The Money Tree

Strategies and advice on managing your money, paying off your debts, and investing your cash for a better future.

Location: Caversfield, Oxfordshire, United Kingdom

too handsome to be a business mogul and too tall to be an actor I have opted for adventure travel and writing instead. At least for the time being!

Monday, February 19, 2007

Property Investment – Is it Safe? Is it for You?

As a wealth coach one of the main focuses my clients have is obviously to build raw wealth as quickly as possible. In the last decade there has been a great deal of focus on property development as a straight forward way to make very reasonable returns.

However all investments represent risks and with so much press coverage around the property markets laced with terms such as “overheated” and “bubble about to burst” many people are cautious about this area of investing. So is this something you should get into?

Well firstly you need to be clear on what your objectives are (start with the end in mind – Stephen Covey); do you want income, do you want capital growth, are you investing fro the long term or do you need to see capital returned within a period of time say 4 or 6 months in order to provide you with an income?

For each of these scenarios there is a different model and a different risk profile and return. Lets take a look at just a few of them;

Buy – to – Let
A simple proposition, you buy a property, let it out and live on the income generated. This has become difficult in recent years, rental yields have dropped a little while the cost of properties has increased to the point where it’s a challenge to find a property which will give you positive income after all your costs. And the costs are not insignificant, mortgage, council tax, buildings insurance, contents insurance etc.

On the upside however many mortgage companies will allow a mortgage up to 37 years in duration on an interest only basis, often bundeled with special rates of insurance. You can also have your tenants pay the council tax in many cases so if you get the purchase price right you can end up with a modest income from these kinds of investments.

The real money in these comes from annual equity release. If you buy a property for say ₤100k, rent it for a year and break even or make a modest profit, the intrinsic value of the property may well now be ₤107k. You can remortgage and release the ₤7k equity, which is then yours to spend. An advantage of this method is that while rental income is taxable, equity release is tax free.

If the market does correct downwards then you will have to endure a period of negative equity. The average recovery period historically looks like 12 years. You can protect against this by being patient, buying property below its market value, buying property with incumbent rent paying tenants – these some up at auction every week.

Buy – off – Plan
Buy of plan is a route you can use to generate locked in short term capital gains either in the UK or overseas. My rule of thumb is to start here in the UK where you understand the laws and can operate this model safely before venturing elsewhere.

It’s perfectly possible to approach house builders in the UK when you see they are starting on a new site (or indeed to contact them directly to express interest in any new developments they have planned) and enquire about buying off-plan.

This simply means that you agree to buy a house before it is built. In exchange you negotiate a small discount on the panned price and pay a deposit and further stage payments culminating in raising a mortgage once the house is finished so that you can take possession.

In practice, as soon as the house is complete you sell it on to another buyer. The profit here is two fold; firstly you negotiated and early purchase discount, secondly in the 6 – 9 months it took to build the house it went up in value by 5 – 12% depending on the area.

It’s possible to make ₤20k-₤30k this way in profit, however this profit is a taxable capital gain after your allowance of ₤8,800.00 per year. You should also note that this method requires significant capital, sometimes up to 30% of the original proposed price.

Buy – to – Renovate
This is another classic and one that has attracted much TV time. Buy a dilapidated property, fix it up over 3 months and sell it quick for a massive profit.

Getting this right is all about location. You need to find the worst house in an otherwise very good street/area. There is no point in buying what you can afford regardless of the location… simply doesn’t work that way.

You also need to get your sums right up front. While you can do it for less as a rule of thumb renovation costs will be between 20% and 30% of the price you paid for the property. That assumes that you get value for money for the renovation materials and that you stick to the basics.

By sticking to the basics I mean don’t get emotionally involved in the property, otherwise you will tend to over design and thus over spend. Here are the basics:
- neutral colours throughout, professionally painted for a crisp clean result.
- Simple white bathroom suite, clean neutral tiling
- Built in kitchen
- Garage if possible
- Third bedroom if possible
- Tidy the garden
- Paint the exterior is appropriate
- Double glazing a must if not a period property

In most cases you don’t need to do much in terms of investing to get a solid return.

By sticking to the basics many, many people make a significant wage renovating and selling 1-3 properties a year. Again this income is taxable.


Needless to say, all of these models can be pursued off-shore. Overseas buying, letting and renovation involves very different legal structures and issues so you MUST have local expert help to do this successfully.

However on the upside the growth rates in eastern Europe, parts of the Mediterranean, Asia and South America far outstrip domestic rates of growth, making it a very attractive prospect.

Again location and sticking to the basics are your keys to successful overseas investing which if followed and if done with local expert advice can generate staggering 25%+ yields regularly.

Ok that's all for now, next time Investment Prioritieswhat should yours be?

All the best


Sunday, January 07, 2007

The Great Debt Debate

One of the top three questions I'm asked as a wealth coach is "Mike, should I pay of ALL my debts including the mortgage?"

It might seem like a silly question on the surface of it however there are many actual and so called "wealth gurus" and they all seem to have conflicting opinions on this subject.

Many also tout the idea of good debt versus bad debt which I am sure just confused peple even more : on the one hand you talk about getting rid fo debt and then on the other you talk about it being ok to have "good debt"!

I thought in this opening post I would put this top question to bed for you.

Types of Debt
The first thing to understand is that there are many different types of debt, and they need to be treated differently. I'm going to take for granted for the time being that you know how to prioritise your debts!

Revolving , Unsecured Lending
This means Store Cards, Credit cards, overdrafts and other small loans. These should be paid off as fast as possible and paid off completely.

Secured Personal Lending
For this I'm really thinking of a personal loan for a capital purchase say a car or a boat where the loan is secured against the item you are purchasing. This means that if you default they re posses your car/boat whatever. Again these debts should be paid off asap and never incurred again. Save before you spend!

This is a loan secured agains the property, it should be last on your list and is a very special case. Before I explain why I want to answer a couple of questions that relate to mortgages and property;

1) "Mike, should I get a consolidation loan and roll all my credit card debts and so on into one loan with lower monthly payments?"
- the answer in this case is almost always NO. It may seem tempting to have one lower payment, heaven knows that loan providers spend a fortune on clever ads to promote this service. However your credit cards debts and store cards are "unsecured" that means if you fall behind in payments there's really not much the lender can do. Consolidation loans on the other hand are regarded as "risky" by the lender and are almost always secured on your property. That means if your circumstances change, if you can't make the payments the lender can literally sell your home out from under you. On top of that your total repayments will end up costing you MUCH more in the long run.

2) Should I roll my other debts into my mortgage to benefit from the lower rate?
- only and I do mean ONLY if you can resist spending on plastic. Rolling debts into yor mortgage for a lower rate is good but you need to keep the mortgage payment period the same i.e. extend the amount of your mortgage but not the term. At the same time I suggest that you get rid of all but one credit card (if you really must have one).

OK so back to the big one - Should you pay off your mortgage? The simple answer is that it depends where you live. If you live in a nation which allows you to write off your mortgage interest against your income tax bill then I suggest that you don't need to be in a rush however neither should you work to increase it!

If you live somewhere like the UK where there are no tax benefits then I have to say that you must pay off your mortgage as soon as humanly possible. You need to reverse the situation from paying 5 - 6% on £150k to earning 5-6% on £150K.

OK that's it for now. Next time - property investment, should I get into property and whats the best way to make money from it.

All the best