Buy and hold if you can

My preferred strategy when it comes to property is a boring buy-and-hold for as long as I can. Being a ‘Mingebag’ (or ‘Fun Sponge’ as my 8-year old calls me) this suits my personality.

Property prices are very cyclic, as I have witnessed first hand over the last 18 years. This is ok if you are a Landlord who is in it long-term, as the ups and downs tend to have less impact.

In my mid twenties I had 3 rentals that were in negative equity after the 2008/2009 financial crisis. Being around £50,000 in the red put me in a dark place and I eventually became numb to it and accepted the fact that I was a failed property investor.

It took me over a decade to sort my act out and get back into buying rentals. My problem was that I let a few bumps in the road deter me and prevent me from doing something that I love.

Being a Landlord isn’t always easy. There is always a tenant who wants their ass wiping and the Government doesn’t help, as they always seem to find a way to kick you in the proverbial balls.

With sustained tax and regulatory squeeze from successive chancellors, this has had a big (negative) impact on landlords in the UK (Financial Times). This almost led to me giving up on property all together and I can fully understand how this will prompt many landlords to sell up.

An example is the 3% stamp duty on buy-to-let and second homes that was introduced in 2016. This means that if you want to buy a rental for £100,000, you have an additional £3,000 to find as well as the 25% deposit and other costs like solicitor fees.

This is without the next bump in the road, which is the COVID-19 pandemic that we are all, trying our best to deal with.

Back in March when the UK was about to go into lockdown, I was getting messages from my tenants who were understandably concerned. My attitude was that if they were out of work they could have a 3-month rent holiday providing the mortgage company gave me a 3-month mortgage holiday.

It worked out that 2 out of 4 tenants lost their jobs so they were given the rent holiday. Thankfully, the mortgage companies gave me the mortgage holiday so there were no real issues. Interest will still be added to my mortgage and my payments on those two accounts will go up but this was my only option for tenants who were struggling at the time.

My aim is to review it in the middle of June and hopefully my tenants will be in a better place financially. The Mortgage holiday scheme, initially set up in March, has been extended so that borrowers can have a break of up to 6 months (This is Money). This is something I hope to avoid, as I don’t want the interest to add up for another 3 months.

Even with increasing taxes, more and more legislation, the current crisis and the looming aftermath (inevitable hard times economically) I still feel confident that the ‘Buy and hold’ strategy is the way forward.

Thinking back to the financial crisis of 2008/2009, it scared me away from property for many years. This time I am hoping that my experience will kick in and the current crisis won’t scare me away and (with a bit of luck) I will be able to continue to buy rentals.

Another mistake

The first house that Mrs Duffy and me lived in was the result of one of my financial mistakes.

Getting a little too excited, I didn’t want to miss out on a new development in the area where I lived. Me being the big time property investor I would swoop in and make a quick £10,000 and move on to the next one.

This didn’t happen, as my £130,000 purchase never got valued above £125,000 after it was built. So because of my little f**k up, we had to move in and live in the house (a house we didn’t want to live in) for 5 years.

I was never going to sell for any loss so I knew I had to keep it long-term. After moving out we started renting it out and have had good tenants ever since.

14 years after the failed purchase, the mortgage is now significantly lower than the £120,000 that we would probably get if we sold it so we now see it as a good investment.

This just shows that with the right strategy (buy and hold long-term) you can afford the occasional mistake when buying rentals. Just don’t make as many mistakes as I have over the years!

What to teach the kids

Teaching is a difficult skill and I have increased respect for the brave souls teaching a classroom full of kids. Thinking of my 8-year olds teacher, she deserves a medal, as my little angel is interested in anything but education.

Mrs Duffy and me are doing our best to home school our kids (during the current Pandemic) but it is difficult and our worry is that they fall behind. The school is in touch and have re-assured us that anything they do is a bonus and that they will have the chance to catch up when the schools re-open.

I am going to take this opportunity (home schooling) to teach my kids the importance of being financially literate from an early age. This is a process that takes years as I am finding out myself.

Although schools are brilliant at teaching subjects like Maths, English and Science, they don’t teach the kids how to learn (Jim Kwik). They don’t teach the kids about money (Robert Kiyosaki) and how to be financially literate.

This is where I come in. If I can get my kids to be financially literate from an early age, they can avoid all of the mistakes that I have made over the years.

In theory, both my girls (due to their ages) have minds like sponges so I should be able to educate them effectively.

Looking at the basics of the brain, it can be split into two when we are concerned with learning and in this case home schooling. The left side is thought to be the more analytical, logic side. On the other hand, the right side is the creative side.

To make the most of both sides, I am going to educate my kids through a well-known game called Monopoly (Robert Kiyosaki). The theory is that games engage both the left and right side of the grey matter. With both sides of the brain engaged, this helps any information stick as the brain operates more effectively when we use our logic side and our creative side together.

Monopoly can be used to teach kids about passive income. It is all about building houses and hotels on property and this generates a regular source of income. This is the strategy that is going to win you the game.

A common mistake with Monopoly is to hold onto your money and not buy properties. This is a mistake I have made in real life as I left money in Premium bonds for about 5 years instead of buying more rentals. This money could have been used as deposits for 3 rentals but I try not to cry over spilled milk.

If I have £50,000 and hold on to it for 5 years or even 10 years, that money devalues over time due to inflation. This means that I have less spending power after 10 years.

With a little bit of education that money can be used to buy 2 rentals or could also go into a stocks and shares ISA. Both are good options depending on your preference when it comes to investing.

Using the property example, I am going to use the £50,000 to buy 2 rentals at £100,000 each (25% deposit required for each). There are other costs involved but they are excluded for simplicity.

From experience, I know I can achieve a £200 pcm profit on each property by using an interest only mortgage. There are positive and negatives to both repayment and interest only but in this case we are looking for cash flow.

That £200 profit pcm is £2400 per year. With both rentals factored in that is £4800 profit per year. This £200 profit I am referring to has already taken into account mortgage payments, tax and maintenance.

After 10 years, this profit becomes £48,000. So added to the original £50,000 (deposit money) we now have £98,000. As an added bonus, we will probably get capital appreciation so we would likely be well over £100,000 but I am going to be cautious and say the property prices haven’t gone up.

Now even with inflation thrown into the mix, having £98,000 instead of £50,000 means that our money has almost doubled and we will be in a much better place financially and will have more spending power. More spending power than you would have by holding onto your money and being too cautious.

This example would be too much for my kids at this stage but it is what I will be working towards in years to come.

Like the vast majority of parents, I want more for my kids not just in terms of finances but also happiness. I believe that a good financial education will help them and give them a massive advantage in life. Unlike me as a clueless 18-year old (last weeks post), they will be able to make informed financial decisions that will hugely benefit them in their 30s and 40s.

Going forward, I am aiming for 1 game of Monopoly a week as it is up to me to provide the financial education my kids need. When I am eventually financially literate, my kids will also be financially literate.

MY £500 AS A CLUELESS 18-YEAR OLD

If only I had got into self-development as an 18-year old when I was starting out in my chosen career path. If only I had started investing as an 18-year old.

Possibly one of my biggest financial failures (F**k ups) is not investing early and taking advantage of compound interest. The frustrating thing is that I did start 19 years ago with £500 a month.

What I done with that £500 a month was put it into an Alliance and Leicester ISA. I was even considering putting it into a stocks and shares ISA to get an improved interest rate.

To get my head into stocks and shares I started reading the Financial Times on a Saturday. This lasted 3 weeks as the FT was like a foreign language to me. If I continued to read the FT every Saturday, I would have read it 988 times. With that extra knowledge, I would have been in a much better place financially.

The £500 a month investment lasted 6 months and then I stopped investing and withdrew the £3000. There will have been a little bit of interest to add but not much at all. I didn’t invest in stocks and shares and investing for 6 months is not making the most of compound interest.

With a little bit of knowledge back in the day, I could have achieved 7-8% interest per year with a stocks and shares ISA. This knowledge could have been gained by reading the FT or the Economist. Or even a book on how to invest.

Around the time when I was reading the FT (for 3 weeks), I was also in the self-help section of Waterstones looking for a book on how to invest. Again, I didn’t get the book and the rest is history.

An investment of £500 pcm for 19 years would have made the most of compound interest. With an interest rate of 7%, I would now be sitting on £224,273. £110,273 is money earned from interest (compound interest) and the rest (£114,000) is from contributions. This almost brings a tear to my eye.

Let me sicken myself further and add another 11 years on. This would have meant that I am 48 and have been investing for 30 years.

Investing the £500 for 30 years would have got me £566,764. This is when compound interest has kicked in as £386,764 of that end total is from interest on top of interest (compound interest).

This demonstrates the power of compound interest. If I had fully understood how interest works as an 18-year old, things might have been very different.

What I will do going forward is to make sure I invest long-term so that I can take advantage of this knowledge.

Someone very close to me is a young lad (like I was) who doesn’t invest. Knowing some of his finances, I know he could probably afford to invest £1000 pcm. The difficult thing is convincing him to learn from my mistakes.

Let us imagine I convince him to invest. He is 22 now and is going to invest for 20 years. Same as before he will get an interest of 7% – plenty of funds available that can achieve 7-8% interest per year.

That £1000 pcm will get him £491,945 by the time he is 42. £251,945 of that end total is again from compound interest.

Even without much knowledge, it is important to start investing as early as possible. Hopefully the above examples illustrate the benefits of investing long-term.

Many contractors who I work with now in there 60s, would agree with me as they have no pension and are still working hard now trying to get their affairs in order.

Does Money bring happiness

“Today well lived makes yesterday a dream of happiness and every tomorrow a vision of hope.” Kalidasa ‘Solution to the Dawn’

Does money bring happiness? This is a difficult question and one I have wrestled with since becoming obsessed with self-development and pushing for some FI (Financial Independence).

To help me answer this for myself, and anyone who is interested, I am going to go over some key points that I have taken from Brian Portnoy’s excellent book, ‘The Geometry of Wealth.’

CHAPTER 1: Alone together

Money life – earning, spending, saving and investing – is fraught with complexity. People are confronted by three challenges currently. First, the demise of classic pensions and the rise of do-it-yourself investing has put an increasing burden on individuals to control more dimensions of their money lives, despite widespread financial illiteracy. Second, the human brain is hardwired with an array of cognitive and emotional biases that impede good financial decisions. Third, a dim outlook for long term capital market returns and the rapidly changing nature of employment suggest that there is less room for error than in previous generations.

The top and bottom of it is that our generation is up against it. I see examples of financial illiteracy all the time and the majority of the people I talk to about money, have no financial plan and are taking things as they come.

I am very emotional when it comes to money and have made many poor financial decisions. To counter this, I have replaced my strategy of chasing the pot at the end of the rainbow (expecting a big football bet, premium bonds or a hot share to win me serious money) with long-term strategies. My strategies are buy and hold rentals (Property) and also a set and forget index tracker fund (Stocks and Shares).

Not to be too much of a dark cloud, but the prospect of automation and AI (artificial intelligence) is scary from an employment point of view. It seems very likely that the number of jobs will massively reduce over the next few years. So, if we want to be ok money wise, we have to be on our toes!

CHAPTER 6: Setting priorities

Our first priority is to protect ourselves from the potential of less, even catastrophe. We want to maintain a “less wrong” mindset. Second, we map what we own and what we owe. By making sure these are in balance, our money life is likely to be stable. Once achieved the final priority is to engage in more aspirational pursuits, recognizing that gratitude and generosity are proven sources of contentment.

One of my priorities is to provide security for my family and me. To get some security I have started looking at ways of getting more than one source of income. Being a contractor and relying heavily on one source of income is risky. After a few months out of work, it is squeaky bum time as us contractors start to worry about the basics like paying bills and putting food on the table.

Looking at money balance, I am drawn to Robert Kiyoasaki’s money quadrant. As long as our income exceeds our expenses we are in a good place. Looking at the bigger picture, if our assets exceed our liabilities we have stability and security.

Many contractors focus on their day rates when thinking of personal finance. It means absolutely f**k all what you are on per day as I have found out in the past. If you spend more than you earn, you will end up with sweet F**k all.

CHAPTER 7: Making decisions

The human brain is prone to making poor financial decisions, the impact of which can be very large. The classic example is when the market tanks and investors sell in a panic, locking in losses and then later missing the rebound. The second factor is the holistic shape of one’s portfolio, best expressed by being allocated to the appropriate segments of the market. The specific stocks, bonds, and funds which grabs the eye and quicken the pulse of investors are the third, and less important, drivers of financial success.

With painful experience and some self-education, my aim is to move away from poor financial decisions.

After having my ‘Life-Strategy 80/20’ fund for just less than 12 months, I have seen my fund go from +7.6% to -35%. A positive for my new outlook is that I have remained calm and have managed to keep hold of my fund. Not only that, I have also continued to invest each month to take advantage of pound cost averaging.

Due to books I have read, I have ignored the -35% and looked at it as a positive. By continuing to invest each month during a market crash, I have been able to buy shares (via my fund) for reduced prices. Sales are right up my street and 35% off is a big discount.

CHAPTER 10: You are here

The human ability to think through time via memory and imagination is one of our species most important advantages. While that ability creates enormous opportunity, it has some less desirable side effects. One of these is the difficulty to find presence (being in the now versus later or before), which is a demonstratable source of joy. In our money lives, this challenge manifests itself in the enduring tension between two distinct states of mind: desiring more versus having enough. Both are legitimate and useful motivations for human survival. But at any moment, they are incompatible. Striking an ongoing balance between more and enough – between progress and presence – sits at the deep core of enjoying a wealthy life.

Finding the balance between presence and progress is something I am currently battling with. I know that I need to be more present in the moment as I am a little bit obsessed on how I am going to get where I am going.

Although I am very grateful for what I have, I still want more. My aim is to have FI in my 40s to give financial security and stability to my family. So, that I can work at home and get to sleep in my own bed every night.

An added bonus would be having a property business that is my main source of income. This will mean I get to do something I love every day instead of a job that pays the bills.

After reading the Geometry of Wealth it is clear that money happiness is a difficult topic. There is an important distinction between being rich and being wealthy. The first being just about money and more of it, the latter is funded contentment. Personally, I will be very happy with funded contentment.

To me it is ok to have ambitious goals and to want more. The important thing is to try and be happy no matter what stage of your life. If for example, you are pushing hard for your financial goals for years and you have the mentality that you will be happy when you reach them goals, then you might waste 5,10 or even 20 years of being a misery (this is what I am in danger of if I’m being honest).

If you push hard for them same goals but you can be happy during the grind, you have the right type of mentality. Being happy when you are first starting out and haven’t got much money, during the years when you manage to accumulate more money and wherever you end up financially, you have found balance. In the language of the Geometry of Wealth, you will be wealthy and will have funded contentment.

A quick summary of what I got from this book:

  1. It is important to learn about money so that we can take care of our own financial lives
  2. Face your financial fuck ups head on and learn from them
  3. Focus on your net worth not how much you get in your current job
  4. If you are going to invest, think long-term
  5. Don’t panic – stick to the plan
  6. Be grateful for what you have
  7. Think about progress but not too much – try and get some balance
  8. Be present in the moment – this is a game changer and I have heard it over and over – choose calmness over anxiety

Back to that hard question of, does money bring happiness? Approached in the right way with some presence (being happy today), it is a contributing factor in my humble opinion.  

Being too emotional with money, I have had a poor relationship with money for many years. Now that I have changed my strategies and am thinking more long-term, I am starting to get more balance and am enjoying the grind of pushing towards my FI.

Get to grips with your Tax

Hopefully most adults in the UK are fully aware of the tax system and don’t run into any avoidable problems.

We might look at tax as a giant ball ache but it has to be done. Otherwise we wouldn’t have the NHS and other key services that we heavily rely on.

Like many things money related, I have been slow on the uptake when it comes to understanding my tax situation.

NOT GOOD ENOUGH.

Part of my master plan (if you can call it that), is to run my own property business. My younger self wouldn’t have had any hopes of running a business as I didn’t even know what taxes where associated with Limited companies.

Going forward, my intention is to buy rentals via a limited company. What chance will that property business have if I am not aware of the tax implications associated with having a limited company. Not only that, there are the tax laws associated with having rental properties.

Many contractors, who I have worked with over the years, tend to put their tax to the back of their mind and worry about it when their tax bill comes. Looking back in 2012 when I started contracting via a limited company, I should have put 20% of my wages into a separate account to cover my corporation tax. But at the time I honestly had no idea what corporation tax was.

Unfortunately, for the first 6 years of having a limited company, I never bothered to get my head around tax. This brought me a few nasty surprises from my accountant and the usual anxiety I tend to get whenever money is concerned.

As I wasn’t fully aware of the tax system I always thought I had more money than I actually had. This is illustrated in my good old (less than 1% interest) Premium bonds and the fact that I built up a decent amount of savings in there.

After a few good years contracting I had reached £70,000. I got into commissioning when the oil prices were high and the 1st 4-5 years I was very fortunate and was able to get some good savings behind me.

During this period, I was that clueless, I got a £10,000 loan to pay my tax bill. And this happened 2 years in a row.

I was that deluded I thought I was going to win a big prize in Premium bonds and would rather take a loan out to pay my tax bills. So after paying these tax bills with loans, I let myself believe that I still had £70,000 savings.

Choosing to ignore the £20,000 loan was typical of me at the time. Not to mention the £6,000 of interest on top of that. So I didn’t have £70,000, I was now down to £44,000 when factoring the loan into the equation.

Finally realizing the importance of understanding tax, only took me 35 years. This lack of knowledge has no doubt cost me a significant sum of money and contributed to my previous negative mindset towards money.

As I have a limited company and properties that I rent out, understanding what I need to pay the Taxman each year is complicated. My limited company is for electrical contracting and the properties (4 rentals) are personal so I have to add any rent received to my earnings.

Due to changes brought in by George Osborne back in 2016, landlords in the UK have to pay tax on any rent received. The old way of paying tax on any profit received was fair in my opinion. To side step this extra tax I have signed my 4 rentals over to my wife as a declaration of trust.

Mrs Duffy will pay roughly 20% tax instead of the 40% I would have had to pay so it was a no brainer. The changes to property tax, is the reason why property limited companies are becoming more and more popular for landlords and property investors.

Get a grip

The following example is going to be hypothetical and we will use the limited company I have recently set up to buy rentals. Despite having zero properties within my newly formed company, I am going to imagine I have a few and they are making a decent return.

Corporation Tax for Limited Companies

The current tax rate for 2020 is 19%. We will use an £80,000 turnover to avoid the added complication of paying VAT.

Let us imagine DUFF PROPERTIES has earned me £80,000 and my accountant manages to knock off £20,000 in expenses from the top line. I now have to pay corporation tax on £60,000 and that would be £11,400 (19% of £60,000).

I am now going to imagine I have fucked contracting off and DUFF PROPERTIES is my full time job. The money I have left over after expenses and corporation tax is £48,600.

My first £12,500 is tax-free. I am going to spend it all so I have another £36,100 to spend. This will be classed as dividend payments.

Looking at dividends, the first £2,000 is tax-free. The remaining £34,100 is taxed at 7.5% and this totals £2,707. This will take my total tax for 2020 to £14,107.

Self-assessment tax

The £11,400 from above will be paid to HMRC Corporation TAX. The £2,707 falls under my self-assessment that needs to be completed by the end of January to avoid fines.

To see the guidelines for self-assessment tax or any other tax, visit HMRC.gov. For me personally, I get my accountant to complete my self-assessment to ensure it is done correctly. My self-assessment will take into account PAYE tax I owe from taking dividends out of my Limited company.

Self-assessment payments are due by 31st January (1st payment) and also 31st July (2nd payment).

If you are required to complete a self-assessment, you or your accountant will need your UTR (Unique Tax Reference), NI (National Insurance Number) and Employer reference. Another point is that you may have to pay 50% of the projected self-assessment for the next year. This is where it can get a little complicated so it might be worth sending your accountant a quick e-mail for clarification.

Getting to grips with my tax has been difficult. This is because I have let my finances get messy and have brushed taxes to the back of my mind. Now I have an improved understanding, I feel it will help to save me from unnecessary costs and will help me in the future as I attempt to build a property business.

The tax changes that I have mentioned stopped me from buying another rental back in 2016. I could have used some of that premium bond money and bought 2 rentals. This could have led to 1 or 2 rentals a year but I let my negative emotions stop me from doing so.

Now I have a bit of tax knowledge, it is another string to my bow. Reading book after book on self-development it seems someone somewhere has done what you are trying to achieve. There is a solution to every problem it just takes a little bit of effort.

Where there is a will there is a way.