rental income

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Does the 1% rule apply in the UK?

/ Gracie Sunderland / Leave a comment

I’ve been writing about my mini-real estate journey throughout this blog: the decision to sell what had been our family home after renting it out: the thought process of buying my new rental: and the associated costs and process of getting to rented. Come and join me on Insta for more of the same, plus money saving tips, recipes, and frugal inspiration!

This week I wanted to look at the 1% rule, and whether it’s really relevant to those of us in the UK (and presumably a lot of the rest of Europe). As the majority of FIRE media creators seem to be from the USA, there is a lot of talk about how fabulous real estate is as a wealth building tool, and lots of great advice about how to calculate options and, essentially, when things are a good idea.

But does the 1% rule work outside of the States?

The 1% rule is a way of thinking about whether the rental property will make is going to pay off the value of the home in a reasonable timeline. As a property investor, this is an indication of a plan which is likely to make you money in the long term rather than being something that just breaks even.

So – if you buy a house for $200,000, it should rent out for $2,000 – or a $300,000 house for $3,000 etc. The purchase price should include everything it takes for you to get the house tenanted. So any renovations, upgrades, essential additions such as smoke or carbon monoxide alarms; along with legal costs of purchase, and of setting up as a rental.

Once you have tenants in place, you will also need to pay a bunch of costs from the income, including maintenance and repairs, taxes, landlord insurance etc. You can think about this as the 50% rule whereby you assume you’ll spend 50% of your income as oprating costs over the long term. You might not – and you might spend very little for a few years then have to repair a roof – but preparing for that spend is part of being a landlord.

So I had a look at some average house and rental prices in the UK to see how it might work. I’ve gone with the median house price rather than the mean since every area of the UK has super expensive enclaves and properties which are not reflected further down the chain. This is true everywhere, but in Cheshire where my rental property is, average prices are around £260,078 also includes the Golden Triangle where homes are more like £2,600,000. So the median is a more useful figure for back-of-the-envelope thinking.

 Rent 23Median house price Rental return
North West £                  958 £         185,000 0.52%
Greater London £              1,804 £         533,687 0.34%
North East £                  594 £         140,000 0.42%
South East £              1,164 £         388,900 0.30%
     
UK minus London £              1,113 £         272,000 0.41%
     
My previous rental £              1,225 £         450,000 0.27%
Current rental £                  895 £         235,000 0.38%

Looking at a few different areas (which are roughly the more expensive and less expensive parts of England and Wales) it looks like the average likely return in the UK is about 0.38% – significantly less than the 1% used in US calculations.

This makes sense to me in terms of the house prices here, and what renters could actually afford. The chances of the average person being able to pay rents otherwise are basically zero. In the South East for example, the average income is £40,300 and take home monthly pay £3,358. The 1% rule would expect that an average rent here would be £3,889 – or significantly more than the average take home pay.

So there are multiple factors at play, which make sense. But it’s also helpful to know what’s likely. It doesn’t make investing in property in the UK a bad idea (more of the pros and cons another time) but hopefully this information is useful in your own planning and calculations.

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So I bought a new rental 2

/ Gracie Sunderland / 1 Comment

This should really be entitled “so I finally rented out my new rental” but hurray! It is done. I have been talking about moving on my rental journey since I started this blog, and my last post which was almost three months ago (sorry dear readers, long story which I might come back to) set out the decision making and purchase of that property.

I wanted to talk a little bit about the financial side of it here. I paid £230,000 for the property. In my home town, that amount would barely even buy you a garage, but further north in the UK it really does buy you more. I’ve written extensively about choosing to sell my rental in my home town but maintain a rental in the UK so I won’t go back over it here, but it was a decision that took a long time – and realistically I still have doubts about. But it’s done, so on we go!

I also bought the property free and clear, so it has no mortgage on it. I saved this money essentially in equity from my previous house, which I had laser-focused paying off over the last five years. Whilst I hadn’t fully paid it off, issues with rising mortgage rates and my challenges of spending so much time overseas meant that the mortgage cost of it was starting to really increase. There were costs associated with the purchase and legal elements but because it was such a relatively cheap property, these were significantly (and disproportionately) lower than my last house. A big element is that the stamp duty threshold in the UK – basically a tax on a house purchase – doesn’t kick in until a property is worth more than £250,000, meaning I didn’t have to fork out the £7,000 additional amount that I did last time. The house is a new build and is on a company managed estate. This means there is a monthly fee (of about £60, payable by the tenant) but there was additional set of costs for the purchase based on legal assessment and sign up to the management company. In total this all came to £2,636.

Legal and purchase costs
Standard legal and purchase fees £       1,968
Legal and purchase fees relating to estate management £           668
  £ 2,636

In addition to the standard costs, it took three months to rent out, following about six months of the purchase process since I struggled to find what I wanted, and it took some time for the process to go through. This period has a financial implication as well. In addition there are a few costs needed to get the house tenant-ready, and between these I paid out an additional £1,233.

Pre-tenant and compliance costs
Compliance maintenance (electrical check, smoke alarms etc) £           300
Payment of 3 months estate management fees £           178
Payment of council tax £           354
Landlord insurance (one year) £           401
Total £       1,233

So at this point in time, I have £230,000 of my capital tied up in real estate. In addition, buying and preparing the property for rental required an outlay of £3,869 or about an additional 1.7% on top of the purchase price. As noted, this is unique to a low cost house, as these costs disproportionately increase with homes in higher price brackets.

And now it’s rented out! The rent is set at £850 per month, which is quite a bit less than the UK average of £1000 (excluding Greater London) but that’s based on the location. Minus the letting agent fee which I need as a) I don’t live near the property and b) I am utterly useless at household maintenance, of 10%, I will make an initial net of £765, from which I will need to pay any additional maintenance or upkeep, as well as continued landlord insurance for which I will keep back 10% of the net, or about £1,000 per year. So with a projected profit of about £8,000 per year, I will not be retiring fully on my rental empire. But it works – to stay invested in the real estate market; have some money which isn’t at the whim of the stock market; to have a second option for my family in case the s**t hits the fan; and to have a regular stream of income. And I am glad it’s set up so I can leave it to tick along whilst I focus on other things!

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So I bought a new rental part 1

/ Gracie Sunderland / 2 Comments

Happy end of July! It is almost the end of the summer holidays here in Denmark so I am working on de-cluttering the house, planning for the second half of the year, and sneaking in an more relax time I can get before it’s full steam ahead. Do keep up with the small things over on this blog’s Insta – other people’s Barbie obsessions are louder than mine these days but we still hang out!

One of the things which has been finalised over the summer is the purchase of my new rental.

I wrote in January about having sold my rental – both the decision making and process, and my own history of house ownership. I’m not working on a real estate empire. I am not even sure that it’s possible to do this in the UK for small investors, or if it is the challenges around accessible credit, robust tax measures and the general insanity of housing prices mean it certainly isn’t the walk in the park it seems to be in the US.

There are other difficulties for those like me who don’t live in the UK but plan to return. Once my fixed mortgage term ended, I couldn’t remortgage my UK home which was rented out, and I couldn’t get a mortgage for a rental home without owning a primary residence. And all this in a time of rising if hyper uncertain house prices and massive rises in interest rates and hence mortgage payments.

If landlording was my aim perhaps I would have really worked through these issues – with tenacity everything is possible. But since I also have ethical cautions around owning property for profit in a time when renters’ struggles are being ignored (and noting that this is a nuanced conversation and one I will come back to), I have continued with my previous plan.

From a FIRE perspective, and based on my own risk profile, my plan is:

    1. To own one rental in the UK, partly to maintain connection to the country.
    2. To have it near family/friends who could support me if I couldn’t work and was forced to go back to the UK. Since I am a single parent, not being able to earn money or adequately look after the kids would be an utter disaster, so having a plan B matters. This recognises the need to give tenants six months notice, but it still needs to be an option.
    3. To own it outright: see point 2 about risk mitigation.
    4. To own it for approx. ten years which would give tenants a good stretch of stability, and would bring in additional income for me whilst my kids are finishing up their education.

    With all that in mind, I looked for a property near my brother up around Manchester. This part of the decision making took really a long time, tipping back into the decision to sell my last rental. Who, realistically, could support me in the way I would need if the sh*t hits the fan? Where should I buy a property then? Since I can’t get a mortgage, how much of my nest egg do I want to invest in a property? Was I mad to sell from a high cost of living area where the property might have just carried on making money?

    And I am still not settled on some of the answers, but the housing market waits for no vascillating woman! I started looking for a property in December as I was heading to complete on my own house sale, though I needed to wait on capital gains tax and other fun deductions to work out exactly what I had to play with. My brother and his wife were amazing. I would look at properties online (which is both easy and fun, let’s be honest) and they would then talk me through the location, and go to view if it seemed like a serious option. Paula Pant, a FIRE fairy Godmother, talks a lot about out of state rentals and how to organise such a portfolio. Maybe I don’t put enough time into my rentals, or I’m too limited in my thinking, but without family around I would have found it impossible to sort this out unless I had travelled a couple of times to be hands on.

    So I completed on a house last weekend, and it goes onto the market for rent next week once all the paperwork is sorted out. It’s not my dream house but it will make a lovely easy-to-maintain rental for a family, hopefully long term, and would work for us if it had to.

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    So I sold my rental: part 1

    / Gracie Sunderland / 4 Comments

    Welcome to this blog post – if you’re new, do have a poke about the other posts, and if you’re an old friend, thanks for sticking with me. Also do come join us over on Instagram for frugal food and adventure ideas, reflections from the Barbies (those girls don’t play), and some inspiration.

    So, I was banging on mysteriously in my financial review of 2022 about some major changes in my portfolio, and the biggest one is that I have sold my rental property in the UK. This was something under consideration for a long time – indeed, it’s a year ago that I made the first call to an estate agent to get a valuation. During my portfolio valuation in March 2022, I realised that 60% of my net worth is in property. Since around 30% was in pensions, it meant that there was very little liquidity.

    Whilst I don’t need a ton of liquid cash, I am at a point where I need more flexibility. That might mean having more accessible money for investing in a side hustle, or a smaller property in Kenya as I plan my transition there. So it doesn’t mean putting it all under the bed in a cardboard box but it also doesn’t mean hosting so much of my net worth in one property.

    I write about housing and home ownership a lot, especially recognising the tensions where structural inequalities impact people’s ability to own a home and how this affects generational wealth. I also recognise that the UK rental market is an absolute catastrophe, with rising rents and rising uncertainties holding back a huge number of people from fulfilling their potential. It isn’t just about whether people can buy a home of their own: spending huge amounts on rent means that it’s harder to save for a future, and lack of stability in the market is impacting the sense of living in ‘permacrisis‘ which is impacting mental health for so many.

    All of which are critical conversations. But this post is just about the decision to sell my rental property, and how it is working out so far.

    One of the main challenges with having such a heavy lean towards net worth invested in property, is the level of risk. Whilst owning a house to live comes with a certain amount of risk, it is very different to owning property as an investment. If my house that I live in goes down in value, all the other houses locally will likely go down in value too meaning that I haven’t lost out substantively: the market has changed for all. Plus if I want to live in that house, as long as I can pay the mortgage (hello rising inflation), it balances out.

    With the uncertainties in the housing market in the UK, I felt that the risk was too great and that I would be stuck with the house forever. I had bought the house planning to live in it with my kids, but then I got a job overseas and now I really don’t see us moving back any time soon. Whilst it was a good house for us when my children were smaller, I had planned for it to be a ‘five year home’ and we are past that point – even if we wanted to move back, the size and layout of the house, and proximity to a decent secondary school, means it doesn’t work for this season in our lives.

    Whilst the rental income was covering costs, it wasn’t enough to make the locking up of all other assets worth it. In fact, choosing to rent out a house that I had bought as a family home only made sense when I was thinking we might move back to it. Many FIRE podcasts talk about this – basically, what you look for in a rental property and a home for yourself are different. Which is not rocket science, but good to remember.

    Paula Pant has some useful guides to working out whether a rental property is worth it. You can have a read for yourself to get into the complexities of it, but my property fails at the first hurdle. Paula’s ‘one percent rule’ recommends that you only consider a property where the rent equals one percent of the purchase price. So if you have a house like mine where the acquisition price was £360,000 it should rent for £3,600 per month. Whilst the rental markets in the UK and US are totally different, by the time of the sale (noting that the value had increased, and I had frozen rents at the same amount since 2016), rent for my property equaled less than 0.25% of the market value.

    So I decided to sell. I wanted to treat my tenants well, and gave them six months notice that I would not be renewing their tenancy in September. I agreed a price and put the house on the market. Since things are so strange at the moment, I had no offers for some time, then an over asking price offer which I accepted immediately. There was a lot of negotiation trying to get things done as quickly as possible on their side so they could be in for Christmas, and my recognising that just after my dad passed away, I was really not capable of dealing with very much. So, with help from the estate agents, we muddled through and completed on the sale 10 days before Christmas.

    And that’s it! It feels like a long post but it was a decision which took so much thought, and one where a lot of the thinking was basically crystal-balling in terms of what would happen with housing market, mortgage rates and so on. And in the end, I had to make a decision based on the information that I had at the time, and what season of life I am in right now. I am finalising the financial assessment of how it went and will share in a future post (including all the joy of Capital Gains Tax woohoo) but for now, I am excited about what’s next for that money, and hoping the new owners had a great Christmas in their new home.