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How big a portfolio do you need to retire?

Tue 03 Oct 2023

The ultimate goal for many landlords is to build up a portfolio of dwellings that generate enough in rental profits to replace their other income, then they can give up the ‘day job’. The question is, what does it take to achieve that?

Of course, everyone’s income, allowable deductions, tax position and lifestyle expenditure will be different but, as a guide, we can look at the latest ONS figures for household disposable income in the UK. For the 2021/22 financial year, the median income after tax was £32,300, rising to £66,000 for the richest 20% of people.

Taking net earnings of £32,300 equates roughly to a £45,000 pre-tax salary, so how many properties would you need to own to hit that level of pre-tax rental profit?

how big a portfolio do you need to retire


Looking at data from Rightmove, Zoopla and our own figures for the last year, we can see that the average rent for a single household let is around £1,100 a month, which is £13,200 a year, or just under £12,500 net of voids. However, there will be costs to deduct - including mortgage payments, maintenance, and management and administration of the let – which can vary wildly, depending on whether you have a mortgage or own the dwelling outright, and whether you pay a managing agent or look after it yourself.

To illustrate the point, here are some example scenarios:

According to the Land Registry, the average price for a terraced house in the UK is around £235,000 and for a flat or maisonette it’s £231,000, so we’ll take £233,000 as a property value, with £12,500 annual rental income and the following associated costs:

  • Mortgage at 50% LTV, 6%  = £6,990
  • Full management fee at 15% =  £1,875
  • Maintenance at £100 pcm = £1,200
  • Administration at £50 pcm = £600

 

Scenario 1: The property has 50% mortgage borrowing and is fully managed

Total annual costs = £10,665

Pre-tax profit = £1,835

Properties required = 25

Scenario 2: The property is mortgage free and is fully managed

Total annual costs = £3,675

Pre-tax profit = £8,825

Properties required = 5
 

how big a portfolio do you need to retire


Of course, investing without a mortgage would require in excess of £1m in cash and costs such as property tax (stamp duty land tax in England) and fees. However, if it was specifically income you were aiming for, you could invest in a dwelling that generates a higher rental income, and would need far fewer properties. For instance, if you could buy a dwelling for £300,000 that could be let as a 5-bedroom HMO at £650 pcm per room with all bills included, that’s annual rental income of £36,740 (with an allowance for voids), although you will need to spend more on getting the dwelling ready to rent (licensing and additional fire safety measures) and the running costs will be higher, for example:

Mortgage at 65% LTV, 6% = £11,700              

Bills = £5,800

(Utilities, broadband, council tax, etc.)

Full management fee at 15% = £5,500

Cleaning service =  £1,500

Maintenance at £300 pcm = £3,600

Administration at £150 pcm= £1,800

---

Total annual costs = £29,900

Annual pre-tax profit = £6,840

Properties required = 7


You may also be able to boost your returns and therefore be able to retire with a smaller portfolio by having some short-term and holiday lets. Like HMOs, the running costs and management demands are higher, so do make sure you have accounted for all those before deciding whether to invest.

When working out how much income you’re going to need, it’s also important to plan ahead and think about different life events that will crop up. If you don’t already have money set aside for things like holidays, children going to college or university and family weddings, it’s worth factoring those costs into your calculations. And, of course, it’s wise to consult a wealth manager and property tax specialist to ensure you’re making the most suitable investments for your own personal circumstances.

If you’d like to discuss expanding your portfolio or have questions about any aspect of letting, just contact your local branch in CyncoedPontcanna, or Roath and one of the team will be delighted to help.

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