“How do I turn my house and my inheritance into a £ 10,000 a year travel fund?” “
Anna Clare Harper, Managing Director of SPI Capital, a real estate consulting firm, said:
Ms Dempsey’s goal of earning Â£ 10,000-15,000 a year is achievable through real estate investments with the money she inherited.
Rental purchases provide constant income and are one of the least risky real estate investments in terms of cash flow. The demand from tenants for good, affordable rentals is strong and growing.
Vacation rentals are attractive on paper thanks to their gross returns. But due to higher management costs, longer idle periods and inconsistent, seasonal bookings, a question mark over future demand and anticipated future regulations, they are not the best fit.
Ms Dempsey is expected to choose properties for rent valued at Â£ 70,000 to Â£ 150,000 that have a gross yield of 6 pc.
If she buys without a mortgage using the money from her inheritance, her portfolio will start with a value of around Â£ 210,000 after transaction fees. If house price growth were 5%, the annual capital appreciation would be Â£ 10,000 and she could achieve rental income of Â£ 9,198.
If she uses mortgages to buy, however, her portfolio could be worth Â£ 740,000 with the help of 75% mortgage loans. At the same 5% growth rate, capital appreciation would be Â£ 37,500 per year. Using a 75% five-year fixed rate mortgage at 1.75%, Ms Dempsey could use her initial Â£ 42,000 to buy a property worth Â£ 136,000 in the short term, generating gross income of 8 Â£ 160.
Assuming a typical management fee of 10pc plus VAT and setting aside 15pc each year for vacancies, maintenance and contingencies, she would have a pre-tax income of Â£ 4,172.
The additional investment of Â£ 180,000 in a few years could be used to purchase a property worth Â£ 581,000, generating pre-tax income of Â£ 17,822 with the same assumptions. She would then have a portfolio worth Â£ 717,000 generating Â£ 43,020 in rent, with pre-tax income of Â£ 21,994.
Buying through a limited company allows investors to make mortgage interest tax deductible. If Ms Dempsey chooses to borrow, she could set up an investment firm to take advantage of it. But the financial costs are higher at over 3.5 pc. For a modest portfolio and a low rate taxpayer, it may be cheaper not to bother with the limited company.