Robert Allen, self made American property millionaire and guru, in his excellent book ‘Nothing Down for the 1990s’, suggests an interesting plan by which we can all retire early and live off a plentiful supply of untaxed income. Does this sound too good to be true? Well, actually, it probably isn’t, although there are some aspects which require a closer look and some careful thought.
Robert Allen credits the original idea to Jack Miller and John Schaub, authors of “Making it Big on Little deals”. The plan itself is very simple. It goes something like this.
First, buy a property which you can let out at a high enough rent to cover your costs. Preferably take your time and if you can look for a bargain you can pick up substantially below market value.
Next, repeat the process annually for at least the next four years until you have a minimum of five properties.
Here comes the clever bit. By year six, assuming past trends continue, property number one should have substantially increased in value, and with it your equity (the difference between what the property is worth and what you owe by way of a mortgage). In his example Robert Allen assumes a 10% per annum growth rate.
So does he now recommend selling and taking your profit? No, instead he recommends that you refinance. Indeed, Robert, in this and other books he has written, strongly recommends that you never sell your property investments.
So the investor should now remortgage, releasing say 80%-85% of the increased equity (my Buy-to-Let lender will allow me to borrow 85% of loan to value), which he can then pocket as a tax-free lump sum. The extra finance charges will be covered by the rent, which he speculates should also have risen over the five years.
In year seven repeat the process by refinancing property number two, and so on until year eleven, when you will refinance property number one again. And so and so on. Congratulations, by following this plan you are now officially off the nine to five treadmill.
Like all good plans it is simple. And it seems relatively easy to implement. But is it realistic? We’ll begin to answer that question in the next post.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor