Looking Back: Part 3

[Originally published November 15th, 2019].

Weekly Update

The short version of the story is that I’m still in pain.  My ankle/foot is still hurting a lot but the tramadol is taking the edge off and leaving me pretty spaced out.  I’ve seen a consultant who thinks I could have a stress fracture or possibly something called Complex Regional Pain Syndrome (CRPS).  The consultant did go to great lengths to explain that CRPS is rare and that it is diagnosed through a process of eliminating other diagnoses first.  If it is CRPS I could be left in pain for months and as there is no known cure, the treatment is a case of pain management.  Safe to say, I hope it is not CRPS.

I don’t like being trapped inside due to health problems.  Since the 5th of November, I have been outside of my apartment four times and each time was to visit the hospital.  I would love to head out and chill in a café or bar for a little while, but the pain is simply too intense.  So here I am, writing this blog whilst watching the rain hammer down outside.  I do enjoy the sound of rain though.  Water generally produces relaxing sounds, apart from the roar of a tsunami.     

​So, here we are; Part three of Mortgage Advisor on F.I.R.E.  I am going to discuss a few things in this update.  I will have a closer look at some of the best books I have read on financial independence and investing.  I will also have a brief look at BTL mortgage affordability, and Stocks and Shares ISAs.  First things first though, my weekly financial update.

Financial Update

Premium Bonds: £8,650 (no change from last week).

Stocks and Shares ISA: £6,912.39 (up £31.19 from last week).

Credit Card Debt: £3,899.99 (down £37.24 from last week).

F**k It Fund: £850.96 (no change from last week).

Surplus Cash: £295.00 (down £5 from last week).

Total Wealth Figure: £189,208.35 (property valued at £172,500) – £138,818.82 = £50,389.53 (up £486.53 from last week).

Not a bad week overall.  Some weeks will see very little change but the week when I get paid will see more change as I move money into investments and pay larger sums off my credit card and mortgage debt.  

Book Recommendations

If you are just starting your journey of financial education, then the best book I can recommend to start with is Rich Dad, Poor Dad by Robert Kiyosaki.  There is limited practical information in this book, but it will change your mindset.  It will make you think about money in a completely different way.  Most people think of money as a taboo subject.  In many households money is seen as a source of stress and some Google-fu will demonstrate that financial issues are one of the main reasons couples split.  There are two aspects to this; the first is that people do not talk about money enough.  The second aspect is that people are generally not financially educated enough to talk about money in an informed way.  Rich Dad, Poor Dad will put you on the right path but it is only the start of the journey.

Another book I would thoroughly recommend to advance your journey would be Money by Rob Moore.  This book looks at the concept of money in a bit more detail.  Again, it’s a bit thin on the ground in terms of practical advice but the book will keep you thinking in the right way about money.  Rob Moore made his fortune in property and so the book is coming at you from that viewpoint.  To balance things up a little I would then suggest reading How To Own The World by Andrew Craig.  This is a fascinating book that will help explain how stocks and shares ISAs work.  It also looks in more detail at the mechanical, automatic way wealth can accumulate if you set up the right systems and processes.  Another book looking at this is I Will Teach You To Be Rich by Ramit Sethi, although this is focused on the US many of the lessons can be applied to the UK as well.  

​If you find books like those mentioned a chore where you feel you are being lectured to, then I would recommend The Latte Factor by David Bach and John David Mann.  I have just finished listening to the audiobook.  At my level of financial education, it was a very basic listen.  However, it interestingly approached the subject matter.  On the surface, The Latte Factor is a work of fiction.  However, through the events described, there are several financial lessons learned.  The Richest Man in Babylon by George S. Clason uses a similar method to teach financial wisdom. 

BTL Mortgage Affordability and Eligibility

The eligibility criteria for the BTL mortgage are different for an owner-occupier mortgage.  When you buy a property to live in yourself, you generally need to satisfy three things; affordability, credit worthiness and the property needs to be suitable for a mortgage.  It does not matter if you are a first-time buyer, a homemover, or raising money on a property you live in and own outright.  The three pillars of mortgage eligibility are the same; you need to be able to afford the mortgage payments, you need to have a good credit record., and the property needs to be adequate security i.e. it can’t be a wreck that is about to collapse and it needs to be habitable.  

BTL criteria are somewhat different across the market, although some specifics differ between individual lenders.  In general;

1. You need to own the property you live in, either outright or with a mortgage.
2. You need to earn a minimum amount, normally £20K-£25K (although it varies from lender to lender).
3. You need a deposit of at least 25%, although some lenders accept less, the rates of interest will be much higher.  The deposit source cannot be a loan.
4. The anticipated rent needs to exceed the mortgage payments by a certain amount.  You will hear a lot of figures thrown around regarding “stress tests” on mortgage affordability.  A bit of Google-fu shows some lenders are stress testing at 5% and require the rent to be 125% of the mortgage payments at 5%.  [These figures will have probably changed since this was originally posted, although the principle remains the same].
5. There are rules around who you can let the property to.  Letting to a family member opens up a can of worms, for example.

Although I am looking at BTL properties being the foundation of my financial independence, I am a qualified mortgage advisor and have taken years to financially educate myself.  If you are thinking of taking on a BTL mortgage, I strongly advise you to seek advice from a qualified professional who can look at your specific circumstances and tailor advice accordingly.  I take no responsibility for your actions. 

​Using the above criteria, if you are earning enough money and have a deposit saved, it can be quite easy to obtain a BTL.  The biggest barrier myself and my JV partner will encounter is when we get three BTLs we may be considered portfolio landlords.  At this point, some lenders get a little more cautious about offering further BTL mortgages.  However, a lot could change in the year or two it will take us to obtain that many BTL mortgages. [Oh, my naive optimism strikes again!]  Once you are a portfolio landlord, you generally need to approach more specialist lenders to obtain new BTL mortgages.

There are costs associated with BTL that many amateurs do not consider when buying their first rental property.  As of 14/11/2019, Stamp Duty Land Tax is payable on all BTL regardless of purchase price.  If you are buying a rental property for less than £125,000 then you pay 3%.  This is one of the reasons why many landlords accumulate properties in the £70K-£100K bracket.  There are costs to bring the property up to the safety specs needed to rent it out, as well as agent and management fees.  If you do not educate yourself first, you will almost certainly lose money on a BTL.  

[Even when experienced in mortgages and property, some things can completely derail your plans, such as consecutive tenants causing thousands of pounds of damage when moving out].

​What I like about BTL is that the income is regular, and the underlying asset is stable.  Over time, property prices increase.  This is demonstrable over decades if not centuries.  There are risks with BTL such as a tenant not paying on time or simply refusing to pay altogether.  However, there are steps you can take to mitigate this risk such as enhanced tenant screening, using guarantors or even insurance against tenants not paying rent.  Although BTL is at the foundation of my plan for F.I.R.E., there is another important part; my stocks and shares ISA.

What is a Stocks and Shares ISA?

A stocks and shares ISA, sometimes known as an investment ISA, is a tax-efficient way to invest in individual stocks or investment funds.  There are many share dealing accounts out there but not all of them have ISA status.  A basic share dealing account will allow you to buy and sell shares.  Each account provider will charge fees in one way or another.  Some have a flat fee per trade, whilst others allow a certain number of free trades per month before you are charged.  In a stocks and shares ISA, these charges are still applicable.  The main advantage to a stocks and shares ISA is that you are exempt from Capital Gains Tax on any profit made.  If you are looking for long-term capital growth, then you need to protect your gains within the ISA wrapper.  

Within the ISA you can choose to invest in a vast range of funds or individual stocks.  Countless books have been written on how to pick funds or stocks, but the best advice I have received is to make the process as “hands-off” as possible.

There are many types of investment funds and there are several ways to categorize them.  You can look at accumulation or income funds, or actively managed funds or passively managed funds.  There is a lot of information to take in.  However, as I stated a few sentences ago, my research suggests that the key to long-term growth and wealth is to make the process as passive as possible.

I invest in funds that track the FTSE 100, FTSE 250 as well as a US Equity Index tracker from Vanguard (my preferred fund manager).  Like with property, the stock market increases over time.  There are peaks and troughs and some of those troughs are major, but over time the stock market has always bounced back and it tends to outpace inflation.  

[I now invest in fewer funds, with just two in my ISA; a global index tracker, and an income fund that pays a monthly dividend].

Over the last century or so, the stock market has shown year-on-year growth of 8%-10% when viewed over the long-term. Actual returns vary depending on the time frame you are looking at.  I am investing £250 per month at the moment into my stocks and shares ISA.  Assuming an 8% rate of growth, in ten years’ my stocks and shares ISA could be worth £60,000.  At a rate of 10%, we would be looking at almost £70,000.   Over twenty years, at a growth rate of 8%, the fund would be worth £180,000.  If you google a compound interest calculator and play with some figures, you will see just how scary compound interest can be. 

[I got to £60k in my ISA much faster, but the market has been stagnant for a while. It’s going to be interesting to see how the market develops in the coming years following Brexit, Trump, Covid, the war in Ukraine etc].

A couple of examples:

1. You are an eighteen-year-old and want to be financially comfortable by the time you reach 50.  You have a decent job and don’t go crazy with your cash.  You invest £10 a day into a stocks and shares ISA.  After 32 years, at a rate of just 5% growth, you would have over £250,000.  If the rate of growth was 10%, you would have over £750,000.
2. You are a twenty-five-year-old in a good job.  You have plenty of disposable income and are putting that money into a cash savings account.  If you were to invest £20 a day to retire at 60, assuming 5% growth you would have around £670,000 to help when you retire.  Assuming 10% growth you would have over £2,000,000. 

Compound returns are so, so powerful.

Exit Strategy

You might be thinking regarding my figures “£180,000 is not a lot of money to live off.”  You’re correct.  It is not.  The point here is that the ISA is just one part of how I plan to create enough wealth to retire early.  I will have the properties generating income every month as well as the capital growth that comes with property.  The ISA is a different animal. 

​In addition to the different funds I invest in, I have holdings in individual stocks.  These stocks pay dividends either two or four times a year.  At present, I reinvest my dividends to increase my holding in those stocks.  However, as I get to retirement I may look at splitting the dividends so I use some of them to live off and reinvest some of them.  It is a similar principle to investment funds.  I mentioned earlier that there are accumulation and income funds.  An accumulation fund is concerned with accumulating more value, which means gains in the fund are thrown back into the fund to increase the overall value.  Income funds take the income generated by the fund and pay it out as dividends to those who own shares of the fund.  Most of the major funds will allow you to switch from accumulation to income so that when you are ready to live off your investments you move from the accumulation phase to the income phase.  There is a part of this puzzle I have not yet discussed, which is the concept of Safe Withdrawal Rates.  I will cover this in next week’s blog.  For now, thanks for reading. 

[It’s a little bit jarring to look back and see how much my opinions, and knowledge, have changed and developed. The whole concept of selling units in line with a Safe Withdrawal Rate was something I was uncomfortable with because it felt too risky. However, I’ve come to realise that it’s probably less risky than going with just income funds].