Money Matters - How to make money work for you 50K challenge

By Shelley Mackay

Jun 14

What I want to share with you today is the £50,000 challenge. Before I do that, I want to ask you this question, is inflation good or bad? Now I'm going to bet that almost every single one of you just said no. No, inflation is bad because we're taught it is bad. The Bank of England or the monetary policy committee and the government and everybody, the system wants to keep inflation low because they say it's good for the economy. Well, I say it depends on what you're doing. So is inflation good or bad? Specifically, if you're a property investor? What does inflation do to the value of houses over time? It sends them up.

When I bought my first flat in London for £9,000, and then I watched that flat years I can tell you that one, just three doors away from it, just sold for £265,000. It’s  gone up in value from, let's call it £10,000 to make it easy to £250,000, so it's gone up by a factor of 25 times in 30 years. I know the house prices double in value every 7 to 10 years. Why? Because I've seen it happen to some of my own. And at the same time, what do we do when we buy houses? Most of the money that we use is somebody else's because you take a mortgage. What does inflation do to the value of that mortgage over time? It sends it down.

So you've got a double impact going on here due to inflation. You've got the value of the house going up because of inflation and you've got the value of the money that you've borrowed, that you’re going to pay back pushing the value of the mortgage down. So the more and more the house value goes up, and the more and more the mortgage value goes down, means that gap in the middle. More and more money for you. So you contrary to anything you've previously been told, inflation is actually good. That's the first thing I want to share with you. Now let's roll the clock forward a little bit, and let's pretend that you're in a fortunate position where you've got £50,000.

You've had an inheritance, you've had some redundancy, you saved up and some financial plan has just come in and for whatever reason, you've ended up with £50,000. Now maybe you've already got £50,000, maybe you'd like £50,000 one day, I don't know, but for the purposes of this, you've got £50,000. So, I want to put you two options and then I want to compare them. Here's option one, you stick it in the bank. Let's say you put your £50,000 in the bank for 10 years. So if you put £50,000 in the bank for 10 years, what's going to happen? Well at the moment go and Google it or whatever, inflation for the last few years has been an average of 3%, so the value of your money when it comes to buying things is going down by 3% a year.

On the other hand, you're earning some interest. Well again, Google it, the best rate you're going to find for savings for £50,000, is about 1%. If the value of your money is getting destroyed by inflation at the rate of 3% a year, but your value for money is going up by 1% a year, that means the net impact three minus three plus one is minus two, so you're losing. Your money is losing 2% of its value every year. And let's say that carries on for 10 years, 2% a year for 10 years is 20%, I know I'm sort of slightly oversimplifying it but you get the point. So in real terms if you started off with £50,000, 10 years later in real terms, that same £50,000 is only going to be worth £40,000 because you've lost 20% of the value because of 10 years of inflation being higher than the interest rate, and that's what's happening to so many people at moment.

So many people are looking for a different way to actually make their money worth more as opposed to putting in the bank and it gets worth less. Gone are the days when you could make money from just having money, you need to do something with it. So if you get to do something with it, what could you do? Option two, you could go and stick it into a house, you go and buy a house. Now the average property in the UK at the moment is worth round about £250,000. So with your £50,000 deposit cash, you could go and buy a £250,000 property. Again, go and Google it. You can easily get an 80% buy to let mortgage. So for the purpose of this example of pessimists demonstration, your £50,000 is now not gone into the bank, it's gone into a house as a deposit.

You now own a £250,000 house. You've put your £50,000 in as a deposit and the rest of the money the mortgage, you've borrowed as interest only. So, unless you do that for 10 years, 10 years later what's happening? You've actually got a tenant in there paying you some rent. Now after you've paid your mortgage and paid your letting fees and paid for a bit of voids and maintenance, the average buy to let profit per month because this is an average house, the average buy to let profit per month is £250. So you return £250, if you multiply that up by 12 months in the year, that's £3,000 a year. And even that's not bad, that's £3,000 a year on £50,000.

If you get the calculator out that's 6% interest. So if you want 6% interest on your money, fantastic, because your £50,000 deposit is bringing you after everything £3,000 a year. So let's do that for 10 years, that's obviously £30,000. But more importantly, the property doubles in value every 7 to 10 years. So in 10 years time, the property is probably not going to be the £250 that you bought it for, it's going to be closer to the £500,000 that it's going to be worth in seven to 10 years time, but let's say 10 years time. But your mortgage is still £200,000, less than that in real terms, but it's still £200,000 in cash. So that means your equity, your money in the property has gone up from £50,000 to £300,000.

Your £500,000 property where the mortgage has stayed the same but the value is doubled, was just urge £250,000. And on top of that, you've got your £30,000 of rent that you've had as profit. Now let's be really miserable and let's put an inflation adjustment on what you've just earned. Well, if you do the same calculations as the previous example, that's going to be about a £15,000 adjustment. So you've got your £30,000 of rent, £3000 a year. You've got your £300,000 of equity in the property. I'm going to make a £15,000 adjustment, so in real terms you're £50,000 that you started with, 10 years later is worth £315,000.

You've multiplied it by more than a factor of six, and of course you could re-mortgage it, pull some money out, and go and buy some more. How many could you buy? You could pull out 200, 300,000 however you want to structure it, and you can buy several more houses. So not only does your £50,000 become £3000+. That then gives you the war chest to re-mortgage and go and buy even more. So in another 10 years time, you haven't got one house anymore, you've now maybe you've got three and each one of those three is giving you hundreds of thousands of pounds every 10 years. So let's just summarize that.

You could start with £50,000, you could stick it in the bank, we could stick it in the house. 10 years later, you're £50,000 in the bank is worth £40,000. 10 years later you stick it in the house, is worth £315,000. That’s ultimately your choice.

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