Living off passive income like rent from your investment properties seems like a dream to many people, but is it realistic? Ditching the nine-to-five in favour of paying the bills with rental income promises financial freedom and self-made property millionaires online can make the building of a hugely profitable property portfolio look deceptively simple.
That’s why today, we’ll take a realistic look at how people can actually build a portfolio that can supplement, if not completely replace, a full-time salary.
How much will you have to earn to live off property investment?
How much income you need to live the life you want or are accustomed to is unique to you, so if you’d like to figure out whether you could live off your rental income, you’ll need to do a bit of math. First off, write down how much you’re currently earning through your work. If you’re not the only person in employment in your household, include your partner’s salary to this.
Consider if you are comfortable living off this. Are you living paycheck to paycheck or are you able to live a nice, comfortable life with the amount of money coming each month? If you find yourself in the former camp, consider how much you’d have to add to your annual salary to live comfortably. The key here isn’t to think of a figure that would allow you to live a life of luxury – just what you’d need in order to not stress about money.
Then you divide this figure by 12 – this is how much money per month your rental properties would have to generate profit in order for you to live off your investment properties. Then you just evaluate how much rental income you’d be likely to get for one property within your price range and divide your monthly income by this number to get the number of properties you’d need to quit your job. Pretty simple, right? Well, not quite: you’ll still have to consider the expenses of managing your property.
The expenses that come with buy-to-let properties
For some flats and houses, these could be almost as high – if not even higher than the rental income they generate. The good thing about opting for long-term residential letting rather than holiday lets is that your tenants will be the ones to pay utility bills and council tax. Even so, you’ll need to make mortgage repayments if you’ve taken out loans to buy your property portfolio. These repayments alone could be as big as the rental income your property generates.
You’ll also need to prepare for the unexpected: a leak, rising damp or a boiler that needs replacing. So make sure that you still have some liquidity after purchasing investment properties and that you set some money aside each month for a rainy day fund.
Another potential expense is a property management service for your rental properties. This will be an added cost but a letting agent can help eliminate a lot of headaches and save you time by dealing with tenants on your behalf. This is especially important if you don’t live near your buy-to-let properties.
All of these factors will affect the calculation we laid out in the previous section. So in reality, you’ll take the expected rental income you can expect to generate from a single flat, take out any mortgage repayments, management services and rainy day funds and use this figure to estimate how many properties you’d need to live off rental income.
How to start building your property portfolio
If your goal is to build your property portfolio up to a point where you can make a full income from your rental properties, you’ll likely need to acquire these properties over some time before you’re in a place where you have enough and can quit your job.
Saving up for the deposit for your first buy-to-let property will be the hardest: after that, you’ll have your rental income from that property on top of your regular job to speed up the saving process. For some tips for saving up for your first deposit, check out our article on property investment myths.
Alternatives to living off rental income alone
If making a living solely off of your buy-to-let properties isn’t something that’s available to you or if you’re not interested in the day-to-day management of your properties, you could consider switching to part-time work or using your investments as a way to supplement your pension.
Working part-time while investing is great because you’ll only make about half of your current paycheck through investment, while your part-time salary acts as a buffer in case anything goes wrong as well as helping you get better mortgage rates. A steady income not derived from rental properties is usually a prerequisite for getting the best rates: if you do quit your job and the time comes to remortgage your properties, you should expect a bump up in your interest rates.
Another option for part-time work is going freelance, which means you can scale the number of hours you work on your freelance business up or down depending on your needs. This won’t necessarily help you in the process of getting the best mortgages but it will allow for greater flexibility.
You can also use rental income to aid you in retirement. Investing in some buy-to-let property while you’re still in employment means you’ll have a monthly boost to your pension and might even be able to retire early.
Should you be a landlord?
If your intention is making property investment a full-time job for yourself, you might not want to work with a property manager who’ll take a cut of your profits. However, before you write off working with a professional, take a long, realistic look at your skills and the amount of time you can dedicate to being a landlord.
Being a people-person is essential if you’d like to manage your rental properties yourself. This means you can establish strong working relationships with highly-skilled contractors in order to negotiate good rates for maintenance work. Some basic construction and plumbing skills will also help, as you’ll be able to take care of basic repairs yourself.
Being personable also helps with maintaining a good relationship with your tenants. They might be nice, honest people, but that doesn’t mean that they can’t suffer knocks to their cash flow or have very different personalities and values from you. Being able to deal with people of all kinds and not buckling under pressure are essential qualities if you want to be a landlord.
Remember also that as a landlord, you’ll have to be reachable 24-7 – literally! If your rental property floods in the middle of the night, during a big meeting or while you’re on holiday, you’ll need to respond quickly to protect both your investment property and your tenants.
Should you work with a letting agent?
If this all sounds like too much for you to handle, working with a letting agent could be the right option for you. The time you save working with one leaves you with more time to work on new investment opportunities or on your side hustle or part-time job. A letting agent will help you advertise your flat, choose the best tenants and deal with them throughout their tenancy.
A letting agent is an added cost, but remember that your time is valuable and your sanity is priceless – if working with one will help you with these, they’re worth the investment. For additional levels of support, consider enlisting the help of an expert property investment manager.
Working with a property investment manager
Living off rental income doesn’t happen overnight: it takes a lot of hard work and dedication over a long period of time – most commonly, we’re talking about several years. A property investment manager can help make this process easier by supporting you each step of the way. Cox & Co offer a full property investment service to help you build your portfolio: we’ll help you source the most suitable investment properties, find you the best mortgage products and even act as your letting agent.