £20,000 p.a., have no savings but the discipline to save, have a bit of time, and willing to accept a medium level of risk then it probably will happen.

So how do know what won’t, might or will happen? This is best explained by looking at two extreme cases and what’s in between.

Target Retirement Income At Today’s Value	Timescale	Time	Money	Risk	Outcome
Double income being earned today	Less than 5 years	None	No savings and not willing to contribute	Acceptance of low level risk	Won’t happen
Equal or more than income being earned today	Greater than 5 years	Have some time	Have some savings and ongoing contribution	Acceptance of medium risk	Might happen
Same as income being earned today	Greater than 15 years	Willing to put time in over all aspects	Has savings and willing to contribute ongoing	Acceptance of medium level of risk	Will happen

So, in my professional opinion, as long as you are willing to earn a retirement income that is what you are earning now, that is 15 years away, have the time, can save and have savings, accept a medium level of risk then it WILL happen.

Deriving Your Profile

Based on the above you should be able to build a profile of yourself and your aims. Your profile should follow the answers to the above prompts. A profile would be made up of the following:

Profile	Range Of Answer	Considerations
Target Retirement Income at today’s value	0.5 – 5 times your actual income now	How much do you want based on today’s value. Do you think you will have expensive tastes in retirement? Do you want a simple life in retirement? Or do you just want what you have now?


Timescale	5 – 30 years	How soon do you want to retire? Is it soon, next decade or next millennium!


TIME	Low/ Medium/ High	Are you willing to be involved in the buying process, rent collection and repairs? Or do you work full-time (and overtime!) and want zero involvement?
MONEY	Low/ Medium/ High	Do you have a deposit? Are you good at saving? Are you willing to contribute month to month? Or do you have no savings and require a monthly profit from the properties?
ACCEPTANCE OF RISK	Low/ Medium/ High	Are you willing to borrow significantly, accept fluctuations in interest rates, take interest only mortgages and go for less desirable properties that yield highly? Or do you want minimal borrowings, fixed rate borrowings, repayment mortgages and nicer properties near your home town?

So a typical profile may be:

Profile	Answer
Target Retirement Income at today’s value	£30,000
Timescale	24 years
TIME	Low
MONEY	Medium
ACCEPTANCE OF RISK	Medium

Based on this profile we can match it to the strategies available. What’s your profile? Take your time to really think about what you want. Is it realistic? Will it be enough? Do you earn enough to save and/or contribute? Can you take a higher level of risk?

Based on your profile we can match a strategy or even a number of strategies based on your profile. Chapter 3 has all the answers.

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