Part 28

Introduction

Hello and welcome back to Mortgage Advisor on F.I.R.E.  This week I will be sharing an interview with Luke, another follower of F.I.R.E.  I will also look in more detail at my updated timetable for achieving F.I.R.E. 

Weekly Update

​Until quite recently I had been coping fine with the lockdown.  I’m still coping ok, but I can feel the strain of the day-to-day monotony starting to annoy me.  The constant cycle of sleep-work-TV-sleep is getting old quite quickly.  I’m also getting angrier by the day at the misinformation and conspiracy theories doing the rounds on social media, and yet angrier still by how accepting people seem to be of this clusterfuck of a government. There are a lot of good people in this country; people I care for, love and respect.  There are also countless stories of normal people coming together to support their neighbours in these troubled times.  In the face of this adversity, there is a lot we can look at and be proud of.  All of this is in spite of the government, and not because of it.    

I don’t understand the cult of personality around Boris and his party.  There are many, many examples of the attitude they have to the working class people.  Yet, they are seen as heroes to be celebrated by a large proportion of the population.  I just don’t get it.  Is there something I’m missing?  From what I see everyday, anyone who questions the Tory government is met with the response “at least we don’t have Comrade Corbyn” or “imagine Abbott in charge of this mess lol” or “remoaners out in force again”.  These types of responses miss the point; the whole political system in the UK is a joke.  It’s a members only club, and any honest politician who tries to make a difference is ostracized and subjected to a media hate campaign.  This is what wrecked Corbyn’s chances of being elected, well this and sabotage from within his own ranks.  I don’t see the system changing anytime soon.  I like the idea that one person can make a difference, and sometimes they can.  The JFK quote is one that I try to follow;

It’s a simple rule to remember.  “Try to make a difference.”  Through this blog, I try to make a difference.  It can be as small as bringing attention to a book that helps explain something.  It can be as large as convincing someone to finally take charge of their finances.  The key thing is to try and make a difference, and for that difference to snowball through society.  If enough people make enough small differences, then maybe we can change society.  People have to be receptive to change though, and social media, and the mainstream media, have processes in place to maintain the status quo.  The problem is that everyone’s social media becomes an echo chamber, where they only see views that align with their own in a cycle of self-reinforcement.  Some days I feel positive about the future of society.  Days like today, I feel pretty pessimistic.  

On a more positive note, in the past week I have started some light resistance work, seeing as though I am feeling uneasy about biking.  I’ve lost so much strength in the past few months.  I can’t wait to get back in the gym and start doing some proper weight training again.  There’s something incredibly satisfying about lifting iron compared to using cables.  The one muscle group I struggle to hit when exercising at home is my back.  I don’t have anywhere to use a pull up bar, and I don’t have any free weights at home.  Until the gym across the road opens back up again, I’m stuck as to how to exercise my back.  I tried wrapping a resistance cable around my feet so I could do cable rows, but there was too much slack in the cable and it wasn’t doing anything.  

As my NHS fundraising ground to a halt, I’m going to apply my financial philosophy to my attempts to get back in shape.  I use this blog to help keep me honest, and on track financially.  I’m going to do the same for my weight by tracking it publicly on this blog.  What I’ve found in the past is that breaking down large goals into a series of smaller goals, makes for better progress.  Rather than setting a goal of losing X number of kilos by the end of the year, it makes sense to me to go with smaller goals that allow for more immediate feedback.  With my finances, I’m more focused on process goals i.e. investing regularly in assets that produce income.  If I concentrate on the process, the outcome comes around naturally.  Losing weight is a little different as feedback is not as immediate.  A person’s weight can vary daily by a couple of kilos.  A reference point is needed so that weight can be monitored under controlled conditions.  If I weigh once a week and record it here, it provides that reference point.  If I was to weigh every day and I see my weight fluctuate up and down from one day to the next, it will not provide motivation to continue eating and exercising sensibly.  

Health Update

At my fittest I was 90kg with a body fat percentage of roughly 12%.  I am now 116.7kg with a body fat percentage of 38.1%.  Before my health went well and truly off the rails, with a shoulder tear leading to the discovery I had a heart condition, I was not in bad shape considering.  I don’t take many selfies, but this is the progress I was starting to make:

Now, I’m too embarrassed to post a photo of how out of shape I am.  

Current Weight: 118.7kg

Current Body Fat: 38.1%

Weekly Goal: lose 0.5kg

Ultimate Goal: 90kg

Financial Update
​
Premium Bonds: £15,075 (up £25 from last update).

Stocks and Shares ISA: £8385.21 (up £443.18 from last update).

F**k It Fund: £5,015.49 (up £14.34 from last update).

Property Value: £181,626 (no change from last update).

Total Assets: £210,101.70 (up £482.52 from last update).

Residential Mortgage: £144,372.10 (down £533.95 from last update). 

Total Debts: £144,372.10 (down £533.95 from last update).

Total Wealth Figure: 65,729.60 (up £1,016.47 from last update). 

Investment Income in 2020: £31.44 (no change from last update) (target £2,000).

F.I.R.E. Timeline

The aim is to be able to retire by the end of 2023.  I have forty-three full months to get from here, to there.  My timeline is on my mind constantly.  I’m always thinking of ways to try and speed things up, but I’ve not found any yet.  So, the plan is to continue down the road of investing in property and recycling as much of the deposit as possible to fund the next purchase.  Rinse and repeat.

One thing I have discussed with several people is why it’s important to try and buy below market value (BMV).  It’s easier to explain with an example.  First some background information.

In 1970, the average UK house cost around £4,975.  In 2020, the average cost is £232,000.  When you calculate the annual growth over those fifty years, it amounts to just under 10% per year.  For ease of calculation with the following examples, I’m going to use 10% annual growth, although I understand growth rates very and really work on a smooth gradient.  

Example 1 – Buying at market value

Purchase price: £100,000
Value: £100,000
Mortgage: £75,000 interest only loan
Deposit: £25,000
LTV: 75% (mortgage loan as a percentage of the property value, and 75% is typically the highest you can get with most BTL mortgage providers).

In this example, the property has been purchased at market value.  Assuming a smooth growth curve of 10% per year, the situation develops like this:

After One Year

Purchase price: £100,000
Value: £110,000
Mortgage: £75,000 interest only loan
Deposit: £25,000
LTV: 68% 

After Two Years

Purchase price: £100,000
Value: £121,000
Mortgage: £75,000 interest only loan
Deposit: £25,000
LTV: 62%

At this point, you have enough equity in the property to borrow more money and bring the LTV back up to 75%.  The situation would now look like this:

Purchase price: £100,000
Value: £110,000
Mortgage: £75,000 interest only loan
Additional borrowing: £15,750
Total mortgage debt: £90,750
Original deposit: £25,000
Money left in the deal: £9,250 (original deposit minus additional borrowing).
LTV: 75%  

Example 2 – Buying below market value

Purchase price: £90,000
Market value: £100,000
Mortgage: £67,500 interest only loan
Deposit: £22,500
LTV: 75% (lender will almost always value at purchase price or lower on new mortgage).
Refurb costs: £5,000
Value after refurb: £110,000
LTV after refurb: 61%

In the above example, you are looking for a property where the vendor needs a quick sale, or a situation where the property needs work, or both.  You get an idea of what a similar property should sell for assuming it was in good condition.  That’s the benchmark or “market value”.  You then research the cost of the refurb and you are aiming for a scenario where your refurb adds more value.  For every £1 spent improving the property, you want to see the value increase by £2.  Then, after six-months you ask the lender to revalue the property.  

At this point, you can look to borrow more money to bring the LTV back up to 75%.  

Additional borrowing after refurb plus one year growth

Purchase price: £90,000
New market value: £121,000
Original mortgage: £67,500 interest only loan
Original deposit: £22,500
Additional borrowing: £23,250
LTV: 75% 
Refurb costs: £5,000
Money left in deal: £4,250 (deposit plus refurb, minus additional borrowing).

Or, additional borrowing after refurb plus two years growth

Purchase price: £90,000
New market value: £133,100
Original mortgage: £67,500 interest only loan
Original deposit: £22,500
Additional borrowing: £32,325
LTV: 75% 
Refurb costs: £5,000
Money left in deal: minus £4,825 (you have pulled all your money out of the deal).

The last example above leaves you in a position where you own an income generating asset with none of your money left in the deal.  You are left with more capital than you started with, and the added bonus of a monthly rental income.

Buying BMV is so important to this strategy, but the deals are hard to find.  It’s possible to review dozens or even hundreds of properties before the numbers stack up, but there are deals to be had.

A few weeks ago I signed up to Reddit, where there are several subreddits related to the FIRE movement.  I have been talking with a few people from those groups and it’s been refreshing to be able to discuss FIRE with other, likeminded, people.  One of those people is Luke, who has kindly agreed to be interviewed for this blog.  Here is the transcript:

Hi Luke, thank you for agreeing to be interviewed.  Please introduce yourself to the readers.

Hi, my name is Luke. I’m in my early thirties, I’m married and have a young daughter. I work in capital equipment sales which I have been doing for nearly 12 years.

How did you discover fire?

I wanted to try and find what others in a similar situation and of similar age as me were doing. I’d done some online research, listened to podcasts and been reading MSE forums for a little while but even within sub sections the posts were so differentiated. I’d seen a couple of reddit posts when previously looking into peoples thoughts on Index Funds and trying to scout out their journeys. Recently I decided to sign up and stumbled across “FIRE”. I had never heard the “phrase” before however in simple terms it is what I knew I was aspiring to. It’s funny really as since this I noticed one of the podcasts I started listening to “Meaningful Money”, had hosted Barney Whiter. As I had no idea FIRE was an acronym I skipped past it as I tried to dig out the most relevant podcasts in it’s 10 year existence. Otherwise known as the “Escape Artist” in his blog, Barney was a pioneer of UK FIRE after he discovered Mr Money Moustache’s blog over the pond in America. I have recently made a start of Barney’s blog.

What attracts you to FIRE?

I think the freedom to get to the point of having the option to work or not is what drives me most towards it. I would like to retire early and do aim to, but I do enjoy my job, so for me it isn’t just about retiring asap. I have a little girl who I want to provide for and as a family we enjoy the nice things in life. Oddly, I could happily Topcashback every purchase on a rewards credit card after scouting for a voucher code and reduce my spend in many ways, but I’d draw the line at sacrificing holidays and seeing the world! That’s something I’m willing to accept though and by sticking to the other 90% and investing wisely I trust we will be Financially Independent still long before most.

The freedom of choice is the big one for me as well.  Can you tell me a bit more about your goals?

My goals are ever evolving and changing still. In my early twenties, regrettably I wasn’t interested in pensions or anything FIRE. I went from a £6ph job to earning relatively good money and was just happy to not have any worries of going near my overdraft. I think the turning point came when my daughter was born, like a switch flicked. Just before she was born I dipped my toe in investing in stocks via a friend’s recommendation. But when she was born shortly after I decided to leave the company of 10 years as I felt I was worth more than they paid me or valued me. I got serious about my pension and more importantly started to think about FIRE. A promotion at my current work is likely (I hope) in the next 2-3 years. I would like to be successful in my profession and this goes hand in hand with reaching FIRE.

I like to set shorter and medium term goals as I feel like just aiming for FIRE can feel a long time away. So this year I plan to have a total 50k invested total in the markets whilst I’d upped my pension contribution by 4%. The medium term goal (10 years) is to get to a crossover point whereby I have more invested or achieved greater net asset worth than the amount outstanding on mortgage. We took on a large mortgage so it still stands at around £250k. It’s likely I wouldn’t pay it off (unless interest rates rocket) but the thought of the weight off my shoulders to think I could be mortgage free at that point is quite liberating and an ideal goal for me.

How supportive are friends and family of your goals?

To be honest, not many people know of my goals. Not extensively anyway. My wife is relaxed and happy for me to effectively plan our family’s future by investing. She knows there is risk but she sees the time I spend researching and knows I am not essentially “gambling” it away. That said she doesn’t ask how it’s going very often at all! Despite my closest friends all being home owners and in jobs around or above UK average wage, most are either risk averse or not really interested as they don’t truly understand money. I would profoundly recommend everyone to read “Rich Dad, Poor Dad”. I think if 10 of my closest friends read it, almost all would change their behaviour toward money and their future.

Rich Dad, Poor Dad was a life changing moment for me as well.  It seems to be a common starting point for anyone following FIRE.  What type of investment would you like to learn more about?

Buy to let is probably the one that stands out. I had initially neglected Buy to Let, admittedly due to seeing some stories where people warned away and so I just buried my head on a path of index fund investing. I am open to learning though, especially if I see plans and success stories I think make sense such as the reason I read this full blog within a day or so! I’ve targeted myself to do more research on BTL, as I was shown how easy it is to dismiss something because some people have negative stories. In my opinion that’s half the reason the majority of our parents (who maybe could have) haven’t and daren’t go near the stock market for the fear of losing.

I believe with extensive research, I would back my skills to be able to see whether a BTL opportunity was going to make me money or not. And if the outcome was it would, why not go for it.

New types of investment opportunities are likely to come in the next 10-15 years. If it was robust and I genuinely believed it would help me towards FIRE I would be willing to at least learn about it. You have to be willing to adapt.

A fun question now.  How would you invest £1,000,000.00?

After learning about compounding, I’d do the sensible stuff first(immediately after a nice family holiday!). I would continue to work until my revised FIRE plan was achieved. In year one I would max out mine and my wife’s ISA’s and LISA’s. I would put 40k each into our pensions and max out a JISA for my little one. I would invest it in index funds and I think I would plan to keep the same equity exposure plan. That’s £130k or so with the holiday. I would almost certainly in this instance certainly invest a lot of time into learning about BTL with the aim of receiving passive income, as the other options are then tax on investments or low bank interest rates. I would probably look to own 2 BTLs whilst still working. They’d be under £125k each, bought outright initially (plus costs and refurb) so I could set them up as a Ltd company. That’s £410k. I would probably look to overpay my mortgage, certainly in year one outside tax wrappers as banks pay so little, 10% overpayment would be £435k spent in year one. I would spread my money into separate accounts to be under the 85k insurance threshold (David’s note: In the UK, the FCSC protects customers deposits up to £85,000 with that bank, so that if the bank goes out of business your money is protected up to £85,000.  Many people with large cash sums spread their cash across multiple banks to increase their protection).

I’d then replicate the tax free wrappers in year two onwards. Reviewing if BTL are making me good money I may look to expand whilst probably leaving a healthy £100k immediately accessible. Of course there would be a few more meals out but I wouldn’t drastically change our spending as it would be a real opportunity to FIRE early whilst living a comfortable lifestyle in the future.

I would probably start to look to set up a website selling something once I had set up those BTL’s. I could build this up with help from my wife and ideally get to a point I could work wherever I wanted for just a few hours a day which would give flexibility most likely become a semi retirement option. I’d invest in my health to get back in shape, with intention to stay in shape and stay healthy. Last but not least I would probably set up a small charity relating to Cystic Fibrosis. I am a firm believer that if you give and be kind, then it will come back around.

Do you find it difficult to get people to talk openly about money?

Yes, without a doubt. But I think most people find it difficult. I think from the side of offering information you are mindful not to be too open incase they bought an equity index fund you chose and (like now) it drops 20-30%. From the side of learning, for some they don’t fully understand money nor realise the importance of making it work for you so they aren’t interested. Friends seem to choose not to ask too many questions even if you tell them what you’re doing, especially as it is a long term goal, with risk.

It also means sacrifices need to be made and unfortunately with the generation of Instagram they want to have the £350 trainers, business class air tickets and the general perception of being rich means more to an ever increasing amount of people.

But this is why I enjoy talking to like minded people with an element of anonymity so I can be open with my plans and learn to get the most out of my financial journey.

What is the most difficult financial lesson you had to learn?

It started because I was very lucky and made some money too easily and too quickly when I tried AIM (alternative index market) in the first couple of months. It led to me following people in on stocks I didn’t complete due diligence with. I might as well have been betting on the 3rd division of Mexican football. I didn’t really understand the market and so had some stocks that lost money within hours. Others made profit and then a month later were down as I didn’t sell because I was greedy. It turned out to be a very good financial lesson, but had I used that money and put it into an index fund from 2015 I would be significantly better off financially now.

I’ve made those same mistakes too.  I remember making money on an airline stock and getting too confident, and then losing money on a mining penny stock.  I think this is the most important financial lesson people need to learn.  If you don’t understand an investment, you are gambling.  What is your biggest financial success?

As I am still relatively young on my FIRE journey I would probably define a success as being a “penny drop” moment. As mentioned above, there were two of these. Firstly was the birth of my daughter as that was what gave me my purpose for FIRE and to provide for her. The second was after I finished “Rich Dad, Poor Dad”. It was truly a penny drop moment of starting to understand about making money work for you. It inspired me to need to learn more and more. As Gary Player the golfer once said “The harder I practice, the luckier I get” and I think this is especially relevant in order to be successful in getting to FIRE.

I couldn’t agree more.  Thanks for your time, Luke.  I’d love to catch up with you again in a few months and see how you’re getting on.  

Final Notes

Thank you for reading this week, and I hope you have a great week ahead.  If you are following F.I.R.E. or would like to know more about it, please get in touch via Twitter (https://twitter.com/NowWeLive01) or leave a comment on this post.  ​