DUFF Properties and the prospect of rising interest rates

After reading How to own the world, by Andrew Craig, I’ve been reading Moneyweek for the last few years. One of the constants each week, is that inflation is coming. Whether you believe that to be true or not, it is worth doing some research on the subject.

The Great Financial crisis of 2008, led to QE (quantitative easing). Basically, the likes of the US and the UK printing shit loads of cash. And if you believe what many experts are saying (like experts in MW), this will lead to inflation.

Inflation is basically the decline of purchasing power of a certain currency over time. With rising inflation our pound (here in the UK) is getting weaker.

QE causes inflation because an increase in supply, weakens the value of currency. With this, QE reduces the purchasing power of the pound in the UK. If you look at Bitcoin, the supply is limited to 21 million. This is a reason why many believe the value will increase significantly in the future.

The price of bread also contributes to inflation. If the cost of goods increases (e.g. bread), this again reduces purchasing power of our pound.

Going back to How to own the world, you will learn all about interest rates and inflation. For example, if you earn 2% in your savings for a given year, the inflation rate might be 3%. This mean your real interest on your savings is -1%. Trust me, interest rates and inflation is worth understanding.

What does rising interest rates mean for your properties?

With rising inflation, interest rates tend to rise as they are linked. What if these interest rates went back to the early 90s. In 1992, the interest rates were at about 10%. Imagine your mortgage payments if the interest rate jumped to 10%. This would cause serious pain for property investors who chose a variable mortgage product. Hopefully, this won’t happen, but it is worth doing some research into your mortgage products and the impact of potential inflation.

The current Bank of England base rate is 0.1%. And mortgage products are linked to the Bank of England base rate. According to WHICH, this figure was at 5% before the 2008 financial crisis. Hopefully, this won’t happen, but it is worth doing some research into your mortgage products and the impact of potential inflation.

If you have a variable rate product and the Bank of England base rate goes from 0.1% to 5%, then your mortgage interest is going up by a couple of % also. This means a few hundred pounds when you look further into it. This may eat into your profits or worse still, mean you lose money each month.

Being a wise investor, you might have a fixed rate mortgage product, and this will insulate you from this scenario. At least in the short-term. When you listen to property experts like Simon Zutshi, he recommends 5-year fixed products to insulate you against this type of scenario.

DUFFMONEY’s current mortgage situation

Me and Mrs Duffy like a bit of diversification in our lives. And our mortgage products are no different. Our current portfolio is made up of 7 single lets. We have 4 personal properties in Mrs Duffy’s name, and these are on repayment. And are fixed on 2- or 5-years deals.

With DUFF PROPERTIES, the 3 properties are interest only and are fixed on 2-year deals. Thinking about what could possibly happen with inflation and rising interest rates, I may have made a little mistake with the 2-year deals. Maybe I should have gone with the 5-year deals?

We like this balanced approach because we benefit from positive cashflow (mainly from DUFF PROPERTIES) and the 4 personal properties will be paid off in x amount of years.

Going forward

As I’m writing this week’s blog, I’m thinking that I will stick with interest only with DUFF PROPERTIES. This will mean cashflow that I can use to continue to build the current portfolio. The aim over the next few years is that property can become my full-time job.

This means x number of properties bringing in a certain amount of money pcm. Big rises in interest, will have a negative impact on my plans but I’m hoping my fixed rate products will give me enough short-term insulation. Then it will be a case of over paying the mortgages with any profits from rental income.

One of the things I have learned in the last 19 years of property investing, is that you have to expect the unexpected.

What to do

Don’t just assume that interest rates will remain at rock bottom levels for the foreseeable future. Never assume anything.

Have a good look into inflation and the potential rise in interest rates. Get very familiar with your mortgage products. And hopefully you will be fully aware of the effects that rising interest rates will have on your property business. If you find it hard to understand, speak to a suitable FA (Financial Advisor).

Book of the week: Quit like a millionaire, by Kristy Shen and Bryce Leung. An excellent guide to managing your money and building your wealth. With a mathematically proven approach to saving, investing and spending, this book will help you towards financial independence.

For a hard copy visit the excellent Imagined Things Bookshop: https://imaginedthings.co.uk/

Stay calm through any build work

In my 19 years as a landlord, I’ve been involved in a few refurbs. Like the refurb that allowed me to pull all my deposit money from rental No.4 in late 2019.

This little refurb stressed me out to be honest as I was worried about money at the time. But over the last few years, I’ve been working on my mindset and things have improved.

Our little extension

After 3 full years of resistance, I finally gave in and agreed to get an extension on our home. We could have done it a few years earlier, but I convinced Mrs Duffy that we needed to focus on building DUFF PROPERTIES. We needed some more assets so that we could move closer to early FI.

To start with, the first issue was getting in touch with our builder. He was due to start in mid-April and wasn’t answering his phone. His communication skills were poor to say the least.

When we eventually got hold of him, he’d been having a nightmare with the job before ours. There are 2 reasons for his poor communication skills: 1. When he is on a job his only focus is that particular job – old school 2. He is not a fan of phones … Not ideal when you are trying to find out the start date when trying to arrange kitchen fitters etc.

The extension started at the end of May and the builders (x2 brothers) have been good as gold. They are just old school and not a fan of using mobiles.

As well as the delayed start, we have had quite a few delays due to materials and tradesman. We’ve had a leaky roof and a few other issues. The builders covered the flat roof with tarpaulin whilst we waited for the roofer. This was 2 weeks and it pissed down most days and there was a leak in the corner for a few days. The builders sorted it after one of the weekends – I didn’t want to bother our old school builder over the weekend and just got a few pots and pans out for the leaks.

After several delays, we were finally going to get our kitchen installed on Monday the 19th of July. But COVID had other plans. Our kitchen fitter and his apprentice had COVID so that meant another 10 days delay. And 10 days extra without a functioning kitchen.

Me and Mrs Duffy smiled through everything and were able to keep positive throughout. Sometimes you just need the right perspective.

Going forward with BRR (Buy Refurbish Refinance)

BRR is something I am seriously considering going forward. Even though I haven’t fancied it in the past because of tradesman. To be honest, this was partly down to the poor mindset I had (did I mention my negative mindset between 2008 and 2018 …).

Me and Mrs Duffy have had to deal with tradesman regularly over the last few weeks. It wasn’t always smooth and there were lots of delays due to unforeseen circumstances – like materials and COVID. But we remained calm.

Any issues, we genuinely laughed at and even enjoyed the process. And this whole process of getting the extension done, has made me realise that I’m more than capable of overseeing some BRR projects as I move forward.

Working on mindset over the last few years is paying off and this extension has proved it. Shit happens and you must adapt and go with the flow.

DUFF PROPERTIES are looking for investors to come on board and help us grow our portfolio. We will be looking at doing BRR (Buy Refurb Refinance) on properties in Middlesbrough and surrounding areas. If you are interested and want an excellent return on your money, please contact us for more details.

We have a proven track record of refurbs and have 19 years of property experience. See below for a little case study of rental No. 4:

Case study

  • Rental No. 4 on the market for £140k
  • Purchase price £90k (75% LTV therefore £22.5k deposit)
  • Renovation costs £10k
  • Total investment £35k (£22.5k deposit, £10k renovation plus £2.5k legal fees)
  • Profit pa £3.6k (£550 rent – (£180 Mortgage + £20 Insurance + £50 maintenance) = £300 pcm profit … £300 x 12 = £3.6k pa)
  • ROI=3.6k/35k=10.3%
  • 6 Months later we done a re-mortgage to recycle the deposit money
  • House valued at £120k which I thought was low, but I decided against contesting the valuation
  • Mortgage now at £90k so my £22.5k deposit is now recycled
  • Money left in the deal now stands at £12.5k – therefore total investment £12.5k
  • Profit pa £3k ((£550 rent – (£230 Mortgage + £20 Insurance + £50 maintenance) = £250 pcm profit … £250 x 12 = £3k pa)
  • ROI=3k/12.5k=24%

Although the market has been crazy over the last few months, there are still potential deals out there if you look hard enough. Now that the extension is complete, DUFF PROPERTIES are looking for a little BRR project. The aim is to get to 10 properties over the next few months (another x3 properties). At this point, I will either continue with BRR or look at increasing cash flow with HMOs (House of Multiple Occupation).

What to do

Before any property investing, look to work on mindset. Property is not easy. It can be relatively passive (which I have found with BTL properties) but it takes work getting things up and running. You will make mistakes along the way but it’s about remaining calm throughout. Or at least, trying to remain calm.

If you fancy BRR, don’t let self-doubt kick in or procrastination. Get in there and give it a go. You might have issues and you might make mistakes. But if you keep at it, you will make a success of BRR or whatever else you decide to do.

Book of the week: The Monk who sold his Ferrari, by Robin Sharma. There is a reason why this book has sold millions of copies. As far as personal development books go, this is probably the best one I’ve read. If you are a bit stressed out and suffering from overwhelm, this book is a must read.

For a hard copy visit the excellent Imagined Things Bookshop: https://imaginedthings.co.uk/

The prep work (in property)

 

‘Prior … preparation … prevents … piss … poor … performance’ a common saying in the British Military

This week’s blog is chapter 15 from the book I am currently writing …. It is all about the prep work involved with buying property

CHAPTER 15

THE PREP WORK

Now, the last thing I want to do is bore you to death with figures. But we absolutely have to do the prep work.

Before we get stuck in, we need to review our goals. 1st our financial goals. Then our property goals.

One of my main goals is to be FI. At the back end of 2018, I set myself a realistic goal of FI before I am 45. If not sooner!! I was 35 so that gave me 10 years.

After giving it some serious thought, I decided that figure would be £4k pcm and £48k pa. But we are doing this book together as a team. And our FI figure is going to be £30k pa as this is the national average wage in the UK as I am sat writing away.

Now we have a realistic goal to aim for, we can start putting the plan in to place.

£30k divided by 12 months = £2.5k pcm required. From my experience, it is very achievable to get £250 pcm per property. This is based on properties in the North East of England so the figures are dependent on your geographical location.

With these Northern figures in mind, we need to get 10 properties to reach our monthly target of £2.5k. To be clear, that is profit after all expenses and tax are taken care of.

Now before we go any further, I want to stop to mention why I am using realistic, achievable goals and expectations. Acquiring 10 properties is very achievable. It’s not very sexy and isn’t going to help you to become a millionaire. But we are a team. And I want to help as many people as possible get into property. And to get into property with solid foundations.

You might reach our target and want to push on and become a property millionaire. That’s all good and I wish you well. The reality is that property isn’t easy and it’s very rare to go out and buy 20 properties in year 1. Or go out and buy 5 HMO’s in year 1 and boom your set for life.

This is what many training companies are selling. They funnel you into expensive training by selling you the dream. I want you to have the dream. But I want you to build your foundations first. After all, Rome wasn’t built in a day.

Back to the prep work and we will start with our target for each property. We are looking for £250 profit pcm. Just to be clear, I am not going to go over tax. Everyone has their own situation and their own tax to consider. Not only that, most people’s accountants have their own interpretation of tax. Well, that is from my experience anyway.

As we touched on in chapter 13, our ROI is the figure we are looking for. To get ROI, we need (profit pa / total investment) x 100 = ROI %. To make sure we are happy with working this out, we will look at rental No. 5.

Case study 2

  • Rental No. 5 on the market for £100k
  • Purchase price £80k (75% LTV therefore £20k deposit)
  • Renovation costs £1.5k
  • Total investment £24.5k (£20k deposit, £1.5k renovation plus approx. £3k legal fees)
  • Profit pa £3.72k (£550 rent – (£170 Mortgage + £20 Insurance + £50 maintenance) = £310 pcm profit … £310 x 12 = £3.6k pa)
  • ROI = 3.72k / 24.5k = 15.2%

This is again an excellent ROI for a single let and is achievable because of house prices in the North of England. And again, because it was secured BMV.

Let us break the calculations down further. From a free property training seminar, I learned ROI at the end of 2019. It had only taken me 17 years as a Landlord. I might be a slow learner, but I get there in the end …

The ROI calculation at the free seminar was profit / total investment. The profit and total investment were broken down like this:

  • Profit = Rent – (M + M + M) … the 3 M’s are Mortgage + Maintenance + Management
  • From my experience, Maintenance is £50 pcm
  • Management is normally 10% of the rent so that would be £50 pcm if the rent received was £500 pcm
  • Mortgage payment is normally about 3.5% of the mortgage if you are limited and your product is interest only
  • Total investment is deposit, solicitor fees, surveyor fees, stamp duty, local authority search etc

From case study 2, DUFF PROPERTIES are making £310 pcm with an ROI of 15.2%. This is another example that £250 pcm in my area, is very achievable. Again, these calculations are not taking tax into account. This is unique to each individual or each individual company and is really a book in itself. For more on property tax, see the book recommendations within the appendix.

Now you know your target profit per property, you can go and find some properties. Personally, my properties are all within a 6-mile radius of where I live. It is possible to go further afield but this will take more time and work.

What is important is that you research the area or areas you want to invest in. You want to be investing in an area of high demand.

From my experience, it is very important to do some prep work before you get stuck into property investing. It is very easy to get swept away with your emotions. You might have had enough of your job and want to be a property millionaire within 12 months. Now this is possible, but not for everyone. Certainly not me currently. But with an obsession with personal development, I believe anything is possible.

Get the prep work done. And build your property business on solid foundations.

Now, as a team we know we need to earn £250 pcm profit per property. And we know we need to get 10 of these houses to achieve our FI in the UK. Again, this gets us £30k pa and this is the average income in the UK as I am writing in mid-2021.

If I don’t do the prep work, I might think a £150k 3 bed house single let will achieve our target £250 profit pcm. This would barely break even and definitely wouldn’t achieve our target profit pcm. That’s the case where I invest anyway.

With this in mind, my price range is £80-120k in the area I invest. The areas I am looking at is Middlesbrough and Redcar in the North East. Your figures will be different depending on your geographical area.

You might live in the midlands for example. That £150k 3 bed single let will get you more rent than in the North East. And will enable you to achieve at least £250 profit pcm.

Even the 2 areas I invest in achieve different rents. Most of my properties are 3-bed in Middlesbrough and most achieve a rent of £500-550 pcm. Even if I got a 4-bed in the same area I would struggle to get over £600 and would probably achieve £550 pcm. Now, rent prices do fluctuate so don’t quote me on these figures. This is from my experience in the area I invest in.

But I could achieve slightly more in Redcar for a 4-bed which is only 5 miles or so from where I live. Towards the back end of 2019, I got an offer accepted on a 4-bed terraced house in Redcar.

If my memory is correct, it was initially up for £110k. This was when I was looking for rental No. 5 and I was obsessed with BMV. I had a few initial bids rejected but finally got an offer of £82k accepted.

This was an awesome deal and the house was also a potential HMO (House of Multiple Occupation). After speaking to a couple of local estate agents, I knew the achievable rent was £650 pcm.

The deal fell through because of the survey report. There was damp and a few other issues and there was an additional £6k to pay before I could even go through with the deal. This showed my total lack of experience at the time. Sorry, not experience because I’d been a landlord for 17 years. It was because I was still an average landlord at that time.

Now I have done some training, I realise that even with this extra £6k it was still a good deal. And there was still a significant discount. Not only that, I could have went back and re-negotiated with the vendor. But, you live and you learn. It was simply because I was obsessed with getting a similar deal to rental No. 4. £50k BMV isn’t always possible and this is a lesson I have had to learn.

The beauty of getting around other investors, is that I’m not just learning from my own mistakes. Stumbling along and learning by trial and error. I’m learning from other investors. I’m learning from their mistakes and picking up on their skills and expertise. It makes a massive difference getting around other investors. I can’t stress this point enough!

Anyway, I’m going off on a bit of a tangent. The point is, different areas will demand different rents. Once you know the calculations and have some local knowledge you can get to your target figures. That target figure of £250 pcm for each property.

I know you can achieve more with serviced accommodation and HMOs and other creative ways of investing. But this book is about building solid foundations with single lets. Once you have that base, you can go off and do your own thing. You can go off and earn more cash flow.

My opinion is that it would be a mistake to rush in and try these creative ways of investing without building your base first.

At this stage, we have now done the essential prep work. Remember the 6 P’s from the British Military.

This might take you a few months. It might take you 6 months or even a year. Trust me, it is worth it.

Just learn from my mistakes. My property journey wasn’t built on solid foundations. It was built on shitty sand. And this led to 3 properties in 16 years. Things have improved over the last few years but I had many years of pain with regards to money and my 3 properties that were in £50k of collective negative equity. And I 100% don’t want you to be an average landlord.

Let’s review:

  • Work out how much you want to earn pcm and pa from your portfolio
  • Break it down so that you know how much you need to earn per property
  • Learn the calculations so you know how much you can afford to pay for a property to reach your profit targets
  • Research the area you want to invest in so that there is a high demand and this makes void periods less likely
  • Ensure you are fully aware of the market value of each property you look at by using up to date comparable data

Don’t even think about being average. You are a professional property investor.

What to do

Let me know what you think of this chapter from my next book – The Dormant Landlord. Any feedback is welcome good or bad and will make a massive difference to the quality if the book.

Book of the week: Rich Dad’s Cashflow Quadrant, Robert Kiyosaki. If you are looking for some early financial independence, this book is an excellent guide. It contains instruction and is easy to digest. Similar to Rich Dad Poor Dad, it is conceptual and helps the reader to understand asset’s, liabilities, income and expenses.

For a hard copy visit the excellent Imagined Things Bookshop: https://imaginedthings.co.uk/

A little change to my index funds

As investors, we have to be flexible, and we have to adapt. This is from my experience.

This is what I’ve had to do in recent weeks to enable me to stick to my target of £1000 pcm. £1000 pcm into my LS 80/20 fund. For further info on my particular fund see duffmoney.com – index fund.

New extension

Me regularly investing in my index fund is part of my goals. This was written down in my 1st ever goals at the start of 2019 and I have maintained my monthly investment for over 2 years. And the aim is to continue to do this for the next 20 years at least …

This is because I am all about long-term buy and hold.

Another one of them goals written down at the start of 2019, was to get Mrs Duffy the extension she wanted (the one she had hounded me about for 2-3 years). That extension is almost complete.

To pay for the extension, we’ve had to remortgage our home to finance it. We are both happy with the extension. The issue is that the increase in mortgage has increased my expenses. This has meant my budget has to be adjusted to enable me to keep investing every month into my LS 80/20 fund.

Just to be clear, before the remortgage, I was investing £900 pcm into my ISA and £100 pcm into my SIPP. If you want to know why I invested like this, read my new book. This will help you to understand index investing and how to invest in index investing. And in my opinion, will help you to avoid the state pension

New allocation

Index investing is a big part of duffmoney. It is part of my long-term wealth strategy. My strategy to get some very early Financial Independence and help my family as much as possible.

With this, it was important for me to maintain that £1000 pcm investment. But I can’t afford it because of my new expenses. How do I find the money then?

Out of nowhere, I’ve managed to get a new job through DUFFY ELECTRICAL (a limited company I use for contractor services). This means that I can afford to increase the amount I invest into my SIPP.

The money I invest through DUFFY ELECTRICAL, is tax efficient. This is because it comes off my top-line and therefore reduces my corporation bill. Not only that, but the Government also add 20% to your monthly contribution. This incentive is because they want people in the UK to invest into a pension.

If you have excess money in a limited company, a SIPP is worthwhile for many reasons (including the tax benefits and Government contributions).

Disclaimer: this is not advice. This is information only. Please speak to a financial advisor before making any investment decisions.

My new allocation is £500 pcm into my ISA and £500 pcm into my SIPP.

What this means is that I can afford £500 pcm. The reduced amount I put into my ISA (from my current account) is what I am roughly spending on my new mortgage payment.

Both the £500 into my ISA and the £500 into my SIPP are going into my LS 80/20 funds. They are just different investment vehicles. For example, I can access my ISA money anytime and can only access my SIPP at 57 (currently). If you are not familiar with investing into ISA’s or SIPP’s, this can seem complicated.

If you want some further info on ISA’s and SIPP’s message me on any social media platform and I’ll send you some more info.

What to do

The main points from this week’s blogs are that it is important to have goals and it is important to be flexible. This is only my opinion.

From reading well over 100 personal development books, writing goals down is mentioned all the time!

Investing in Index funds is one of my main goals and is a big part of duffmoney. I have had to be a little bit flexible but thankfully have been able to maintain my index investing target of £1000 pcm.

Have a look into the importance of goal setting.

Have a look into index investing.

Have a look into ISA’s and SIPP’s.

And again, if you have any further questions relating to this weeks blog, message me on any social media platform. Well apart from Tik Tok …

Book of the week: How to Make Money in ISAs and SIPPs, Stephen Sutherland. This is a book on how to invest in tax efficient wrappers (ISAs and SIPPs). Well worth a read and will help you understand ISAs and SIPPs.

For a hard copy visit the excellent Imagined Things Bookshop: https://imaginedthings.co.uk/