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Can Property be a good Pension?

Buy to letI live in a part of the world where everyone seems to be a finacial adviser.

For me any financial adviser (IFA) is someone to be approached with extreme caution, for the following reasons.

Insurance companies make money for share holders not policy holders.
This is a personal view (so don’t take any legal action). Here’s how insurance companies work. They sell their pension products through intermediaries (IFA’s) to which their paid a commission. Whilst this is a lot small since the introduction of RDR insurance companies still make regular payments on every account an IFA brings them. That;s not just a one off, it’s every year a client has a pension with them.

Additionally, insurance companies have a sizeable shareholder following, who, in the case of the UK all expect to see regular dividends.

So if an insurance co. has to pay an out of date commission structure to people that did a little bit of work back in 1997, offer city sized bonuses to it’s management teams to they don’t go and work for an American bank and find enough profit to pay out shareholder who secure their business how can their possibly be any profit for policy holders?

IFA can’t benchmark
The stockmarket, in particular the FTSE 100 has done little over the last 10 years. The stockmarket is where the majority of UK based pension funds invest, so do the math. IFA’s still take their cut, shareholder take a divy and the management team will insist on a bonus that’s not quite big enough to attract the attention of any watch dog (who always seems to be asleep anyway). This is why an IFA in pensions will never be able to give you a performance benchmark. “I need to know what my annual yeild will be if I invest £100k in a pension” – go on ask them, listen to the reply you’ll get all sorts of stats about growth and performace of certain funds they’ve invested in – but you will not get a committed answer. That makes it a high risk investment in anyones book. In fact you’re better off being a dragon in the dragons den!

It’s only TAX efficient if it makes money.
The government is always trying to encourage people to save in pensions for their old age. there several reasons for this. Firstly the UK financial services industry produces more GDP that any other industry, in fact the industry in the UK claims to be at the centre of financial services in the world. This nets the treasurey a fair amount of wonga in corporation tax and employee income tax. Secondly, we have an increasingly aging population that are currently entitled to a state pension. If ongoing governments keep borrowing the way they are their just won’t be any state pension. Insurance companies have been quick to identify this and place pressure on politcians to offer tax releif for those that save.

All of this makes sense, and downright attractive if you’re trying to reduce your personal tax liability. But it’s only a good deal if you’re able to see growth. And this is where pension pots fail to offer any hope. If they offered a minimum guarenteed yeild, then you can understand the attraction. But most pensions accually loose money when they are first open because of the commission that need to get paid. In some cases this take years to retain – meaning that you could have just paid your tax and invested in say, a property that will guarentee an annual yeild, even after you pay you own income tax from it.

Why is property a better investment that the TAX efficient pension fund?
Now I’m not suggesting that you put all your money in property. And I’m not saying that all pension are a bad thing. I’m just saying they’re not the only way to create an income for your old age.

The UK property market over the last 30 years has outperformed the stockmarket by a considerable degree. Yes, there’s been a few crashes along the way but if you took the 30 year time frame it’s seen growth. Not only that but rental yeilds have also been growing. I average around 6% yeild on my rental property. Yes I pay tax, yes I have the cost of upkeep but when i combine the groth in capital and the rental yeild I’m much better off than someone who invested the last 20 years of their salary into a pension fund.

Buy to regret
Buy to let is not easy. The rental market is littered with rouge agents and tenants that will take avantage of any green property investor/ landlord. You need to do your homework and protect yourself from tenants that do not pay and ‘stitch up’ letting agent contracts. Do your sums. If a property cannot yield 5%+ you are better off investing in a pension fund. The property makret may crash but as long as you can secure 5% letting yeild you are outperfoming the IFA and your property capital will recover if you are prepared to keep it for the long term.

I’ve seen plenty of ‘green’ buy to let’ers go to the wall because they thought they could keep on borrowing. Times have changed (thank God) Now if you want a good finance deal you’ll need to stick down 40% deposit. This is making the Buy to let market alot slower and a lot more considered.

Using Equity In Your Home To Buy Your First Property Development.

Equity releaseThese are tough times for raising finance especially for the potentially risky business of property development. And let’s be honest, it’s not always possible to rasie enough finance through a traditional mortgage or home loan. Mortgage companies will want to take into account your salary and any other expenses you have such as other outstanding loans. All this could prevent you from buying your first development opportunity.

What is Equity?Equity is the difference between the value of your home and what you own. So if your home is worth £300,000 and your mortgage is £100,000 you have £200,000 equity.

Why use your home Equity?
As I mentioned before, raising finance has not been easy for many so the opportunity to increase borrowing on your existing property will offer any potential lender greater security and enable you to become, in effect, a cash buyer. This will enable you to move quickly should you see a worthy opportunity, this might also put you in a favourable position as a potential buyer.

What are the risks of releasing equity from my Home?
Before you embark on any finance to purchase a property you should seek independant advice. Raising finance on your home will increase repayments and the debt you eventually need to pay back. You need to be comfortable with this before you move forward, so a conversation with an independent advisor will highlight the risks that relate to your personal situation. You could loos your home if you fail to repay the loan, so please make sure you do your sums and if anything look too tight or too risky in terms of repayments don’t do it you could lose everything and gain nothing.

Most developers I know started by raising finance on their home. It’s not ideal but to secure any property you need to be well financed. Since the financial meltdown in 2007 lenders have been far more restrictive in re mortgage products. Only a few years ago it was possible to get a 100% mortgage based on the value of your home. Today the best product I’ve seen is for 75% so shop around, use brokers and take into account the overall loan including fee’s, which in recent years have gone through the roof. Lenders will always tempt you to put any fees onto the loan but you’ll be paying back in the long term.

How do I go about releasing equity from my home?
Releasing equity is, in effect, re mortgaging your home. You’re finding another mortgage product based on an up to date valuation. To this end you need to find a product on the internet or (better still) find a product through a broker.

There are 2 sorts of mortgage brokers. Independent – those that have no tie to mortgage products and can search the entire marketplace on your behalf. These guy’s charge for the advice they dispence; typically this is done at an agreed fixed price or an hourly rate or a percentage of the loan required. The other type of motgage broker are ‘commission tied’ brokers. These guy’s are’tied’ to a limited number of mortgage products so there’s no guarentee that you’re getting a the deal. However, thay do not charge as their fee is 100% commission from the lender. I’m not sure what value these guy’s add over any online comparison site but they seem to still get business. Since 2013 many advisors can only offer advise on a fee basis due to impending changes in the way financial products can be sold in the UK. For more information or to find a mortgage adviser visit unbiased.co.uk.

 

 

Buying from an Estate Agent

Property DeveloperLet’s be honest, no one likes estate agents. For outsiders they can seem intimidating places, full of aggressive sales people looking to sell you something you don’t want.

But before you judge them too hard here something to remember. Estate agents work on commission, they get paid on the sales they make. They also work on behalf of the vendor to get the best sale price for their commission. This is perhap why they’re often seen in such a negative light. Trying to push up prices and sell small cramped studio flats as ‘pier d’teir’!!

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Auction Properties

Auction PropertiesAsk anyone who has brought from an auction and they’ll tell you that the main reason they brought was because of the difference in price. At auctions you don’t get the Estate agent’s telling you how much the competition want it or the facts it’s under offer. The truth is Auction properties attract developers, investors and owners because of 1 thing – they are typically cheaper. I’ve seen properties go for 33% less that their private treaty counterparts.

But times have changed in recent years. There is a lot less property available on the market and even the most affordable home now attract stamp duty. This makes finding a devleopment oportunity rare and buying one that will enable you to make profit even rarer. Continue reading