On the UK Housing Market – Part Two

This is the second post in a series of three about my experience of the UK housing market. I wrote it all out and then realised it was a little too long for one post so I’ve split it out into three sections – the houses I grew up in, the houses I bought, and my thoughts on the UK rental market and strategies to make the most of it.

 

Early in 2012 one of my friends introduced me to the concept of Financial Independence. He talked about the Early Retirement Extreme blog. He said he was keeping his expenses (in Manchester) below £700 a month to save as much as possible. Initially I just thought early retirement was a case of saving hard and then living off your savings. So if you had say, £1m in savings and say, roughly 50 years left to live then you’d be able to budget yourself £20k a year. I was a bit clueless about things like the stock market and I thought if you wanted to be successful you had to start a business or climb up the corporate ladder or just get lucky with say house price increases (see my earlier post).

My friend pointed out that investments in the stock market could return 5 or 6 percent after inflation. It took a while for that to sink in really – it was only on the drive home that I was mulling this over. If you had £1m in stocks and shares then you could live off £50k and it would in theory never run out. Could I sit on £1m though? My initial thought was a big fat ‘No’. Maybe I underestimated myself but at the time I thought I would probably just fritter it away on cars and fancy technology and a nice house until it was gone. Having come to this conclusion I decided it probably wasn’t worth the hardship of trying to save up all this money. I would try to be sensible for money sure, but I wouldn’t go to the extreme lengths of the ERE blog.

Nevertheless, the thought stayed in the back of my mind and I did start to pay a bit more attention to my spending. Later in 2012 I watched a documentary on the BBC called Who Wants to Be a Millionaire. I would highly recommend watching this, it’s very easy to find on YouTube. The journalist behind it interviews several people; a young couple in their teens, a rich lady with a trophy husband, an older couple with several properties, a care worker, and so on. All of them had the same objective: to be financially independent. Some of them had already achieved it of course. Some of them seemed hopelessly naïve. But it was a real eye opener.

Rich Dad Poor Dad

One thing kept coming up in the documentary. They’d all read Rich Dad Poor Dad by Robert Kiyosaki. One guy, a successful investor, had read the book and he said “I couldn’t believe it. It’s so obvious.” The journalist of the program managed to get an interview with Kiyosaki himself which was equally eye opening. Here was a guy, with some really cool looking sports cars, with a huge mansion and a beautiful wife (who it seems is just as entrepreneurial as he is), willing to share his secrets.

I remained sceptical of course, but decided to read the book. And funnily enough, I went home to see my family shortly after watching this documentary and lo and behold, my parents owned a copy of the book! There it was, Rich Dad Poor Dad, just sat on the shelf. So I surreptitiously slipped it into my bag and resolved to read it when I got home.

Which I did. I made notes on the book as I read through. Then I reread it. It’s actually quite a short book so it didn’t take long to digest. And I have to say, it really is a great book. Like the guy in the documentary, after reading some sections I just face palmed myself. It’s so obvious!

Now, the book isn’t perfect. There are sections that could be thrown out. There is one anecdote Kiyosaki tells where he buys a house really cheap in a rundown area, then the area comes good and he sells the house and makes a massive profit. Stories like this I have no time for – it’s a massive stroke of luck and it sort of undermines some of the other arguments he makes. I’m also fairly sure one of the main reasons Kiyosaki is rich is because he’s made a lot of money from selling this book, not because he’s a genius investor or anything like that.

Still, there is a lot of quality advice in the book. It (supposedly) tells the story of when Kiyosaki was growing up. He compares his own dad – the poor dad – with a rich family friend – the rich dad. He says the poor dad encouraged him to get a good education and buy as big a house for himself as possible whilst putting money into his pension. This is the standard route most Americans take. The rich dad on the other hand gave him some different advice.

I’m not going to try and explain it all here – if you haven’t read the book then go and read it – I’d love to hear other people’s thoughts on it. But there were a couple of big things I took away from it:

  1. Rich people put their money into assets which in turn throws money back at them. This could be anything, rental properties, business shares, royalties – as long as ownership of these things pays money to the owner then they can be classed as an asset. Wealthy people have enough money in assets that they can live off those assets – they don’t have to worry about money or redundancy because their assets. Poor people on the other hand put their money into liabilities, for example an expensive car that instantly loses most of its value. They might tell themselves it’s an asset, but according to Kiyosaki’s definition it is not an asset because it doesn’t throw off money – the car loses money. Poor people buy expensive televisions and expensive cable contracts (as they say in the US), and they go on expensive holidays, and then they usually justify these expenses by saying they earned it, not realising that they’ll lose most of their lives to the rat race through this self-destructive behaviour.

(I should point out here, Kiyosaki effectively puts everyone into two camps – the wealthy, those who don’t have to work for money, and the rest, those who do have to work for money – and he calls these two camps rich and poor. It’s perhaps a little confusing because you might have people on high incomes who are nevertheless poor according to this definition because they have no assets. That is his central point really – income is incidental – you are poor if you have no assets because if you lost your job then you’d be out on the street.)

  1. Your house is a liability. Most people (especially in the UK) think their house is an asset – this is certainly what my parents told me – but Kiyosaki disagrees. Now my own view on this has become a bit more nuanced over the years – my current view is that a house is an asset in so far as it pays your rent for you. Put it this way, if you didn’t own a house you would need to live somewhere so you’d need to pay rent. Owning a house means you don’t have to pay rent. Nevertheless Kiyosaki’s point remains – if you buy as big a house as possible then this will be (on the most part) a liability – in terms of maintenance, bills, unused space, council tax, and so on.

It was around this time, the second half of 2012, that my best friend and his girlfriend bought a big house – 4 bedrooms, detached, big garden, big kitchen and so on. I was quite jealous naturally! I believe they spent around £300k on it, with a little help from their parents of course. (Are there any first time buyers out there able to buy a house without help from their parents anymore? Certainly not a house as nice as this one was anyway.) They’d already been living in a flat they owned so they were simply upgrading.

The thing is, they weren’t married and weren’t expecting to have kids straight away, so why the need for four bedrooms? They would probably say it was so they could have lots of guests round and that eventually they’d have kids so they’d grow into it. They might even have reasoned that buying a bigger house meant that over time house price inflation will work for them, more so than staying in a smaller place.

Even so, I suspect a large factor in why they bought the biggest house possible is because that is what is expected – after all, that is what our parents told us to do – that is what our parents did and it worked out pretty well for them (see my earlier post).

In September 2012 I began my 4 month secondment in Italy and I started trying to figure out what I would do when I got back. I was getting paid quite a lot out there – on top of my salary they were paying me a 55 euro post-tax daily allowance (which I hardly spent) and my accommodation and flights were all paid for. When I returned to England I had some decent savings – well it seemed a lot to me at the time. I had no debts apart from student loan and I had about £7k spare which I thought was a lot, though in hindsight for someone who’s just turned 28 that really isn’t that great (I had about £3k in my pension as well so my net worth would have been around £10k). Still, the job was going well and I’d just been promoted.

Also, significantly, my parents had downsized and told me they’d be willing to loan me some money (emphasis on the word ‘loan’) to help with a deposit for a house. They couldn’t simply give me money – they had their retirement to pay for and I have two older brothers and a younger sister who’d want help as well so it would be a bit of a stretch. Even so I was incredibly fortunate to have parents willing to do this and I’m very thankful for it. It does seem there is a divide growing in this country – between those who can afford to buy a house and those who can’t – but that’s a subject for another day.

My First House

Of my friends that had bought a house, they were all just buying themselves as big a place as possible given their circumstances. Which is fine as I say, that’s what we were expected to do.

After reading Rich Dad Poor Dad I decided I wanted to do things a little differently. I was living in a house share with 4 other people and I decided that I would try and buy a similar property and rent out the other rooms. I quite liked living in a house share after all. I reasoned, I would be buying an asset rather than a liability – well, it would be 80% asset and 20% liability anyway. Then hopefully I’d be able to save a significant amount of money and eventually do the same thing again – buy another house with 4 or 5 bedrooms. And so on.

As it happens, shortly after I returned to England from my secondment, our landlord announced she would be selling the house. It was ideal timing really. I spoke to my parents about my plan and they were fully supportive and so, in April 2013 I bought my first house.

DSCF1910.JPG

Apparently our landlord had been given the deposit to buy the house by her parents (as I say, it seems that’s the way these days), but her parents wanted the money back and so she had to sell. It turns out she’d had an interest-only mortgage and hadn’t built up any equity in the house. She bought the house in 2007 for £172k and sold it me in 2012 for £162k. That’s the Credit Crunch for you folks! She’ll have made a loss of over £10k with fees taken into account, though I suppose she’d have been making money on the house while she owned it so maybe it’s not so bad.

It’s a mid-terrace house and probably doesn’t look like much but it’s deceptively spacious inside. The basement has a nice lounge/kitchen layout which is quite sociable – a big selling point for prospective tenants. The bedrooms are all fairly large. I actually went to see another property on the same street that has six bedrooms, a small kitchen and no lounge – no doubt this setup is more profitable (6 tenants is better than 5) but it doesn’t sit well with me – I feel a house should have at least the potential for a social aspect to it – a lounge of some sort. Seems a bit inhumane otherwise – everyone cooped up in their bedrooms. I’d like to get to FI as soon as possible but I don’t want to be a bad landlord to achieve it.

(On that note, in future I plan to write a little about landlording the UK. It seems many people are resentful of landlords and see landlords in a very negative light. And I have to agree in some respects – there are certainly a lot of landlords that are scum. On the other hand there will always be a need for rental properties. More on this another time.)

One of the first things I did with the house was to separate the large bathroom into a smaller bathroom and a shower room. With 5 people living in a property I feel you need to have 2 bathrooms (there is a 2nd toilet in the basement as well). It cost about £10k to get this work done but it seemed necessary to me. It’s one of those things you only think about when you live in a house share – if I was a live-out landlord I probably wouldn’t have considered a 2nd bathroom as necessary. I got one of those 0% finance deals with B&Q and spread the cost out over 4 years (a few years later I paid it off early so that I could get a bigger mortgage on another house).

There was some other work that needed doing to the house, and whenever a housemate moved out I renovated those bedrooms before a new person moved in. Our old landlord (the previous owner) had neglected the house a bit so it needed work and I did a lot of this myself, stripping wallpaper, getting plasterers in, painting, and so on. That first year I spent a lot of time doing DIY and I learn’t quite a lot.

My Second House

Just over a year after buying my first house, in June 2014 I bought a little semi-detached bungalow with my then girlfriend. We’d been going out a while and she’d basically moved into my room in the house share and it had become quite cramped – not ideal really.

The house cost us £140k and we put down a 10% deposit – £14k. It was just the right size for us I think. We got a cat and all was good. My parents helped us a little with the deposit (again) but we paid them back fairly quickly. Again there was lots to do – the garden was basically a jungle and we did some wallpapering and other decoration inside.

The street was lovely. It was fairly quiet and one of our neighbours – a little old lady – bought us some flowers when we moved in. The garden was south facing as well, so perfect for sitting outside and watching the sun go down in the autumn. Here’s a picture:

second house

Unexpected Costs

At the end of 2014 I got a fairly unnerving letter from Northampton Council. It turned out that as I was no longer living at my first property it was now classed as a HMO – a house of multiple occupancy. Basically if you let out a 3 or more storey house to 5 or more people on separate tenancy agreements then the house is a HMO and stricter regulations apply. The letter from the council told me I needed to apply for a license and get the property up to regulation standards or face a fine of £20k and be forced to pay back rent.

Naturally this scared the daylights out of me – I’d never been on the wrong side of the law or anything like that. I always paid the taxes I owed for the house (I read recently something like 50% of landlords don’t even do this). Certainly our old landlord hadn’t been following the rules, though it was no longer her problem so I guess she got away with it.

Overall I believe I spent over £7.5k getting the house up to standard. The largest expense was to the electrician –  £4500 to install a mains integrated fire alarm system, with central panel, smoke and heat detectors in every room, emergency lighting, break points, and to carry out electrical safety checks and provide paperwork and so on. I spent just over £2000 on fire doors for the bedrooms – they’re much more expensive than you would think – the door frames needed to be recreated, special strips installed and so on. And I spent about £550 on the 5 year license.

For the license paperwork I had to draw out a plan of the house – each floor, each fire alarm and so on. I then had an appointment with someone from the council who I went through it with. She was quite impressed actually, and she said they weren’t bothered that I hadn’t declared the house up to that point, they were just happy that I was doing things properly now as there were so many landlords out there who manage to fly under the radar and let unsafe houses out.

Nevertheless these expenses almost crippled me at the time – this was early 2015 and it was only getting a timely bonus from work in March that year that got me through. I feel like I’ve learn’t some important lessons though. I will probably continue to buy HMO style properties because they are very profitable but I will know what needs doing and how much cash these things will cost.

Aside from that, the rest of 2015 and the first half of 2016 were fairly uneventful on the housing front. I watched as the house prices increased, and I saved into my workplace pension and share save schemes. I bought a 7 year old car that had only done about 35k miles for about £4.5k. And then, in September 2016, I broke up with my girlfriend.

My Third House

All in all, it wasn’t the worst break up ever, I’m not going to dwell on it or go into the reasons or anything. It was painful, but I’ve been through painful breakups before. The difference this time however was that we owned a house together. It’s just fortunate we weren’t married as that would have made things very complicated.

I offered to buy out my girlfriend’s half of the bungalow. With her income being quite low she couldn’t really buy out my half – she wouldn’t have been able to get a big enough mortgage. However she said she’d rather we just sell the house – it was quite close to her parents house so she’d probably see it all the time and she didn’t much like the thought of that. I was happy to oblige so we got some estate agents round to value the property and they all said they’d market it for between £175-180k with a view to getting about £170-175k for it.

I was quite surprised by this. We’d bought the house for £140k only 2 years earlier, and now we were looking at a £30k uplift. That’s over 10% per year right? We’d also paid down the mortgage a bit, from £126k down to just over £120k so we were looking at pocketing £50k, or £25k each from the sale. Not bad considering our initial deposit was only £14k. That’s the magic of the housing market in the UK – when times are good money seems to just materialise out of thin air. It was certainly a silver lining to the breakdown of our relationship anyway.

And so in September 2016 I began looking for my third house to buy. I decided I would do what I did with my first house – buy a mid-terrace house with extra bedrooms that I could rent out. I did want an en suite bathroom for my room though – small comforts hey. As I was selling my house and buying another I didn’t need to pay the extra 3% stamp duty a lot of landlords need to pay now. I eventually decided on a house and had an offer of £242k accepted. It took an absolute age for everything to go through – the owners were very slow for some reason but eventually it all came together and I moved, in February 2017, into this house:

third house

Again, it’s a lot more spacious than it looks. The ground floor has the kitchen and lounge, the first floor has my bedroom (with en suite) and a couple of small rooms one of which I’m using as a guest room, and the top floor has 2 large bedrooms and a bathroom. I’m renting out the 2 bedrooms on the top floor and this pretty much covers my mortgage. I’m considering knocking the 2 small rooms on my floor together and renting that out – then all my expenses for the house would be covered.

So far everything has gone fairly swimmingly. I did spend about £5k on new furniture and redecorating – the previous owners had let the property out and everything (and I mean everything) was magnolia – the kitchen, the carpets, the curtains, the bedrooms, the bathrooms, everything. So I set about and got some help painting, wallpapering, tiling and so on to make the house a bit more homely. I have had issues with a couple of my housemates unfortunately, but that will hopefully resolve itself (they’re moving out in December).

Conclusion

That about brings us up to date. Currently I own 2 houses – my first house that I let out room by room to 5 tenants, and the third house I bought that I live in with 3 tenants (a couple and a single).

I actually reckon the first house has significant equity in it now. Next year the mortgage is up for renewal and I’m thinking of seeing if I can release some equity in order to buy another house – either one for myself or just another rental property. I don’t know – it’s just a vague plan at the moment.

What do you think? Could I have done things better? Do you agree with my approach? I’d love to hear people’s thoughts on it all.

In my next post I’m planning to go into a bit more depth about house strategies, my thoughts on landlording in the UK, and I may go into a little more detail about how I work out my cash flow and rental profits and how that feeds into my personal accounts and savings rates.

As always thanks for reading,

Wephway

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3 thoughts on “On the UK Housing Market – Part Two

  1. This was a great read, thanks for sharing. MMOs are the way to go to make money from letting but as you have shown, it takes a lot of effort initially to get the properties compliant to regulations. I too despair with the ‘all landlords are evil’ rants – if you were to put your property up for sale, that’s several people who would be forced to find somewhere else to live.

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  2. Interesting post. Looking back I did some similar. I bought a shared ownership property with my now ex wife. The moved to a 2 bed house then moved to a 4 bed place. We were both earning good money (over 100k between us) so even the 4 bed wasn’t a stretch. We then divorced 3 years ago amicably and I bought her out. Being frugal meant I was able to do this though I was left with a mortgage over 5 times my salary. I got 2 lodgers in and paid it Down to now less than 4 times. Now have one lodger paying mates rates and I’ve fixed my mortgage for 10 years at 2.49%. Repayment. Borrowed over 30 years but my plan is to invest rather than pay it off and hopefully over 10 years I can make enough to make a serious dent in this when it comes up. Worst case I will have paid a decent chunk off anyway and I have more than 60%ltv so I think it’s the right call. My ex has just bought a place in London for over 500k. Probably the right call as that’s way less than her rent but it terrifies me having that much debt I was bad enough with a mortgage the size I had. I just don’t like debt

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  3. Always interesting to read people that make a success of this. In your last post on housing, you mentioned your family’s luck when it came to buying. You bought your first property in the recovery of the housing crash and we are starting to see house prices level off now. You are suggesting increasing risk on your first property to buy another at a potentially risky time. Part of what I’ve read about FI, and investing, is having a balanced portfolio to spread risk. It looks like you’re putting all your money into the housing market. I’m certainly not against it, but you definitely need to do the maths on worst case scenario and how your liabilities could stack up against the value of the asset. If there was another major downturn, what would it look like for you? Would you be stuck in your current place? What if you needed to move on ie new girlfriend, family? What if you lost your job and some tenants? It’s very easy to see all the positives when you’re doing well, as you are, but all I’m saying is you definitely need to consider worst case scenario risks.

    Just came across your blog recently and loving the posts. Keep it up!

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