Inheritance and leverage

Over the last few years, I have had many connections mention to me the topic of inheritance, and although this is not a pleasant time in anyone’s life it’s still a critical time that can greatly affect how your life can pan out from this point forwards.

From going on holiday, buying a new car, clearing your mortgage or investing it in property, I have seen all of these scenarios play out.

There is no correct way to spend inheritance and luckily I have not personally been in this situation.

But given what I know now, I am keen to explore the topic of leverage and why if you are deciding to invest it you may want to consider some form of a mortgage.

Probably the most common thing I hear is people investing the money by buying a property outright… This is not a terrible idea as at the very least you have put money into an asset class that’s proved time and time again to be a safe place to store wealth.

My issue with this is the lack of leverage, many people want to clear mortgages and fear debt at all costs. Debt can be amazing if its good debt.

In the simplest terms:

Good Debt is a debt against an asset, something that earns you money and goes up in value

Bad Debt is something that’s disposable, earns you nothing and loses money long term.

i.e. Buying a 2 bed flat to rent out with a £50k mortgage = Good Debt, getting a loan for a £50k car which will be worth £30k in 2 years is Bad Debt.

Single House Investment Purchase

Let’s assume Sally has inherited £200k and decides to buy a house outright (and assuming house prices go up 4% a year for 10 years):

  • Money Invested: £200k
  • Mortgage: £0
  • Rental Income: £1000 per month
  • Rental Income over 10 years: £120k
  • Property Value: £200k
  • Property Value after 10 years: £296,048
  • Property Value Increase: £96,048
  • Total Profit over 10 years: £216,048

Not bad, far better than spending it all on cars and holidays, as this income will have allowed for cars and holidays.

Multiple House Investment Purchase

Now let’s say that Sally decided to leverage good debt and get some simple buy-to-let mortgages with her money at 75% LTV

Keeping it really simple let’s assume each property costs £180k (£45k deposit in each) allowing £5k in legal fees to purchase.

There are 4 properties purchased with the money the numbers on each property are as follows:

  • Money Invested: £45k
  • Mortgage: £135k
  • Rental Income (profit): £350 per month
  • Rental Income over 10 years: £42k
  • Property Value: £180k
  • Property Value after 10 years: £266,443
  • Property Value Increase: £86,443
  • Total Profit over 10 years: £128,443

Now consider the bigger picture…

Now multiply this by the 4 properties that you have purchased:

Rental Income (profit): £1400 per month

Portfolio Value Increase: £345,772

Total Profit over 10 years: £513,772

In Summary

You can see by simply choosing to get some mortgages (which the rent will easily cover) you stand to make this money work much harder, and it shouldn’t need to be tricky or a lot of hassle, simply find an amazing lettings agent to take care of everything for you or partner with an investor to execute this type of strategy end to end.

This is also a great way to build intergenerational wealth, something that all of my investors are keen on, these 4x properties can be passed down through the family and continue to grow in value.

Please note this is just my opinion and does not constitute any form of advice or recommendation by and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.