What’s next?

What’s next? 

For anyone who has watched ‘The West Wing’, you know what I am talking about.

What’s next?

 

The business is 99% over. I have a few things to clear up in terms of contracts etc and also there are still some prospects out there that may come off at some point, but nothing immediate.

 

This leaves me with the greatest asset of all. Time.

I now have all the time in the world, the rest of my life ahead and I can do whatever I want.

So what to do now.

 

Well, I have learnt a hell of a lot since starting this journey a year ago, perhaps a good place to start would be to see what I have learnt and use this to form a new business plan.

 

1. I have learnt a lot about the markets, trading (both share dealing and spread betting)

 

This is mostly to do with technical analysis, the mechanism for trading, the importance of having a trading system and risk management.

 

2. I have learnt a lot about running a proper business, getting sales and productising ideas to sell to potential customers.

 

This is mostly about keeping costs down, being creative, taking that idea and making it commercially viable and then selling that idea to someone who then pays for you to build it.

This is great in a growing market, and extremely difficult in a shrinking market (as I have found).

 

3. Property would be great to buy now, but I don’t have any cash. Have not explored this avenue yet.

 

4. I love the flexibility of running my own business and the fact that this allows me to spend time with my family when I want to.

 

5. I like being the boss.

 

6. Not many of my friends understand this way of life and in fact some don’t even like to talk about it. (I had one friend who took one look at the very first paragraph of this blog and switched it off quickly as if the thought of discussing making money through assets was somehow unclean!)

 

7. I don’t mind using the telephone to call people up

 

8. I like working on my own as well as with others

 

9. Spending money is a good way of losing money not making money.

 

10. The most important aspect of anything is to have fun!

 

Into the pot, I could also throw that I need some cash in the reasonably short term to carry on paying my expenses.

 

There are some options in order of what I am thinking I might do next:

 

1. Get some contract work which I can do quite easily which is high paid and short term to build cash reserves. The downside of this, is it is back to working on someone else’s asset, the advantage is low responsibility, short term and high cash.

 

2. Go back to working on freelance work form home. The advantage of this is that I can manage my time as I like so I can keep open for opportunities, work from home to see my family more, but the disadvantage is I am not building assets and the cash is a lot less than contracting work.

 

3. Carry on with the business as a background task to keep up with the prospects we have made, pursue any low cost / low time prospects as they might arise.

 

4. Come up with a whole new business idea

 

5. Learn more about trading in its various forms and make a living through that

 

6. Carry on learning and come up with another method of making some money

 

I am going to think about this over the next few days. I have been testing the water with contract work and there still seems to some of it about although not as much as a few years ago.

 

I’ll let you know how it goes.

 

Houses for free

Whilst having my haircut today, my hairdresser told me she had just bought her first flat. It is a two bedroom apartment in a brand new block that will be completed in October. What amazed me, was the offer she got.

The deal was that she can move in for free. She has to get a 75% mortgage and the developers will loan her at zero percent interest for five years the remaining 25%. After that the interest goes up to 3% per year.

This seems like a great deal to me as I could rent out the flat, and pay off the mortgage and the free loan well within the time.

I decided to visit the web site of the company and visit the flats to see what they were like.

I checked out the deal online, you can view it here:  http://www.crestnicholson.com/microsites/Base/assets/pdfs/EasyBuy.pdf

It seemed like a good idea, but the 25% is not fixed. It is 25% of whatever the market value of the house is at the time of repayment. If the house increases in value, so does the loan.

This deal seems like a wolf in sheep’s clothing to me. It comes with the promise of a desperate market begging for you to take their free home of their hands, but in the medium term of 5 -10 years, you are left with an unknown loan amount to cover. In all likelihood, you would have to sell the flat to cover the loan and lose any gains in the short term. It therefore doesn’t work for buy to let investors as you want to own the house for as long as possible.

I nearly got excited over that one. If anyone finds any good deals out there that don’t have a hidden bite in them, please post a comment or drop me a line.

 

Interest Only Mortgages

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.

 

Reviewing the buy to let situation in the UK

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.

 

A Place in the Sun Exhibition – what I learnt

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.

It is all about getting as many properties as possible and using the income to grow your portfolio to a size you are happy with. Then once the houses are all paid off, you have a large income cash flow.

 

 

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.

 

Investment property abroad

After a quick search on the web I have found an exhibition called ‘A place in the sun’ (http://www.aplaceinthesunlive.com/) that is on at the Excel centre next weekend.

The seminars include:

How to build an investment portfolio
How to finance your investment property abroad
What to look for when making an investment
Making your investment pay for itself through rentals
Measuring risk and making returns
Protecting your investment

This seems like a perfect start. There are also articles for download about buying property abroad for investment which I shall read.

I’ll write here again with more info when I find out more.