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tuk

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  1. Thanks David. I was beginning to come to the same conclusion myself so it's good to have your endorsement.
  2. Hello, I'm about to choose an accountant for to set up my first SPV, which I will use for my next investment and any further to that. I have narrowed it down to two accountancy companies, both of which I quite like. A) The first is a company of about 15 employees, but the owner handles most of the client relationships and tax advice himself. He seems very switched on and gave me a lot of advice on the phone for free when I first spoke to him. They are not property specific, although say that property investors make up nearly half their business and they have their own property investments. Cost ~£1,300/yr. B ) The second option is a property specific accountancy that branched out of a larger firm a few years ago. They would assign me an accountant who would manage my business and I would get 4 half-hour consultations with a year for tax advice, plus unlimited more general advice and technical support. They also have their own software for recording and tracking property finance and operation, which sounds quite useful. Cost ~£1,000/yr. My feeling is that A) might be a slightly more personal experience and possibly spot more opportunities to optimise drawing income from the company, but B ) is more tailored to the property investor so might spot more opportunities to operate more efficiently, plus the software sounds useful. I don't consider the difference in price that significant and would rather choose the better service. I feel like one of these probably is a better choice but I'm finding it difficult to evaluate which it is. I would appreciate your thoughts and advice! Thank you.
  3. I would say the general consensus on Property Hub is that it is very difficult to time investments around recessions and that speculatively putting an investment off until after a recession is not the optimal way to invest because that recession might never come. There are reasons to believe that a recession now would not hit property as hard as in 2008. On the other hand, interest rates might have to go up a lot. You need to decide for yourself whether you think now is a sensible time to invest. But putting it off forever is not great, and in absence of a strong conviction, the best time to invest is often "now". "Time in the market is better than timing the market"
  4. Interesting OK.. Is it possible that the stated liabilities are monies that you owe yourself by way of an initial loan you made to your company? And perhaps the assets are director's loans made from your company to yourself which is effectively a loan (asset) that your company owns? I would be interested to here from anyone else who is also skeptical about this. Thanks
  5. Hi @russellshire, Thanks for the article. I think this is an important point to consider for anyone wanting to manage risk in their investments. In order to put some numbers to risk, it is helpful to be able to put a number to a maximum anticipated drop in prices. I would quickly caution though that the best number to arrive at might not be the average price drop from a previous recession, because there was a large range between different properties in terms of how much their value dropped. Now turning to what might happen next, I think we are in uncharted waters! As a country and as a world, current debt levels are historically high and interest rates historically low. So the economic theory goes, a government can sustain as much debt as they want as long as the economy is growing at a higher rate than they are paying interest. For the last 14 years that has been easy because we've had negative real interest rates, so the economy doesn't even need to grow in real terms to exceed the interest rate. Meanwhile, the 30 years we've had of falling real interest rates have pumped up all asset prices including property, in both real terms and nominal terms. The situation seems stable then, as long as these real rates stay low. And on top of that, today we have better mortgage health as well (no silly 100% LTV mortgages like in 2007). Of course though, nothing is ever that easy and unfortunately we have a pandemic and major regional war causing inflation higher than we have seen in many of our lifetimes. What's interesting is I think a lot of people alive today don't appreciate the potential for high inflation to cause instability and major market disruptions.I include myself in that, I'm living through this for the first time like many others. I don't think inflation in itself is necessarily going to cause a crash, in theory rents and prices will rise. Interest rates will of course rise, but as long as real interest rates remain where they are today, rents and prices will simply keep up over the long run*. This would mean no concern for unencumbered property owners as everything will balance out and good news for leveraged investors who's mortgages get smaller in real terms. So I think an important question to grapple with is whether these negative real interest rates can be sustained. To shine some light on this I found data for the last time there was an inflation spike. Here I plot data from the worldbank.org showing that the inflation spike in the 1970s was followed by a rise in real interest rates and these high real rates were sustained around 5% for the next two decades while inflation was brought under control. That's 7% higher than the real interest rates of -2% we had last year!! An important differences between then and now is that real asset prices are much higher, so they have a long way to potentially fall. A common argument is that central banks cannot raise interest rates very much at the moment because governments are carrying a lot of debt. That makes sense but I'm not sure I am convinced. Sure they don't want to raise rates if they don't have to, but their job is literally to control inflation and raising real rates above zero the only tool they have to do this. What would be worse, governments getting crippled by debt repayments or inflation spiraling out of control? My point is that interest rates might have to rise a lot more than people are expecting. This is the opposite to what happened during the 2008 financial crisis and the opposite environment to which everyone is used to operating in. This is almost certainly going to mean real price decreases, I can envisage real prices reducing more than in 2008. But for the leveraged investor, that might not be a problem as long as nominal prices hold up (which is what people normally think of when thinking of the property market). I'm concerned about this but my prediction is not for a big crash, because central banks seem to be reacting slowly. And that leaves me worried about inflation... Things could get messy! Q: What do you think, is it bizarrely real interest rate changes that is going to control nominal prices? * I like to think of this relationship between interest rates and inflation like running on a treadmill. The speed of the treadmill is inflation and the speed you walk at is the nominal interest rate. Whether you are moving forward or backward on the treadmill is the real interest rate. A tread mill speed of 1mph (eg. 1%) is quite easy to keep up with, you just stroll along and all is fine. If you are going a bit too slow you have plenty of space to react before you fall off, by adjusting your speed (AKA the real interest rate). In real terms, life is stable. Up the speed a bit to 4mph (4%) and you have less time to react, but it's still pretty stable. Now up the speed a lot to 12mph (12%). You can still keep up with inflation here by running at 12% nominal interest rates, but it's a lot less stable, you don't have much time to react to mistakes. Up the interest rates too much and you'll crash into the front (recession), go too slowly and you'll fall off the back (spiraling inflation). The treadmill in my gym doesn't go above 12mph, but there's no reason inflation couldn't go higher and higher if it sets in and real rates don't tick up.
  6. Thank you both for your for replying so quickly. That's very helpful and I hadn't realised about the accountant's address, that sounds convenient. That's interesting. I thought one could just look up on, for example, companycheck.co.uk and see the reported total value of assets, liabilities and net value of the company. I've done this myself before to check out other people... Even without an accurate asset valuation, anyone in the know would realise that for every £300k of loans you have, you're likely to have at least £100k equity. What am I misunderstanding then, does one not have to report these figures publicly? And if that's the case, why can I see them for other people on companycheck.co.uk? Thanks again!
  7. I'm thinking that any future property I purchase should be in a Ltd company structure. The only thing I don't like is that anyone would be able to look my name up online and see that I own a property investment company and how much it is worth. I don't mind a lawyer being able to find what I own, I'm just not sure I'm comfortable with my friends and colleagues being able to look me up and say "ooh they're worth £X". Not least because they might not even understand what they're looking at, and possible think I'm far wealthier than I am 😆 Furthermore, there seems to be resentment towards landlords which other investors don't have to suffer. I don't suppose there is any practical way anyway around this..? Also, for the Ltd company's registered address, I was thinking of using a 'virtual trading address' such as those that UKpostbox offer, just so I don't have to give my home address to tenants. Is this something others are using? Thanks!
  8. Thanks for your further thoughts, Chris. This risk of inaction is interesting. Very easy to underestimate.
  9. Hi Chris and Barry, Thanks for the interesting thoughts here and sorry I did not reply to your previous message sooner, Chris. My response may come across as contrarian, but I am just trying broaden the discussion. I think I will always be sceptical about growth prospects while at the same time proceeding to invest with an expectation of some growth happening. By normal asset valuations methods (eg. using yield or net present value of future income), it is hard to imagine asset prices getting much higher in real terms without economic growth (see Antti Ilmanen's work for a good account of why). The only lever left to pull is loosening lending rules, but we know that is unlikely to end well. To counter this, I think the aging population is going to put pension pressure on asset prices, perhaps meaning yields settle at a lower level in the future. As for quantitative easing, it's hard to argue that this doesn't have an inflationary effect on asset prices since a lot of it goes straight into the bond market. I see this as a different mechanism to general inflation though, which in the immediate term takes more money from people's pockets so they have less to spend on mortgage repayments. In the long term one might expect it to balance out and people's wages rise to match. You ask a good question, Chris, whether I would come to a different conclusion if asking whether GBP will drop in value. I think my answer here is "yes, eventually". What I don't know is whether the effects of inflation will filter through fast enough to counter any plunges in real asset values that might take place along the way. If I have an investment horizon of 40 years, it would be easy to say that over that time frame, inflation, wages, interest rates etc will all balance out, but it would be prudent to have a plan that will not bankrupt me at any point in those 40 years during a period which might for a while be unbalanced. That's why I'm focussed on mitigating this risk. Beginning to take place now is a shift in policy making power from the baby-boomer generation to the millennial generation. The millennials look at the boomers and see that they have all the wealth, built over decades, largely by luck of the draw of falling interest rates and decent economic growth. At some point we will likely see new policy makers orchestrate a means to redistribute that wealth between generations. I don't know how that can be achieved smoothly but can imagine it might involve engineering a decline in real house prices. Do you have any thoughts on how this might play out? I am relatively early in my investment career, hence I am trying to identify these long term macro trends. Barry, I don't speak as someone in your fantastic position of having achieved financial independence, but my two cents would be that you should not put what you've already got at risk. It is standard practice for pension investments to de-risk as the investor approaches retirement and so I would apply this thought to a property portfolio as well. If you have enough income already, go and enjoy it. Don't put yourself in a position where you'll worry about it. I agree with Chris that housing is an essential need and so I personally don't worry about rental income vanishing (as long as the portfolio is somewhat diversified). What you might have guessed from reading my posts though is that I don't view the prosperity of the leveraged investor as an essential need and so we have to find a way to stay alive (avoid bankruptcy). The next few decades is quite likely to be different to the last few for investors of all kinds, and so I think a bit of caution on the leverage is prudent. How much LTV is 'safe'? I don't know, I started this discussion to try and help with that question. Lastly, I love Chris' point about the high risk option being not quitting your job, if you're already in a good position to do so. It's not a natural way to think, but I think there's a lot of sense in it when you weigh up life as a whole.
  10. Thanks to you both for your further thoughts. The point about being forced to sell as the main risk to avoid is a good one and was not how I was looking at it previously, so thanks for bringing that to my attention. I too value income above capital growth (you can see my scepticism on long-term future capital growth in this topic: Macro-economics and the risks to property investors - Interest rates - House prices ). An 8% gross yield is usually about when I think the net returns starts to look particularly appealing, if you assume low capital growth. It also, in light of your points about good income meaning you can cover your costs even if interest rates rise, provides a good buffer to rising costs. You make a good point though, Chris, about avoiding areas without fundamental strengths, and that makes 8% nigh on impossible at the moment, at least for a basic residential BTL strategy.
  11. Thanks for pointing that out. I have spoken to brokers who have told me 20-30% but not sure of the exact terms. If 100%, the concern is the same, just greater. Back to the consideration of negative equity, thanks also for the rest of your reply. I like your emphasis on negative equity only being a problem if one needs to sell or remortgage. I suppose that by staggering mortgage terms you will never be remortgaging everything all at once either. Even so, the prospect of a prolonged downturn would still be alarming (it happened in Japan, and in parts of the UK, it could happen again). I guess this is why it's important to stress test at high interest rates, in case you end up stuck on a variable rate not being able to remortgage. I also take your point about having unencumbered properties which I suppose falls into the category C) of the suggestions I gave in my original post. My reservation here, and also with having lower LTV across the portfolio, is that at reduces the yield of the portfolio as a whole. If an investor is buying property with a 7% ROI but backing each one up with an unencumbered property with ROI of 3%, then the overall return is 5%. My point being that the returns that make property so great only come with a large amount of leverage due to yields being so low in today's environment, so someone going down the road of property as their main investment vehicle would want those leveraged returns, otherwise why not just invest in stocks. (I'm also sceptical about future capital growth, as you can probably tell! But I acknowledge that can greatly boost total returns). It seems like overall the point you're making is that negative equity is extremely unlikely to be a problem an investor actually has to deal with, but that there's not much one can do to actually protect themself against the remote possibility other than reducing leverage. Would you agree? Anyone else have a view on this subject? Thanks.
  12. It's no secret that leveraged property investment has been very lucrative in recent decades, but people have been made bankrupt as well, especially in 2008. I'm trying to get to grips with how people with larger portfolios sleep at night with lots of mortgage debt to their name. Let's say I have one Buy-To-Let worth £200k with £150k debt against it and it's held in an SPV with a 20% personal guarantee (PG). The most I can lose personally is 20% of debt, so £30k. This isn't too scary, unless I've spent all my money it probably won't bankrupt me and it's not an insurmountable amount of money to rebuild. Anyone hoping to grow big though is going to one day end up with much more debt than this, perhaps they will end up with 20 of the same property, worth a total of £4M with £3M debt and the same 20% PG. Now they are personally liable for up to £600k! That's a much scarier amount. I can think of a few ways investors might justify these risks and I'd be interested to get your thoughts. A) prices will never fall more than 25% and so negative equity will never occur, and if the property needs remortaging at this price (which won't be possible without putting new money in because of the new value) then it can be easily sold to cover the debt. B ) before prices get anywhere near dropping by 25%, the government will step in to support the housing market C) The investor has sufficient other assets to cover any insolvency in their property portfolio I get the impression that a lot of people are either not thinking about this risk or thinking of A and B. In my eyes at the moment, only C is really that safe. If the properties are held personally or with a larger PG, then much more is at risk. As an investor grows their portfolio, they might be under the impression that they are unstoppable, but if they keep up a mortgage LTV of 75% across their portfolio, they are no more safe against bankruptcy than someone with a single property, and in fact have more to lose. Please let me know what you think, do you have a way to mitigate against these risks? Am I missing something? Thanks
  13. Thanks again David. I am now beginning to think that over the long term, the realistic ways to maintain a particular LTV across a portfolio (eg. 70%) would be to either: A ) sell properties (thus realising gains) and take out new debt against new properties, or B ) continually expand a portfolio, thus making it more likely to meet loan terms for refinancing because the money will be used for further acquisitions. Option A ) sounds expensive and I don't see how it's actually any less risky to lenders compared to just increasing LTV on an existing property. Option B ) is all well and good to a point, but there's an absolute limit on debt that I would be comfortable with, or I might want to use capital gains in property to fund different investments. If you have any further thoughts, I'd be interested to hear them.
  14. Thanks David, I hadn't thought about the terms of the loan, thanks. If equity is released through a loan I assume that would not be recorded as a profit, and so in which case a dividend cannot be issued on this? That would leave salary only. I am beginning to think that an SPV is an effective vehicle for continually building a portfolio, but once the desired portfolio size has been reached, how can one go about keeping a decent amount of leverage without adding more properties? (assuming value goes up, but there's no reasonable ground for increasing the loan size). If one was investing in their own name, they could just release some equity and use the money... Thanks again.
  15. While it seems common place to refinance properties owned in an SPV and use the proceeds to fund the deposit on further properties, what options are there to access that equity if one doesn't want to grow there property portfolio any further..? Since equity released by refinancing is not a profit, I imagine it is therefore impossible to extract the equity through dividends - one would instead have to sell a property and record a profit?? This seems like a significant drawback to me compared to owning property in my own name, considering that I don't intend to just forever buy more and more property... (but might want to buy enough to otherwise make an SPV worthwhile..) Looking forward to hearing what people have to say on this. Thanks in advance!
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