How I became obscenely rich

Today, I have found out about interest only mortgages. Interest only mortgages are where you only pay the interest owed to the bank and you do not pay off any of the capital on the loan. At first this seemed insane to me, and if you do a search on ‘Interest only mortgages’ in Google, you will find lots of financial sites telling you they are very bad news and should only be used by struggling first time buyers to get on the ladder.

However, I found a blog full of posts from people who had these mortgages and all of them said how good they were. The key that is missing in the financial warnings is the word ‘Over Payments’. You can ‘over pay’ by a certain amount each month and that pays off some of the capital.

By overpaying you can reduce your debt without the mandatory high payments that come with a capital repayment mortgage. This essentially reduces the risk when having empty months in the property.

The key thing for me is that by having lower monthly mandatory mortgage repayments, I can use less deposit for buying the house. As the rent payments will now cover a larger mortgage. This means, that is instead of my previous situation where I was saving for 2 years to save a sum of £65K (see post http://obscenelyrich.wordpress.com/2008/05/25/reviewing-the-buy-to-let-situation-in-the-uk/) and then buy a properly on capital repayments, I could save for one year to get £32.5K and buy the property. The rent will still cover the mandatory payments as this is only the interest. Then I can either use my savings to over pay the mortgage for the next year, or buy another property when prices are low.

 I will be able to take more advantage of the low prices and buy more property during the low period.

The key as above is you must make the Over Payments sooner rather than later. Otherwise you could end up losing the property later. Therefore, even if as in the above scenario where i can now buy two properties instead of one, it would be important to over pay as soon as prices start to increase again and it is no longer a good deal to buy property.

I am also thinking of keeping a savings account with enough cash in for each property equivalent of one years repayments. This should keep me out of trouble if interest rates go up or the property is left empty.

I will investigate how much as a percentage the lender will allow as overpayments and let you know how the maths work out.

Two of my friends have recently recommended to me that I review the Buy to Let situation again in this country. One of my friends has just completed his first commercial mortgage for a residential property and he is now renting it out.

His situation was slightly different in that he already owned the house and was moving to a bigger one. So instead of selling the old one, he took out a commercial mortgage and rented his old house out. For the next few years however, his rent will only just cover the mortgage and any repairs or empty time he will have to cover himself and generate the money from elsewhere.

To review the situation for myself, I have looked at three different geographical areas. I chose three areas I know well, so I would know what areas are likely to rent well. These included places near to train stations for commuters into London, and places near hospitals or business parks.

The three locations are Colchester, Cambridge and Chelmsford.

The first review was to find out how much I could buy a simple house for. I decided I would rather buy a house than a flat as this would have more chance of appreciating in the future, would likely bring a more responsible type of tenant and be less susceptible to problems from neighbours.

I found that in all three areas, the type of property I was looking for ranged between about £190K - £220K. Any less than this and the property would start to have problems in rentability.

I then looked to see how much properties are renting for in the same streets and area. The rental values were approximately £850 - £1000 / month.

So, I then looked up some mortgage calculators on the web and looked to see how much I would need as a deposit to ensure the remaining repayments were covered by the rent.

The average amount to make repayments of roughly £1000 would be a mortgage of around £140K.

This is based upon the calculator at:

http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml

using the values of £140K mortgage borrowed over 25 years at 7%.

This value comes out a roughly £1K / month so would not cover damages, emergencies, insurance and empty time.

So if we look at a £140K mortgage on a £200K house, we would need roughly £5K for stamp duty, surveys, solicitors and perhaps some work on the property.

This means we would need £65K down, with probably a few hundred a month for external income to cover any of the insurances etc.

In terms of the overall market, I think that in the short term there will certainly be no immediate growth of capital in terms of house prices going up, and in the next year or two perhaps a significant decrease. However, in the very long term, such as 25 years plus, the house prices will certainly rise a lot as space is always a limiting factor especially in the towns mentioned above.

The risk of a foreign government (in this case the UK governament) deciding to take your property is pretty much zero and it would be a lot easier to look after if something goes wrong here in the UK, as I could always visit it, especially if it is near to where I live.

So, in conclusion, if you have the initial capital, it might be worth it in terms of risk versus long term return, as long as you can cover the empty time or emergencies.

This weekend just gone, I attended the two day Trader’s University course (www.knowledgetoaction.co.uk). (See previous posts)

I stayed over in a hotel called Jury’s Inn in Chelsea, which is only two minutes walk from the seminar and got a good room. I’m not very good with mornings so I wanted to make sure I could get up as late as possible but still get there on time.

I arrived early and booked in. The room was great but the food was awful!

The course started the next morning and about 40 people attended. There was plenty of room and two massive screens to see what was going on. I sat down the front as I had forgotten my glasses, but wouldn’t have needed them anyway.

The presenter (Sandra) was excellent and gave the whole day an uplifting tone. She had just the right amount of humour to make you laugh but not to getting the way of her seminar and getting the information across. There were three other trader coaches there who helped with the exercises etc. and also Kelly who helped with the admin and bookings etc.

There was a lot of information to take onboard, and we each got a very thick manual of all the slides through the weekend.

As detailed in my last post, I changed my spread betting broker to igindex. (www.igindex.co.uk)

The course started by explaining what spread betting is and the differences between spread betting and contracts for difference (CFDs) and trading in stocks.

During the next two days we worked our way through the thick manual covering these topics:

·         Patterns in stock charts such as ascending triangles, flags and channels; these fall into two categories, converging patterns and pivot patterns.

·         Moving Averages

·         Indicators. We covered MACD, RSI, Stochastic.

·         Volume

·         Risk and reward

·         Power Play strategy or pivot strategy

For each topic we did a practical exercise to identify or work out the topic on charts printed in the manual.

The information covered was not complicated but there was a lot of it.

We also covered placing a trade and setting up sharescope. Traders University provide some filters and configuration files to load into sharescope so that you have all the necessary indicators etc in your setup that are used on the course.

After completing the course, I was looking forward to getting started.

I transferred £2K into my igindex account to get me started. The estimated return on investment for trading purely following their rules is estimated to be between 6-10% per month, which at 6% would double your initial capital in one year.

A lot of the trades do seem to make quite a small amount of money and at that rate of return I would need at least £30K in my account to be financially free just from spread betting. It would take me 4 years to achieve this with an initial pot of £2k.

The golden rules in spread betting are as follows:

• Dont ever trade without a stop loss
• Dont risk more than 1% of your capital in any one trade
• Weight up the reward : risk ratio and make sure it is at least 3:1

I have three skype calls that last 30 minutes for one to one mentoring to come, and so hopefully that will be very useful too.

The traders university offers more one to one training, time on their trading floor and also training in intra day trading and FOREX trading. This can make a lot more money. Their courses are very expensive, with the top option costing nearly £15K.

The reason they start you off on the FTSE 350 only and only trade out of hours is to learn the process in a slower moving market. Once you have the basics they then teach on faster markets.

I have decided that if I can get their system to work, and it s really good, I will invest the money I make into the next part of their course, however, if I cant get this part to work, then I wont go back to them.

So in conclusion, I would at this point recommend the course to anyone wanting to learn spread betting. I cant guarantee the system works yet and as I have only placed a couple of trades, but I will talk about that in a future post and let you know how it goes and if I make any money.

Its been a hectic week and there is a lot to write about. I attended the Trader’s University course at the weekend, went to see our business mentor and our accountant to discuss long term financial plans and also made some fundamental decisions about our business.

I will write about the trading course in a separate post. It’s half written already, and I will post that here when it’s done.

Our business mentor, gave us some good clarity on the ‘glass ceiling’ we have been bumping against. We are battling with ourselves trying to convince our clients to treat us more like a company but it seems that once they think of as a self employed person, it is very hard for them to change their perspective. The trust is built upon the person, not the company. It might be we have to start again, get some completely new clients and start afresh.

I have been talking to my brother about him doing some work to get our website finished so we can start pointing people to it without having to apologise for it!

Our accountant cum financial planner was very helpful in outlining some of the advantages of pensions, especially tax advantages. I am still not completely convinced about a pension, but the idea of having a flexible tax efficient and disciplined way of investing our money does appeal to me. I will write a post about this as I learn more.

We have also decided to overhaul our insurances as we are both under insured and now we have a baby on the way, it is becoming more important.

So all in all a productive, slightly stressful but sunny week.

Oh yes, I placed my first spread bets yesterday. I’ll let you know how it goes.

A new broker

Before attending the course last weekend at the traders university, I tried to register with the recommended broker, Echelon in Glasgow. I had not really shopped around as I thought that it might be a detriment to my learning on the course if I chose a different broker than everyone else.

I started the process of opening the account and sent my details to Echelon. They opened a web based trading platform account for me so that I could see what it was like before I had been accepted.

The web platform was a bit clunky and being a web developer I could see it was pretty basic. After a week, I tried to contact Echelon to see how the account opening was going. I was asked to ring back 3 times. I was getting a bit nervous about having given them all of my passport details and private account details which they insist on having before opening an account.

I finally got through to Michael Cohen, who was extremely rude to me. He practically hung up on me after telling me I would just have to wait until they were ready to open my account.

After being a bit peeved at this, I wrote to Michael and told him to close the process and destroy my details as I will not deal with rude people. I can’t imagine trusting them with my money.

I shopped around and found there are actually hundreds of brokers for spread betting and I chose igindex.co.uk. They are the market leaders and the difference to Echelon is incredible. The service is very friendly and I applied online through their website and needed to give no details like passport information.

My account was open and ready to trade in under 3 minutes. I have found out they offer better spreads than echelon as well.

The interface is great and instead of having to enter up to four separate orders to place a bet, stop, limit and entry point, like in Echelon, you can do it all in one screen. This is much better and much less likely to be error prone.

The charting that comes with igindex is almost as good as sharescope as is obviously web based for those times when you are not at home.

I would definitely recommend them.

Getting ready for my course

I have opened my welcome pack for the course next weekend on stock market trading with the ‘trader’s university’ in Fulham. The welcome pack is a CD with instructions as to what you need to do to get ready for the course.

The 3 things are:

·         Buy the GOLD version of sharescope and set it up with their settings

·         Open a spread betting account with a broker in Glasgow called Echelon

·         Create a SKYPE account so that you can receive conference calls and support after the course

I have done all of these things. I was very cautious about giving my details to this unknown firm in Glasgow. I have checked out their company on the web and cant find anything bad about them. I also did a lot more research on the trading course and also can only find very good things about them. So I trusted my details to the brokers.

Sharescope looks a lot better than the charting tools given by Barclays and I would recommend this over any information given by them. Sharescope is not an execution tool, just a charting and data package for research.

SKYPE looks amazing and I am already thinking of using it for all my business to cut down on BT calls. I have bought a SKYPE phone that does not need a computer.

New meeting with financial planner

I went to see our accountant again today to discuss our end of year accounts. What was interesting was that as I had arrived early, I waited in reception and found out that the accounting firm have just opened a new service of financial planning.

I discussed briefly the type of investments we have been looking at, and it turns out that he has (personally) already bought property abroad in Romania and also invests in the stock exchange including spread betting which I am interested in. The firms outlook on wealth creation and management is much more fluid than the last advisor we saw, and he can help us build a plan based upon our own goals rather than specific products he is trying to sell us.

He knows our situation very well from looking after our accounts for many years and so was able to offer some very good advice.

We have book a meeting on the 2oth May to see him and his partner to discuss our financial plan in much more detail.

Perhaps at last we have found someone who can help us. We shall see on the 20th; I’ll write here to let you know.

Financial Salesmen

I finally got to see a financial advisor today. We had made the appointment with Evolve. They say on their website they have experience with and cater for entrepreneurs and this is obviously very important for us.

We spoke about our situation and explained our goals and plans and the chap from Evolve explained about their services.

The way they make their money is on a fee basis, where they charge 1% on all money invested by them. He explained this was not commission but an impartial fee. We would directly get any commission given back to us to help offset his fees.

I voiced some concerns that their plan was basically placing money in one thing, which was index based funds. I wanted to be sure that we would be able to build into the plan or at least get an opinion on the other investment ideas we have, such as stock market trading and property abroad.

He was concerned that we would be too easily led by sales people in the industry and deviate from the plan. He mentioned some of his clients did have some ‘fun money’ which they used to do a bit of investment on the side, away from the plan and that this was OK.

We agreed to read through this literature. He hurried the end of the meeting and practically pushed us out the door. I assume he had another meeting or had decided we were not worth any more time.

Later, on reflection, I think he saw what I only saw an hour later and that was what he was offering did not suit our needs or personalities. He was, in my opinion, exactly the type of person he was warning me about. A salesperson telling me that I should invest all my money is his thing. In fact, of all the people I have spoken to so far, both in property, my business and stock trading, no one has been as singly focused on one product of idea as he was.

There is no way he could help us to plan our financial picture with only one idea or direction forward. His idea seems really targeted at a middle management type person, with a fixed income and who has a bit of extra cash but doesn’t want to think about investing.

His cynicism, very briefly made me think whether the other people I had spoken to, the course providers and other advisors were trying to rip me off. Through his own negativity of other possible investments can put that fear or paralysis of thought and action into a beginner and keep them from ever realising their potential.

The final thing that made me really think he was not the guy for us, was when he could not give one example of another entrepreneur that was his client and what they did with their money.

The one good thing he did say, was regarding pensions. Our accountant has previously mentioned this as a very tax efficient way to get money out of the company. I will need to investigate this further. Perhaps it is time for another visit to the accountants.

Needless to say, we are still hunting for the an appropriate advisor.

Well, I am having a bit of a down day today. I have been very stressed out as a deadline for a client is coming and the pressure has really mounted as I have been helping out with the day to day coding of the applications as well as trying to manage 2 developers.

Swapping to be purely a business owner is much harder than I thought. It is so easy just to step back into the frey. It is so easy to want to take over and do it yourself. Especially when things are not going as well as they might.

Also I have loked at the amount I have saved as cash and how much is owed to me and how much I owe. The result is what I have to invest and it is a lot less than I thought. This means I dont have enough yet to invest in property yet.

It probably means more hard grafting it for a while I really hope the share dealing course I have signed up for allows me to make some extra cash so I can invest in property quicker.

I have managed to spend half a day planning the new business which is really the first chance I have had yet. It looks like I might have to invest a lot to kick start it off or put alot of time to make up for not having a full team.

I am looking forward to visiting our mentor on Wednesday and seing what he thinks

A place in the sun exhibition

Yesterday, my wife and i went to the ‘A place in the sun’ exhibition at the Excel exhibition centre in the Docklands, London. We arrived early as we wanted to go to all of the seminars about investing in property.

How to build an investment portfolio

The first one began at 10.30 and was entitled ‘How to build an investment portfolio’ and was given by Mark Bishop from ‘A place in the sun’ magazine. Mark built up his own portfolio of 8 properties in different parts of the world. His talk was excellent.

He started by giving the advice that to build a portfolio, just like any business, needs a plan. He identified four types of investor:

1.       Someone looking for a lump sum or cash flow for retirement

2.       Someone who has retired looking to maximise the return on their money

3.       High roller, with lots of money looking for future generation wealth

4.       A couple with a small sum looking to gain maximum growth of their spare income

He defined three variables in each person’s plan. These are:

1.       Looking for cash flow or income

2.       Looking for capital growth

3.       Time

When making the plan, he advised knowing exactly what type of investor you are, do you want income, do you want capital growth, or a mixture of the two? What time frame do you hope to achieve this in?

He then talks about what assets do you have already, what are the raw materials you have to invest, these are things like:

·         Lump sums of cash

·         Equity in property

·         What is your mortgagability? This is a word I think he has trademarked.

·         What is your ability to service the debt, i.e. can you pay the mortgage back?

·         Spare time

·         Experience or skills

·         Appetite for risk

He then talked about the different techniques of fundamentally analysing a property, its location and the country to see if it is worth investing in. He talked about what yields were and how to work them out and also the different ways of investing in property such as:

·         Borrowing, or using leverage to maximise return on investment

·         Flipping, or putting a deposit on an un-built property and then selling it before it is complete for a higher price.

·         Lease backs, which is a French idea, where the government tie you in for a long period of time and give you a small return each year. This essentially pays for the mortgage but doesn’t give you an income. The idea is that it is very safe and when the tie in period is over, you have a property in France that you have got for potentially very little.

This is a very socialist idea from my point of view, and fits in with Alan Greenspan’s comments about some of Europe, especially France having very strong identity values that are more important to the French than the economy.

·         Contrarian buying, which I won’t talk about here.

·         Self financing

·         Off-plan buying, which basically means buying from the developer from the plan of the property before it is built.

He then discussed legal situations and what are the rights of the landlord or potential buyer and gave some very good tips regarding looking around the properties and how to deal with agents.

The talk lasted the full hour and so we had no break when the next speaker came on.

How to finance your investment property abroad

The next speaker was Nigel Lewis, again from the magazine. He is a journalist and has written for Daily Mail. (Although, this is nothing to be proud of in my opinion.)

His talk was very honest, and was an account of how he and his wife financed their property abroad. He talked about the different thought processes they went through, some of the mistakes they made and how he would have done it differently.

I won’t go too deeply into his story as he had different goals than I do. He wanted to be able to holiday in his property and that was a key part of his decision making process when buying somewhere. This is not one of my goals. If I want to go on holiday, I want to just go somewhere I feel like going and not to the same place over and over. My investment is purely for investment.

Nigel’s plan was to borrow a small amount of equity from his own house to raise a deposit for a mortgage on an investment in France. He chose to get a mortgage in France as the rates are much lower than here. He chose to buy a French lease back which guarantees his return at 4% index linked for 9 years with the option to extend for another 9 years after this.

He will not see any return on the property until the property finishes the 18 years of mortgage repayments and he either sells the property or rents it out himself.

One of the problems that he found was that dealing with a French bank, they refused to deal with him in English and he had to sign a French contract. This is another indication of the French culture being more important to the French than business.

This type of agreement does not seem to be in line with my own beliefs or expectations of return. I also would not like to be tied into an agreement for such a long time. So although very interesting, I will look for another solution for my investment plan.

What to look for when making a property investment

The third speaker was again Mark Bishop, this time the topic of the seminar was ‘What to look for when making a property investment’.

Mark started off by giving the advice that before you can make the choices you need to know what your goals are. He recommends writing a business plan with a list of the desired outomes, what timescales these will be achieved and what resources you have to achieve them.

He talked about making a shopping list of the what you might want in your portfolio, how many properties, when you would buy them, where and for how much.

Then you can work out what income these would generate or what capital growth you might make.

He defined 10 triggers or points to go by, these are:

1.       Other people money
How little of my own money must I tie up, make sure you leverage other people’s money. By making use of borrowing you can by more property and make money on capital gains. He also discussed flipping (An idea that R. Kiyosaki hates).

2.       Net Yield
This is the rental income less deductions as a percentage of purchase price. Also whether this is actual (based upon past history), projected (based upon other properties in the area), or guaranteed by a developer.

3.       Mortgagability
How much can I borrow, at what rate, fixed, variable or capped.

4.       Money in verses money out
Making sure you take into account void periods (un-rented time). What is the difference between mortgage payments and net yield?
Make sure you perform monthly cash flow projections

5.       Short term capital appreciation
Is the fundamental value of the property below the market value or can you get it to be? Is the market in a low cycle? How is the currency performing?

6.       Long term appreciation
Look at trends (demand, yield increases), political, transportation or other events

7.       The Tax regime
Do you buy in your own name? Make sure the country has a double taxation treaty with the UK. Buying through a company or a trust. Which country to register the business, which country to borrow money? Make sure you get independent advice. (See later speaker)

8.       You Rights
Legal comeback if a property from a developer is late. Rights as a landlord. How well protected is the property title.

9.       Due Diligence
Test every assumption and every claim. Does the developer own the land, does the seller own the property? Does the brochure match the property you are buying? Is the beach really 2 minutes walk? Who is guaranteeing the income for guaranteed rentals.

10.   An easy life
Good documentation and good sellers go together. Bad contracts, probably bad people. Spread risk. Multiple complexes in one development to save on costs. Choose good advisors. Make income and debt in same currency.

All in all, another excellent seminar by Mark.

One of the most interesting things actually came after the seminar when I asked Mark about how he had built up his portfolio and he had come to the same conclusion as me, in that he would buy say 3 properties and put all of the rental income into paying off the mortgage on one of the properties, then buy another one, and put that into the mortgage. Very quickly you can pay for a house outright and then the income on that house is large. You then use that to pay off another one, and with those two get the next.

Making your investment pay for itself through rentals

The next seminar was given by Ross Elder from Holiday Lettings.

Ross talked about what you can do to make your rental property stand out from the crowd. His company is a web based advertising company that advertises holiday properties to holidaymakers on behalf of the owners.

He talked about making sure you have good photos, neutral colour walls, and decent furniture. He talked about making sure that you do not get too personal with your investment.

He talked about making sure you understand the season and therefore how many rentals you are likely to get. He said that the season is NOT defined by the weather, but by the airlines that fly people to your location.

Watch out for changes in flight paths that stop people coming to your locations.

For 52 week coverage you could look at Euro breaks or the Canary Islands.

He said in most locations, it was common to have 90% occupancy in peak months, 40 – 70% in the shoulder months either side.

He said to watch for letting longer than 3 months; otherwise in some countries the renter may gain tenancy rights.

Do people need to hire a car? This money will come out of the budget for their holiday and therefore won’t go on the rent.

Check for the demographic of the area. Don’t buy a one bedroom apartment next to Disney. Most people will have children. What are the main attractions? Does the area have mass appeal?

Look for unique selling points.

He talked about making sure the cleaning is done correctly; maybe leave a welcome present such as a cheap bottle of champagne. He also said that is an agent is letting it, make sure you get the money. Call the property and if someone answers, make sure you have money for that week.

Don’t forget to include things like liability insurance into the cost. Leave an emergency number in the property with an information pack about the local area and different language peaking doctors locations.

His talk was very informative and I will definitely take some tips from him when I do buy a place to rent. His website apparently generates an average of 40 leads per advert. Not all leads generate a sale of course.

After this time I must admit I was getting a little hungry. These seminars were back to back and I was a little tired so I went to get some lunch. As a result I unfortunately missed the first half of Jonty Crossick’s talk on ‘Measuring risk and making returns’.

Measuring risk and making returns

Jonty talked about the different locations around the world and in particular the risk of currency fluctuations in the market. His company find good deals all over the world and advertise them to investors. They make a fixed fee if you buy the property.

I received an email from them after enquiring about a property in Brazil for only £15K.

The next seminar was by John Howell from The International Law partnership.

Protecting your investment

I found John to be a little cynical and dry but had some excellent advice. I will almost certainly use their services if I buy abroad. He is exactly what you need in a lawyer!

His company has a UK office but has offices with local solicitors in many other countries. They specialise in nothing else but property bought abroad.

His key message was ‘Protecting your investment starts before you buy!”

He had ten points which he went through as part of his seminar, these were:

Before you buy

1.       Understand Risk and Reward

2.       Understand the Maths and the effect of borrowing

3.       Understand the effect of Tax in the UK and elsewhere

4.       Decide on your investment strategy

5.       Do your research

When you buy

6.       Don’t buy rubbish

7.       Put the property in the right name

8.       Always use an independent lawyer

After you buy

9.       Understand how to get good management

10.   Understand when to sell and how to get a good price

After the talk I collected a few leaflets for later reading. I wanted to find out about foreign mortgages, so I got some information from a Spanish bank with a branch here in the UK I specifically asked them if they dealt in English and unlike the French the do.

I got some more details of some accountants who might be able to help me trade through the business rather than as an individual.

I got a really good book called ‘How to be a successful property investor’ by Alise and Jonty Crossick from Ready2Invest. This looks like an amazing find and I am looking forward to reading it.

I will of course write my comments here when I get round to it.

I got quite a few estate agents brochures advertising properties around the world and of course the ‘Place in the Sun’ magazine.

I think the exhibition was well worth going to and that my knowledge as an investor has increased significantly.