Editor’s note: This is a guest post by my good friend Lesley Negus who lives with her husband in a friendly little market town in East Sussex. She gardens sporadically, cooks constantly, reads everything, runs sometimes, and continues to run her business. Having started life dirt poor, she now also writes about eating fantastically frugal food at ThriftyLesley.com. Lesley and her husband built an impressive property portfolio despite being told ‘people like us don’t do that.’ Here is how they started, in Lesley’s words.
Do you have some spare cash?
A couple of years ago, you may have been tempted to travel the world, throw a lavish party or go on a shopping spree. Not today – we are still grounded while firefighting a health pandemic.
Here is an idea, though: why don’t you use your spare cash to start a journey that will change your life. We did, and here is our story.
In the 1990s, I worked as a project manager in IT, and although I loved my job, I was looking for another way of life. I’d been doing it for 15 years; the work was intense and the hours long. Life had pretty much become all work and not much else.
A valuable perk
My job had a valuable perk of a subsidised mortgage of 5%, at a time when mortgage rates had hovered around 13-14% for a while. We were using the subsidy to pay down our mortgage, but I felt we could do more with the opportunity. So, we decided that we’d like to build our own house.
Much research followed, lots of trips to building plots that turned out to be disappointing – a motorway at the bottom of the garden; on an industrial estate; absolutely minute; on a steep slope, or just plain too expensive. We could have swapped our four-bed ex-council house for a building plot. Not feasible.
Hmm, a rethink became necessary.
That life-changing article
In early 1996, I read an article in The Times newspaper about a young woman who lived in a studio flat in London and was ready to move to a 1-bedroom apartment. This was in the depths of a recession, and she was having trouble selling the studio as that type of flat tends to fall further and faster in value than other types, and the banks become reluctant to lend on them.
The young woman in the newspaper article persuaded her bank to allow her to rent out her studio until she could sell it and to lend her the money to buy the flat she wanted to live in.
Now, this was a HUGE light bulb moment for me and the moment my life began to change.
I thought that means someone else is buying that flat for her. My Systems Analysis brain kicked in, and I wondered why I wasn’t reading about this in newspapers’ investment sections. Why hadn’t I heard of it before? Was it because of what could go wrong?
Research, research, research
Immediate research began. I started to visit letting agents who said: ‘Oh yes, we’ve got several people who do that.’ Estate agents said: ‘Oh yes, we could find you lots of suitable properties.’
The more I researched and did the maths, the less I could find wrong with it. This stage is critical in any business opportunity. You need to find the Strengths, Weaknesses, Opportunities, and Threats. Without spending so much time that you end up not taking any action, even if that action is to decide this isn’t for you.
The reason such an opportunity wasn’t in the press was that it was about 18 months before buy-to-let mortgages were first available, and I had stumbled across it at a perfect time.
In March 1997, we took the plunge and bought a studio flat on a development where the builder had got tired of letting them out himself and was selling them off. That first flat cost £27,500.
It was a terrifying moment as I thought, right, now I’m going to find out why people aren’t doing this. And, of course, that didn’t happen. Buy-To-Let began to take off, and before long, we were flying.
We had bought two more properties on the same development within the year and run out of deposit money. There weren’t many banks that would lend on a studio at all, and not many doing buy to let mortgages anyway.
We had painted and refreshed the flats ourselves, working evenings and weekends. We were replacing the tired-looking kitchens and bathrooms with contemporary, nice-looking but inexpensive units and painting in a neutral colour.
We did all the letting work ourselves, too, getting to know our business, what potential tenants were looking for, what they liked, what they didn’t like, and looking after them once they lived there.
We discovered, not surprisingly, that if you look after people and treat them like human beings, they tend to behave decently back. We must be doing something right as many tenants have been with us for ten years or more.
And now we hit the limit that most landlords find – how to get the next deposit.
We were both earning a reasonable salary and started to save every last penny we could scrape together for that purpose. The budget was trimmed drastically, which wasn’t a hardship because I was used to this – I had been broke many times before. Our shared future was more important to us than anything else.
We still lived a wonderful life, but with a strong focus.
The property market was soaring by now, so the strategy that we decided on was an interest-only mortgage, which we would repay much later. As each property rose in value, it would be re-mortgaged, and the excess released used to plough back into more purchases.
After 18 months, we learned enough, so our business and strategy changed and firmed up. Letting out property put us in a triple-win position.
Win 1. Over the long term, the value of the property would increase. It may fluctuate from year to year, sometimes going down, but over time, value has increased for at least the last 150 years, except in times of war.
Long-term interest rates were a concern. We factored in a rate of 8% on the purchase. As our income increased, we made sure to overpay mortgages (they were interest-only at the time, so we paid off £100 or so as soon as we were able. That lowered our Loan to Value ratio (LTV) and made our position more secure.
Win 2. The income in rental received would broadly keep pace with inflation. We wanted to achieve an income we could live on, which didn’t reduce its value over time.
Win 3. If it all went pear-shaped, we had valuable assets that could be sold.
So, we now owned an asset that was increasing in value over time, produced an income stream that could replace our salaries, and could be sold if necessary.
Three years to business success
It felt like a very long time at the time, exhausting trying to cover all the jobs that needed doing while learning this new business and holding down a salaried position. But within three years, by 2001, we had built up a property portfolio to allow us both to leave our jobs and concentrate on the business.
We bought and sold fixer-upper properties for the next few years, refreshing and repairing to increase the value. This was to build up capital to help with the deposits for properties to rent out and keep long term.
We bought three more flats at the initial development, did them up, and sold them on. I would have loved to have been able to afford to keep those; they remain very popular.
I made a few mistakes along the way. Some quite expensive and painful ones – eek.
But here we are, 25 years later, having lived on the rental income for 20+ years. The portfolio is worth more than I could ever have imagined, with an LTV of just over 30% and a net income approaching six figures.
We’re now in the process of executing the next stage of the plan. As interest-only mortgages are coming to an end, selling the ones earmarked for sale and paying off mortgages of those marked for long-term retention with the proceeds, as well as paying off capital each month.
Can you still change your life with buy to let?
The short answer is yes, you can. The right time to buy property is always now; you just do different things depending on where in the investment cycle you happen to be.
Laws and regulations are changing all the time for landlords, and it’s a bit harder now, I think, but still very doable.
You need to be a person who can live with a certain amount of risk; it’s not for everyone.
Once people discover what we do, I’m often asked how to do it. The first thing I say back is what you would like to achieve? Do you want to live on the income, build an income for retirement, have something to pass on to your children, or provide a living for family members with relevant practical skills?
There are as many different ways as there are people doing it, and deciding where you want to end up is an essential part of the setup.
If you want to pass a living onto family members, you might want to use a limited company to hold the properties. Whereas if you want maximum flexibility, which we decided on, you keep them in your names.
Got no spare cash?
If I were in that position, I would go to landlord networking events and make contacts. You can learn an enormous amount at these events. Many people would be very interested in some kind of profit share – they provide the funds, you do all the work for a fixer-upper, and you share the profit.
Or find a property that is a great deal and sell on the information.
Or look into buying at auction – do your research; there is always a reason it’s at auction. We bought one that way, and I thought I knew why – a substantial retaining wall falling into woodland below. But it wasn’t that. It was because the lease didn’t oblige the freeholder to use any insurance funds to rebuild in the unlikely event that a plane landed on top of the building and demolished it. It just needed a slight change in the lease, but surveyors were valuing it at £0, six sales had fallen through, and the owner went to auction.
It would also be beneficial to join a landlords association. For £75 a year, you can learn all about the ins and outs, find out about networking events, etc.