Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will share some projections I’ve been working on for the next few years, and post the interview I completed with my investment partner, my father, Darren Scothern. I hope you’re sitting comfortably as this is the longest blog post to date.
I passed the exam. It was such a relief as I honestly thought I had failed. The exam was difficult and there seemed to be a lot of content that was not covered in the textbook. The main thing is I passed, especially with everything I had been dealing with. I needed that pass; more than I think a lot of people realised, I really needed that pass. I needed something to go right after some of the most stressful weeks I’ve ever had. It might not seem like a big deal, but had I failed that exam I think it may have knocked my confidence so much that I might not have gone back to it. I’ve got a foundation to build on now; a base to build on and move forward. The next exam is booked for mid-August and is focused more on investments and asset classes rather than regulation. I feel much more confident about the material.
There isn’t much more to report from the last week. It’s been a little quieter with the neighbours but I’m dreading another weekend of drug fuelled noise. I spoke with our management company and it seems that a lot of people have been complaining about different neighbours over the last few weeks with everyone being at home more. I’m generally pretty chilled out about my neighbours making noise here and there; it’s an apartment building after all, but there are limits to what’s acceptable.
2020 Reading Challenge
A few weeks ago I posted the list of the books I had read in Q1. Now that Q2 is finished, here is the list for the last three months, with star ratings out of five:
26. Babylon’s Ashes: The Expanse Book 6 by James S. A. Corey.*****
27. Persepolis Rising: The Expanse Book 7 by James S. A. Corey.*****
28: Tiamat’s Wrath: The Expanse Book 8 by James S. A. Corey.*****
29. The Complete No-Nonsense Guide to Property Investing by David Tarn (re-read).*****
30. The Choice by Claire Wade.***
31. The Complete Guide to Property Investment by Rob Dix (re-read).*****
32. Dark Matter by Blake Crouch.****
33. The Glass Hotel by Emily St. John Mandel.*****
34. Seveneves by Neal Stephenson.***
I’ve not read anywhere near as much this year as in 2019. A lot of the time I would have spent reading, I’ve been studying. Also, I listen to a lot of audiobooks when I’m out and about, but with the lockdown I’ve not been out as much.
I have been trying to keep up with the goal of reading more fiction written by women. I enjoyed The Choice but it was only ok. I can’t remember the names of the characters which is never a good sign, but it was an interesting premise. It’s set in Britain where the government has almost complete control over your diet. Everything you eat is monitored, as is the amount of exercise you complete.
The other book with a female author that I read this quarter was The Glass Hotel. I started 2020 having read Station Eleven by the same author, and both books are on the list of my favourites of all time. I was blown away by both stories, but more so the characters that were brought to life on the page. I’m a big believer that the characters create the story, not the other way around. The best stories are when well-rounded, complex characters are thrown into unusual situations, and not when characters are just jumping through hoops to service a plot.
Anyone who follows me on social media will know I’ve been banging on about The Expanse for months now. It is, simply put, the best sci-fi in print at the moment and the TV adaptation is fantastic.
I really enjoyed Dark Matter as well. It deals with the multiverse and how the choices we make can have huge impacts later in life. I don’t want to say too much more for fear of spoiling it, but you should check it out if you are interested in alternate realities.
I stumbled across Seveneves by accident, as I went down a Reddit rabbithole. Someone mentioned this story where the Moon breaks apart and humanity has to act to save itself. A fascinating idea and I bought the book immediately. The execution was mixed. I really enjoyed the first two-thirds of the book, but the final third felt rushed. I think it would have been better had the book ended early, with the final third being fleshed out as a sequel. It will make more sense if you read Seveneves, as I can’t explain why without spoiling the book.
Current Weight: 115.7 (down 0.3kg from last update).
Current Body Fat: 39.5% (up 0.7% from last update).
BMI: 34.9 (down 0.1 from last update).
Weekly Goal: lose 0.75kg.
Ultimate Goal: 90kg.
Weekly Steps: 26,044.
Premium Bonds: £19,150 (up £1,900 from last update).
Stocks and Shares ISA: £11,856.60 (up £112.26 from last update).
Fuck It Fund: £0.00 (down £1,899.95 from last update).
Property Value: £185,248 (no change from last update).
Total Assets: £216,254.60 (up £112.31 from last update).
Credit Card: £342.97 (up £342.97 from last update).
Residential Mortgage: £143,528.46 (down £358.01 from last update).
Total Debts: £143,871.43 (down £15.04 from last update).
Total Wealth Figure: £72,383.17 (up £127.35 from last update).
Investment Income in 2020: £86.36 (up £25.00 from last update) (target £2,000).
As you will have noticed, there have been a few changes in my finances. I’ve reduced my Fuck It Fund to zero as the interest rate was cut again. The rate of interest was insultingly low and so I made the decision to delete the fund and transfer the money to my Premium Bonds. Whilst it’s nice to have a cash reserve, the funds are still readily accessible in Premium Bonds. For immediate emergencies I have a credit card with a substantial credit limit. I will build up a cash reserve again in the future once interest rates have returned to normal levels.
In the last week I’ve had a few things come up which I should have known about but slipped my mind with everything else I have going on. My annual audible subscription was taken, and then I realised my supplies of Nespresso capsules were running low. Between these two expenses I was £250 down, and then I had to take a few Uber trips to and from my exam, and there was a takeaway in the mix as well. The credit card will be reduced to zero within a few weeks, although it may increase in the short-term as I have a medical bill of £150 to settle. I had another £25 of investment income this past week which takes the year-to-date total to £86.36, I was hoping to have brought in much more than this at this stage of the year, but events conspired against all of us.
FIRE Timeline Projections
I’m always thinking about ways to achieve FIRE as soon as possible. It’s bordering on obsessive thinking, but not in a negative way. It’s the only thing that keeps me motivated to work. Property is going to be the main source of income that allows me to achieve FIRE, and so it’s a case of looking at the numbers and working out how many properties will be needed to achieve FIRE, and how much money will be needed to acquire those properties.
In an ideal world deposits will be recycled from one BTL to the next. The gold standard is to recycle the whole deposit but in reality 25%-50% of the deposit being recycled is a good result. One potential problem with this model is that it relies on property values increasing either through refurbishment or general increases in the property market. The outbreak of Covid-19 has made it difficult to complete work on properties, and it will almost certainly result in a property market slump for a short period. So, releasing equity in this way is going to be tricky over the next few months and years. This led me to look at how quickly I could save enough cash for deposits without raising equity from the BTLs I purchase. As I worked this out, I concluded that there are three ways I can generate cash to buy BTLs with.
For a while now, I’ve been able to save or invest over £1,000 each month with little difficulty. For the last couple of months it has been closer to £1,200 per month. I’m shopping in the £90,000-£110,000 price bracket, but for the purposes of this exercise I will assume an average purchase price of £100,000, and that the current SDLT rates will apply moving forward. The total cost for the deposit, legal fees, valuation and SDLT on a £100,000 will be in the region of £29,000. I need ten half-shares of properties to achieve lean FIRE; i.e. enough to cover the basics. To achieve fat FIRE, I need fourteen half-shares.
A slight digression…
Some of the properties I will be buying will be in joint names either with my Dad or my partner. So, I will receive half the rent for half the cost. To more easily conceptualise this, it’s easier for me to think in halves rather than whole properties. Yes, it’s a bit weird but I never claimed to be anything else.
Another point; property values will change over time. However, if values go up then I will be able to release equity from the properties I already have. If values go down, the deposit requirements go down. So, for the purposes of this projection, I think it’s ok to assume values remain static.
Saving Cash - Continued
Assuming I can save £1,200 each month for forty-two months (from now until December 2023), I will accumulate £50,400. Not quite enough for two whole properties. It doesn’t look too positive. However…
I have been working overtime at work and it seems as though the overtime will be available for a while. I don’t need to work too much extra to raise an additional £300 net each month. So, what do the projections look like if I’m saving £1,500 per month?
£1,500 x 42 months = £63,000. Enough for two whole properties. Better, but still a little short.
Saving Cash and Reinvesting Rental Income
If I take the above projection, but factor in additional variables, the picture looks a little better. I already have enough money to acquire a BTL in joint names with my Dad. We are looking at, as an absolute minimum, achieving a net return of £75 per month each. Also, I will probably have around £5,000 left over from the purchase. So, if I start from a position of £5,000 and save £1,200 per month (assuming no overtime) but add in the £75 per month from the first property it will take nineteen months to save up for my next deposit.
Assuming I acquire the property and rent it out immediately (I could have been lining the deal up before I hit the deposit savings goal), then I will have one-and-a-half properties let, netting me an estimated £225 per month on top of my savings of £1,200 each month. From this starting point it will take a further twenty-months to save for the next deposit. At which point, I have seven months left with two-and-a-half properties owned. It’s still not compounding fast enough.
There is one stock I have in my ISA that I believe is massively undervalued. In the next three-months I will have amassed a holding of over twenty-thousand units in that stock. The 52-week high for the stock is a little under 75p. I believe that by December 2023 it will be back trading at that level or even higher. Each month that passes sees the units in my holding increase. It’s not unreasonable to expect that holding, when cashed in, to provide me with enough funds for another BTL deposit, especially when used in conjunction with the seven-months of saving £1,575 described above.
Using my own cash savings I can get to 2.5 BTLs with each half returning £75 net. That means I’m earning £375 per month. Added to the £1,200 I’m saving each month, I have £1,575. Assuming I sell 20,000 units of stock at 70p (a little under the current 52-week high), I have almost enough for another property.
This would see me having seven half-shares. I need three more half-shares for lean FIRE. This is where my own residence comes into play.
Selling My Apartment
My residence is in one of the most up and coming parts of the country. There are often articles in national publications highlighting my area of Sheffield. It’s going through an incredible period of regeneration and properties are in high demand. I believe property values here will increase at a higher rate than the national average, and because the area is compact there is not much more room for further development. If my property increases in value by just 3% per year, then by 2023 it will be worth over £200,000. My mortgage at that point, should be under £125,000. I doubt I would even need to engage an agent to help with the sale as we get a number of requests each week from people wanting to buy property in our complex. So, I could almost certainly arrange a private sale, and walk away with £75,000. It’s almost enough for three more properties (six half-shares) but it would be split with my partner, so we would both have half a share in those properties. That would see me to ten half-shares.
I know that it looks like a house of cards, with one assumption on top of another assumption, but I believe projections to be on the side of conservative-realism. It is possible that in the next three years some of the properties I acquire will increase in value allowing me to release equity and advance at a faster pace. Also, if I pass the remaining exams to become a financial advisor, I will be able to command a higher wage and save more each month.
Also, the figure of £75 per month, per half-share of property is based on saving for void periods and repairs, and assumes a worse tax position than is realistic. I calculated the figures assuming I would be paying 20% tax on the gross rent, when the reality is many of the costs are tax deductible which decreases the tax due. So, although my goals are ambitious, my projections are always extremely conservative.
First things first though. I need that first property as soon as possible.
What were your first experiences of managing money?
That's an interesting question, and I should probably preface it by saying that there is a huge difference between being in a situation where you should be managing money, and being in a situation where you do manage money. For me, I should have been managing money from when I left home to set up house with my girlfriend, when we became parents at a young age and wanted to be independent. Unfortunately, I wasn't even aware that 'managing money' was even a concept. I'm not joking. There were reasons behind that lack of knowledge, of course. I guess the first time I actually started managing money, it was managing someone else's money; namely budgets in my first management job, at the age of 22. It never occurred to me at that time that I could use the same processes to manage my personal finance, which sounds terrible, I know. But again, there were reasons for that.
When did you first start to apply a process to managing your own money, and what caused you to take a more active role in your own finances?
When I became a single parent, with custody, I had sole responsibility for making the domestic finances work, in very difficult circumstances. Basically, there wasn't enough money to make ends meet, and the result over time was predictably disastrous. But I did have a rudimentary method of using a simple spreadsheet to show my current balance, upcoming outgoings and expected result. When you talk about managing finances, at that time in my life, my thirties, it was all about putting out fires and damage limitation. Debt, however, spiralled to almost unbearable. levels. It was only by remortgaging my property, which had rocketed in value, that I got back on an even keel with debt consolidation. It was that experience of debt that made me want to change my approach to money. Since then, the only debt I've had is 'good' debt, where I've made a considered decision to take on debt because it worked in my favour. At present, the only debt I have is my mortgage. But there was a long journey between becoming free of bad debt, and getting to a stage where I had a desire to manage my money more positively, more proactively, and the financial awareness to do that.
To what extent would a better financial education have improved your circumstances in your 20s and 30s?
When I was at secondary school, I took a politics and economics course. I can honestly say that within months of leaving school, the only thing I could remember about economics was the supply and demand chart. For my generation, and still today, it is scandalous that kids come out of school with so little awareness of the issues that affect personal financial security. I genuinely believe that if I had been taught in detail about investment, compounding, and the irreplaceability of spent cash, I would be significantly well-off today. I would never have undergone the ten years of stressful debt that I experienced. There are many, many issues around financial education. It's not just about the numbers, but about the ethics of money as well. It's complex. On the one hand, you have an establishment that is sadly geared to reconcentrating wealth into the possession of a social elite, and on the other hand, there is a culture in the working class, perhaps much more so in my generation, of seeing wealth as morally wrong. This mindset is fed by the excesses, both moral and financial, of the wealthy elite. But there is a third path, I believe. With good financial education, there is the path of ethical capitalism. And although I've come to it late in life, that is the path I now walk.
How difficult was it to change your financial mindset?
Changing my financial mindset has been weird. When I started trying to learn about how to approach finances differently, I found some of my long-held beliefs were being challenged. I think that can be difficult for anyone, and probably gets more difficult the older you get, as those beliefs have had longer to become ingrained. It was difficult to accept certain parts of what I was learning, and I found myself going ‘yeah but,' a lot of the time, and then finding my buts were pointless. I think a lot of people who've tried to start learning about money will have come across Robert Kiyosaki's assertion that a house should be viewed as a liability rather than an asset; that rocked me. Also, I came across the concept that one way of differentiating being poor from being rich is that poor people spend money; rich people make money work for them. Coming from a very lower working class background, that made me angry. But I now believe there's a great deal of truth in it. The problem is, of course, one of education. We've already spoken about the value of financial education. People from economically deprived backgrounds often struggle for quality education, for a whole host of reasons. It creates a poverty trap. I believe that a certain category of person at the apex of financial success is, whether intentionally or not, perpetuating a social chasm in wealth, education and wealth education that ensures the poor stay poor. This is why I always say I'm in favour of capitalism, but it has to be ethical capitalism.
Was there a “penny drop” moment for you regarding financial education, or was it more of a gradual awareness?
There were sudden steps along the way. The first step came with the responsibility of being a single parent. The second step came with becoming debt free and knowing that I could never allow myself to be in that position again. But both those steps were just awareness that money was important. No knowledge came with it. There came a big step-change talking to you about investing, how it works, and what could be achieved. That was the point at which I started investing in a fund via an ISA with Hargreaves Lansdown. Reading books by Robert Kiyosaki and Napoleon Hill was like getting repeatedly punched in the guts, and with each punch, more clarity emerged. Rob Moore's stuff on property investment really got my management and business head directed toward financial security. And then books by Andrew Craig and Ramit Sethi kind of helped me pull together ideas that had been swirling in my mind. I have to say as well that most of the inspiration to pursue financial awareness, and to make bold decisions regarding aiming for financial competence and security in my life has come from your good self. Without your example I might actually not have started down this road.
What does your idea of financial independence look like?
For me, financial independence means not having to rely on an employer to meet my financial requirements. Which is a strange thing, I know, if you think about it. I mean, if I was financially independent, would I just sleep and do nothing all day? Of course not - there are lots of things I want to do, and some of that would include activities that some people consider to be hard work. So, it might be a valid question to ask, well if you're going to be working anyway when your financial requirements are met without recourse to an employer, then how is that different from working for your money? And that brings us to the crux of the matter: It's not about financial independence for the sake of financial independence; it's about choice. It's about freedom. The poverty I experienced as a child, and the financial difficulties I experienced as a young adult, have been exhausting, and that is a huge driver of why I am pursuing financial independence.
If you could go back in time and give an 18-year-old you some advice, what would you say in 100 words or less?
Very simple, this one: “Try again with your education. Pursue your interest in the arts, for sure, but also be practical. Learn how to look after money, and learn the skills for a fulfilling career. Learn how to cook! But most importantly; do not believe the people who have kept telling you that you are not good enough. Fix your eyes on your dream, and NEVER give up.”
What investment types are you interested in other than property?
I'm very cautious, and safety minded. Some might say too cautious. But I tend toward looking for investment that is slow, steady and safe. So, a tracker fund is ideal for my mindset. I have a FTSE 250 tracker, that's performing pretty well so far.
What would you say your biggest financial mistake and success was?
There have been plenty of missed opportunities over the years, but I think when it comes to actual mistakes, one thing stands out. When I sold the first house I had bought, I made a significant profit. I was very naïve, and I just put that money in the bank. Stupid really. Over a period of time, I spent it all. Did I need a new car? Of course I did! Did I deserve an expensive holiday somewhere warm? You're damn right I did. Plain stupid.
In terms of successes, I would say simply learning from the mistakes of the past counts as that. To be specific, a while ago when I got quite a significant tax refund, every penny of it was invested. That's the approach I take now whenever I get any unexpected income: Into the fund it goes.
Thank you for your time.
Thank you for reading this week, and I hope you have a great week ahead. If you are following F.I.R.E. or would like to know more about it, please get in touch via Twitter (https://twitter.com/NowWeLive01) or leave a comment on this post.