"If you have done everything I say, your property will command the highest rent the street has ever seen. They will be falling over themselves to win your support"
- Matt Cottle -
Wait, is there even such a thing as a passive income?
I guess there is. I mean, if you’re a trust fund baby whose billionaire parents employ the services of a reassuringly expensive money manager, there is a high chance that your gas bill will never be a priority for you.
But for most people, there will be a 60-year uphill struggle watching their monthly funds refill their empty bank accounts only to disappear again within a couple of days. Most are too busy getting through the daily rat race, trying to avoid bankruptcy and the Grim Reaper. Modern British life is exhausting.
It doesn't have to be that way though. Selling your time and soul for money is a mug’s game if you think about it. There are other ways to do it if you don’t wish to be stuck in the Matrix. Look up beyond the madding crowd. You’ll find the odd nugget of hope hanging like a lucky coin in Super Mario, waiting for you to jump up and claim it for yourself.
One such lucky coin is investing in rental property. Amazingly, it’s a concept as old as the hills but less than 5% of Britons own any. Which is weird because we all kind of understand it as an asset class.
We all grew up in a house of some description whether owned or rented. I don’t know about you, but none of my friends grew up in a Unit Trust or a Collateralised Debt Obligation.
I mean why wouldn’t you want a monthly recurring income that grows steadily each year?
If you don’t understand rental property, allow me to mansplain: you buy a second property and make it look nice. Then someone comes along and pays you more than the cost of the mortgage to live in it. We call these people tenants. They are the finest people I know and are to be treated accordingly.
Because each month they transfer around a third of their income to your bank account. This is called rent. The difference between the rent and the mortgage is called cash flow. Once the treasury has had its slice, most of the rest will end up in your pocket for doing not very much at all. It really is an excellent arrangement.
It doesn’t come easy though. The landlord, for their side, must be willing to risk their capital in the first place. It’s for this reason they can kick back and collect the winnings. In business and investment, risk is often the part that is overlooked.
I’m a former CEO of a group of finance companies that I co-founded and acquired, and subsequently exited. It was built with scarce resources and nerve-wracking decisions over a long period of time. It never surprised me how many high-producing employees would tell me they ‘deserved’ equity in my business. I argued that they were rewarded well for their efforts.
I would say, how much are you prepared to invest? Strangely enough, none wanted to risk their capital buying equity - they just wanted the financial rewards. I would warn them that if things went sour, they would need to be prepared to put money back into the company. That usually did it. They would leave my office without any shares realising that it is the attitude to risk that divides the entrepreneur and the employee.
If you own a successful business, at some point you will have had the same conversation.
In the rental property game, the capital at risk is the initial deposit, stamp duty, disbursements, and refurbishment monies. Then there are the monthly payments and the personal guarantees. You are locked tightly into a mortgage contract. The tenant who pays you rent is also in a contract, but it is rather less draconian. In short, they can skip the rent and put two fingers up. But the mortgage debt will always be yours and you’ll have a tough time convincing them to leave.
So far, it doesn’t sound very passive at all. In fact, you might be better off going back to the grindstone and working your butt off every day of your life. But where is the fun in that? I don’t want to make this sound easy. It’s important that you understand the risks. There are many more risks that are far too numerous to list in the short space we have.
Over the years, many people who have never invested a penny in property, tell me that it's far from a passive source of income. Because they’d know of course. My answer to such people is this:
“The amount of preparation you do up front on a property before a tenant ever steps foot into it, determines how passive your income will be”.
As a long-term property investor, I have spent a lot of money and experienced many headaches on this major learning curve. But in the last 5-7 years, I feel very sure that I have got my portfolio to be as passive as is humanly possible.
Indeed, I write this in my second home in the sunshine, sporting swimming trunks, bare feet, and a fruity drink in hand. I can tell you that I spend less than 4 hours a week managing my properties. I consider my portfolio to be small enough to be easily manageable, but large enough to produce enough income to cover all my costs. And with enough left over to have a reasonable standard of living.
The key to passive property investment therefore is preparation. You can buy a crappy old property, pay your unemployed mate Dave to run a roller around and hire a carpet cleaner from B&Q. With very little investment, you can rent it out to the first person who comes along.
But very soon, you’ll find that the tenant will be on the phone incessantly reporting the problems you didn’t bother looking for. The chances of this tenancy ending up in arrears are high.
Remember: poor properties = crappy tenants = rent arrears.
Do this instead:
Look out for properties that need love but still have good attributes and are in areas where tenants want to be. Near schools, public services, good roads and with fast internet. Gardens and off-street parking are a must. Don’t buy leasehold properties or flats.
Avoid old houses with any signs of damp. Aim for houses built after 1990, less chance of damp and wiring issues. Look for bathrooms and kitchens that can be repaired and upgraded. Ensure that boilers function correctly during the viewing. Ask for gas-safe certificates or a service report. All this will save you around £10,000.
Next, repair or replace anything that does not work. Get an electrician to hide or eliminate loose cables, change sockets, switches and ceiling roses where needed. Install low-energy light bulbs and fittings. Get your plumber to check over the heating and water systems.
Make sure everything is operational and get the electrical survey and gas certificates done straightaway. Get your carpenter in to straighten kitchen doors and drawers, change handles and reseal wet areas. Install a nice new tap, but don’t overspend unnecessarily. Install under-counter lighting and new lino to the floor.
Upgrade bathrooms by changing toilet seats, bath panels and shower screens. Fill the bath, and drain it. Does it drain well? Fit new wastes if required and change the taps, but only if you need to. Fit an illuminated bathroom cabinet. Board out the floor and fit a fresh new lino. Make sure there is powerful ventilation as tenants don’t like to open windows.
Have your decorator paint everything. I always go for white and grey as it’s an easy blank canvas. Don’t miss areas out or assume that a room is fine. Just paint the lot. Start as you mean to continue.
Get a gardener to jetwash the driveways and patios. Reseed lawns, and repair and paint fences. Install an outdoor tap and maybe an outdoor socket too. It makes it easier to clean everything outdoors between tenants.
Get your carpet fitter to install new underlay and polypropylene carpets which are stain resistant. Only from the stairs upwards though. Downstairs in high-traffic areas, install quality wooden flooring, which will outlast carpets threefold.
Do not spend any more than 4 weeks getting your investment market ready. You want tenants in there paying the mortgage not you.
When the property is almost ready get your agent to take a couple of photos and get it out there on their website. Give them a solid completion date so they can return with a professional photographer. Before they arrive, it is your job to ensure that the property is 100% perfect and ready to market. Put up new lampshades and fresh doormats. A few hanging baskets will make it look like a home.
Arrange a viewing day and ensure the prospective tenants are queued up, seeing their competition. If you have done everything I say, your property will command the highest rent the street has ever seen. They will be falling over themselves to win your support.
You can do additional checks on the tenant to ensure they are a good bet. Insist on seeing 12 months' bank statements each. Check for gambling problems, overdrafts, and big loan payments. Check their net pay matches their payslips and that they have paid each month. Call up their previous landlord unannounced and get their honest opinion.
Set the rent day for the 1st of the month. But collect a pro-rata payment till then.
Before they move in, check everything works again. Have a night out there. Sleep over, take your girl/boyfriend Use the bathroom, kitchen and everything else. Switch everything on and off several times. Does it pass? Good. It’s ready to rent out.
That’s how you make property a passive income.
