Planning for the next 5 years - at 30 y/o

[jaymsw]

Hi all,

Wanted to get some different perspectives on financial planning for my next move. I'm not a big earner and unlikely to earn substantially more than I do now unless I have a major career change.

I live in London and own a flat outright worth circa £600k (early inheritance), and co-own a second house with my partner, worth circa £400k, remaining mortgage £200k, currently tenanted.

In terms of cash and stocks and shares...

I earn £50k a year, max out out my employer-matched pension contributions @ 10%, have Vanguard 80% life strategy fund with £13k at today's values, emergency fund with £27k, and a 1 year fixed saver with £10k in it.

My options as I see it are:

1) Sell my flat and use it as a substantial deposit for a house in London worth between £800k-£1m (rationale: Access to good mortgage rates at that LTV, no hassle of having another rental property)

2) Remortgage the flat to raise equity and use that money for the deposit towards a house. Rent out the flat to cover re-mortgage payments on said property (rationale: maintains 3-property portfolio but a bigger mortgage would be required for the new house, and highly leveraged in this instance)

I defer to the clever people of Reddit...

 

[mandy1998]

@jaymsw This is peak Reddit “I’m not a big earner but I have £1m in property at 30 and £50k of liquidity”

 

[resjudicata]

@mandy1998 Man’s flexing but credit where credit is due

 

[mysticalmiracle]

@mandy1998 to be fair, op said earner and not net worth

 

[uriel_1]

@jaymsw You talk about your investments, but your questions are about expenditure, so just to be clear, are you actually asking: "what is the best way to buy my new house"?

Your options are equity or debt.

So, what is the goal of your portfolio at the moment?

You have a £400k property, £37k in cash and £13k in shares, and £200k in debt.

If you were to do maximum leverage on your properties, you could be able to get possibly £450k on your current primary residence, and another £100k on your additional property.

Combine with a £50k income which can get you about £250k and let's say £50k cash, I think you are unable to afford the property simply using debt. £850k max and stamp duty on your £800k property is going to be £54k.

So, your new house whilst keeping the old houses is a non-starter unless you can get an additional borrower, and even then it's going to be tight.

I imagine that you'd need to sell the £600k house if you want to be able to do it comfortably - which would leave the goal of the investment portfolio untouched.

 

[jaymsw]

@uriel_1 Yes you are right - the option of keeping the 600k flat would involve me going in with my partner to get a bigger mortgage on the new house (he earns 65k so we’d just about be ok) but as you say, still going to be tight. The house is primarily somewhere to live but I also want to see long term capital appreciation, which I think tends to be bigger with houses vs flats, especially in London because of oversupply of the latter.

 

[uriel_1]

@jaymsw You should not look at your property as a financial investment in that sense because it does not have the quality of investment: entry/exit point, rational determination of allocation (you aren't going to sell it to move to a shithole just because you can get a better return), and liquidity (you will always need to actually live somewhere, so you never get the money out unless you downsize).

As well as that, houses v flats - the price of property tends to move with credit conditions.

So, disregardig your main residence, the question is going to be whether you want the majority of your wealth stuck in a one or two leveraged assets. That is a question of risk and suitability for your goal.

Have you actually run the numbers on the profitability and total return of your let property? Do you think the compensation you have had merits the time spent on it, and the risk it represents?

 

[jaymsw]

@uriel_1 Take your point re main residence. The rented property has increased in value by a third so even with CGT taken into account I see that as decent compensation versus what I would have secured had it been put in an index fund or similar.

 

[uriel_1]

@jaymsw You did not mention a timeframe.

For instance in 2019 the S&P 500 rose 30%. Obviously you can cherry pick dates to flatter things - the main return you get from your property is going to be through the leverage tbh.

The reason it's popular is that most retail investors find it difficult to get leverage for anything else, and it's cheap leverage that is not too susceptible to margin calls.

You may find of course that your individual property does very well, as London has done in the past decade. No guarantee of future performance of course!

 

[jaymsw]

@uriel_1 Indeed, let’s see how it goes. Many thanks for your input.

 

[resjudicata]

@jaymsw Seems madness to do that and be counting pennies when for ditching London and moving up north you are literally at the point of being able to retire in a 5 bed house.

I also want to see long term capital appreciation

For what end? You can't take it with you when you die and it's only of any use if you sell. until you sell even if you've £10m equity in it it won't buy you a packet of crisps at Lidl. And if you're going to use that capital appreciation to upgrade the price of everything else has risen too so you still don't benefit.

 

[resjudicata]

@jaymsw 3) Sell up, buy a nice house up north for £200k-£250k such as this 5 bed detached which would probably be not too dissimilar to what £800k in London would get you. Invest remaining, retire at age 30. Maybe get a part time job to give you more fun money.

You're literally knocking at the door of "Financial Independence, Retire Early" level if you move 200 miles away from London, certainly if you head 200 miles or more north.

 

[mandy1998]

@resjudicata Yeah but he’s going to have to live in Scunthorpe, I’d rather work for 30 years and live somewhere with things to do

 

[resjudicata]

@mandy1998 That's not in Scunthorpe. It's a village in the countryside several miles from Scunthorpe.

I’d rather work for 30 years and live somewhere with things to do

I'd rather not die from lung disease brought on by traffic pollution.

 

[mandy1998]

@resjudicata Each to their own

 

[jaymsw]

@resjudicata All my family and friends live in London, and I wouldn’t want to isolate myself in that way. I’m happy to keep working - I enjoy my job- just want to set myself up properly for the day that I do tire of working.

 

[resjudicata]

@jaymsw At least you now know it's an option if you ever get fed up of the rat race in London.

 

[jona23]

@jaymsw This is hugely emotive and personal question not to mention everyone's appetite for risk !

My personal stance would be for option 1. For a few reasons, the first being tax and self assessment - your liability for tax will be less if you have the single property. The second the hassle of finding and maintaining a good tenant and also maintaining the property itself. That is alot of personal stress and cost. Especially if you are young and looking at starting a family or anything like that.

The all in option maybe daunting but ultimately when you are 50 you could sell said bigger house for a pretty penny move somewhere beautiful and have some change to spare to either stick in the bank/pension or help any offspring.

All food for thought but like I said highly emotive and linked to your risk profile/appetite.

 

[jaymsw]

@jona23 Thanks for your thoughts. I tend to agree as we already have a second house which is enough hassle - so to have 3 properties with full time jobs (and maybe kids in the future) may be one step too far but the trade off could be a very cushty retirement...

 

[jona23]

@jaymsw Like I said risk reward appetite - fortune favours the braves and all that ! No one can make the decision for u ! We have 3 kids and opted for a bigger house with better LTV and it's allowed my wife not to work since our eldest was born. Which in our opinion you simply can't put a price on

But a wise man once said - one mans meat is another's poison