If you were born in the early 1970’s or late 1960’s, if you haven’t started to think about it yet, retirement is closer than you think. In fact the number of years you have left to work is less than the number of years you have worked. The basic state pension is worth £115.95 a week for a single person in 2015/16 (or £6,029 a year) and £231.90 a week for a couple (£12,118 a year) as long as your partner has paid their stamp (although there are certain get of jail cards if they haven’t). As a household, could you live on just over £12k a year?
However, could the property you are living in in Morecambe save you from poverty when you reach retirement? You see, a regular income is vital in retirement, and the bricks and mortar you own in Morecambe could provide a way for you to finance life when you retire.
If you are in your 30’s, instead of saddling yourself with bigger and bigger mortgages, going from your first time buyer flat, to a terraced, to the semi and then the large detached house, you could instead keep your terraced or small semi, turning it into buy a buy to let property, let the rent pay the mortgage and then rely on capital growth to provide you with a lump sum when you sell the property and retire. One of the biggest plus points of buy to let is what is known as leverage. Let me explain … 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%. However, 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.
Let me explain how leverage could work for you. If you had bought a Morecambe house in Spring of 1983 for £25,000, using a 75% mortgage and 25% deposit, (meaning your deposit would be £6,250). Today, that Morecambe property would have risen in value to £146,207, a rise of 484.8%. However, when you look at the growth on just your deposit, the rise is even better … instead of 484.8%, we see a rise of 2239% (remembering that the mortgage would have been paid off). However, buy to let is not all about capital growth and in retirement, income is more important than capital growth, as rent is the key to a steady income.
So surely the best strategy is to buy those Morecambe 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 Morecambe? Possibly, but the properties that offer these higher yields (in the order of 6% to 9% per year) tend to be in such areas as Westgate in Morecambe, 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 4% to 5% per year (i.e. lower yields), but in a more up market area such as Broadway. 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.
As regular readers will know, I am happy to share my knowledge and experience of the Morecambe property market, high yields, high capital growth, what to buy, what not to buy and where to buy in the Lancaster and Morecambe areas.
If you’d like to chat about this, pop by our offices or drop me an email at email@example.com.
Thanks for reading