How To Create Your Financial Independence, and Enjoy a Happy and Secure Old Age

A few years ago, my wife and I looked at our meagre pension schemes, and took what we thought at the time were some pretty radical steps to do sometime about it. Steps that even Mr Brown cannot argue with nor worry us too much with tax!

OK, he changed his mind on how we were going to be able to buy properties through our SIPP (Self Investing Pension Plan) with one of the most spectacular U -Turns in this government’s history. After all, Mr Brown must have thought ‘Oh dear me, this is going to help poor pensioners! I can’t have that!’

So with that in mind, if you are looking to bolster up your pension funds to something approaching almost decent, rather than the pathetic apology most of us have coming, or perhaps even looking to pack in the 'Day Job', and even going for full financial independence, this may well be the most important article you have ever read....

Two life-long friends met up after several years without seeing each other at a Home Business Opportunity exhibition in London. Talk naturally moved towards what they hoped to achieve from their visit. They both enjoyed fairly good lifestyles, drove nice cars, had comfortable homes, wives who appreciated good shopping adventures, several grandchildren, and both liked taking several expensive overseas holidays every year.

They then started to discuss why they had come to this exhibition, and what their hopes and dreams were. With the poor performance of their pension plans, and extra poor performance of their endowment policies - both due to poor stock market performance, they were both concerned that come retirement age, their most enjoyable lifestyles would have to come to an end.

Without some serious changes to their financial situation, on their enforced age retirement, there was a high possibility that they would have to sell their houses, and buy or rent something smaller, cut right back on holidays, have to get a cheaper smaller car, cut out the expensive holidays and shopping trips for the wives, and may not even afford to visit the grandchildren as often as they wanted – even though they would have more time on their hands.

They had both come to the exhibition with a view to identifying multiple incomes streams that they could use to supplement or even replace their present incomes, so that they could choose when exactly they left the day job, quietly confident that their lifestyle could go on uninterrupted, or even better.

Recently, the two friends met up in London at another Trade Show. They are both still happily married, are fit and healthy, but one still has the day job with the pathetic pension prospects, while the other has already given up his day job, has a brand new car, has over £300,000 in his SIPP (Self Investment Pension Plan) and was now working around 8 – 10 hours a week from his home – which had just had a new study built on, and had a number of residual incomes coming in from various real estate projects.

Can you imagine what had made the difference? You may be wondering, as I did, what makes such a dramatic difference in people's lives? It isn't some naturally born gift, it's certainly got nothing to do with luck, intelligence, gender, race, age or any of that kind of B.S.

The difference lies in what each person knows and more importantly ... what he or she chooses to do with that knowledge. What has this meant for me? I was one of those people, and my wife Jane and I had had such fears for our future. However, I am the one that no longer has a ‘day’ job! We had for several years dabbled with stocks and shares, been very unsuccessful on the NASDAQ market (lost over £40,000 getting entangled with a crooked broker), played with the idea of buying property, and then went on a very expensive weekend-long property seminar that changed our lives completely.

All of a sudden the old taboos and fears were lifted – we no longer had a burning desire to pay off our mortgage as soon as possible, and appreciated the difference between good (investment) and bad (consumer) debt. We took the opportunity, re-mortgaged our house, borrowed on interest-free credit cards, bank loans, borrowed from parents, and put the money into an expanding portfolio of property. We have even been invited to a major dinner for new property millionaires by the initial property company whose seminar we went on, as a sign of our success.

OK – it’s not been all plain sailing – we have made some expensive mistakes, and had a few nightmares, but now we are sitting on 15 or so properties worth around £3.1 million.

Now - year on year that portfolio grows by between 4 and 6% at the moment, so our wealth is growing at around £150,000 every year without us having to do a thing!

And when you think, property prices have increased on average by 8.5% every year since 1955, statistically we should have around £3.39 million of HARD CASH in 10 years.

What can this mean for you? Which person do you want to be? Like me, or my friend? Have you ever dreamt of being financially independent? How would it feel to be able to do what you want, when you want, and with whom, and not be tied to the day job? In an attempt to spread your risk, I would recommend that you have a fairly balanced portfolio of properties that include a combination of equity growth and good rental yield; and off-plan (both UK and overseas), where you have no tenanting issues until the property completes, so you are looking for good capital growth while the property is built. In fact, choose your property development well, and you may find that on completion, the local capital growth will enable you to get 100% finance, and probably your deposits and more returned to you! Not only that, the developer will guarantee the rents for up to 10 years!

You may be thinking ‘but this is not for me – I could never comprehend it, and anyway, how can I afford to buy other houses when I can only just afford to buy the one I am living in?’

Well, you would be surprised at what you can actually achieve, and when you know that there are ‘buy-to-let’ schemes out there that guarantee your rental income for up to ten years, and property has always doubled in value in every ten year period. OK, so you will need to raise a deposit, but if you have owned your own home for long enough, you will probably have enough equity in there that could be released for the deposit.

Now, a lot of people may think that if they pay ‘cash’ for a second property ,then they can just cream off the rentals, and live happily ever after, with no worries about any void periods ( periods when you have no tenants in place).

Wrong!

Firstly, you will be taxed at the full rate of tax as unearned income on your rent – as you have no outgoing mortgage top offset it against.

Secondly, consider this. If you buy a house for £100,000 (if you can find one), and you pay cash for it, if the house goes up in value by 2%, you will have made a 2%age return on your investment, or £2,000.

Pathetic! You could get that return anywhere, and more! Now, consider where you put just 10% down on the same house, and a 90% mortgage.

If that house now goes up by 2%, you will have made the same £2,000 gain, but that would have meant you would have made a whacking great 20% gain on your investment of £10,000. Do you follow that? £2,000 as a percentage of £10,000 is TEN TIMES HIGHER than £2,000 as a percentage pf £100,000.

The smart investor, all things being equal, would have bought 10 such houses, and made a £20,000 gain on his £100,000 investment. This is the Power Of Leverage – using Other People’s Money, which makes property investment the exciting, rewarding activity that it is.

Getting the deposit. To grab a decent investment property in the region of say £150,000, this is going to cost you around 10% or £15,000 per property, so you would be looking for £15,000 within a few weeks - not the sort of amount you can usually put on either your (interest-free) credit cards, or get from your local Bank too easily. (Don't know what it is with Banks, but they only seem to understand if you want to borrow money on 'consumables' such as cars and boats!) I would also add here that you should be very wary of so-called ‘no money down’ deals. Banks and lenders need to see some commitment from you, and it is also important to remember that not everything in property inve stment is always rose-colored, and you really need probably at least £5,000 per property put aside (or have access to if needed) as an ‘insurance’ fund against bad tenants and so forth. So just where do you lay your hands on this sort of money - and at ridiculously low interest rates - coupled with a long repayment period?

Your House! If you are one of the few people that already realize the purchasing power of the equity of your house, and will psychologically not be phased by putting this to good use then I must apologize, because amazingly over 85% of people fear change more than the uncertainty of poverty in old age. However, if you are one of this 85% who have been brainwashed by your upbringing in society into believing that paying off your mortgage is your paramount goal, continue here.

For many people, their life-long ambition - ingrained by society tendencies - is to arrive at retirement age with their house fully paid for. That may well be your driving ambition too, but please consider this for a moment.

Most people, when buying their main residence, tend to do the following:-

• You think that you will live in the same house for ever.

• You take out a repayment mortgage, so your repayments are relatively high as you are paying off part capital and part interest on your loan.

• You may also take out another investment tool, such as an endowment policy, that matures when the mortgage does.

• You sign up for your mortgage, and never even think about changing your mortgage until you move.

• When you retire, even with a good endowment policy (seen one of these lately?) coupled with your pension, it usually means that you have to sell up and move to a smaller house to keep up your anticipated standard of living.

And what is wrong with that you may ask?

• Most people tend to move every 5 – 7 years (National Statistics Office). Really what you are doing is just renting somewhere to live – with of course the added benefit of holding an increasing pot of equity.

• Interest-only mortgages are so much cheaper – giving you far more spending power in your younger years, and more opportunity to invest in other areas at the same time. For example, a 25 year term repayment mortgage of £100,000 would cost something in the region of £700 per month, whereas an interest-only deal would cost around £360 per month. That’s a lot of saved cash for growing family.

• Endowment policies have been totally discredited over the last few years, as hardly ever returning the promised volumes of cash. On a £100,000 policy, this could cost anywhere up to £300 a month.

• Most mortgages either have no penalties for changing policies, or have limited time periods when they can be changed without penalty. You (or you broker) should always be on the lookout for better deals, as mortgage lenders are forever competing with each other for your business. If you took out your mortgage at a fixed rate of say 6.5% some years ago, very few are going to tell you about lower rates.

• When you retire (or rather reach retirement age), you want to maintain total control over where you live, and your lifestyle. By all means have the mortgage paid off on your main home, but do this from the income or equity from your portfolio of investment properties.

• If you were to buy two houses at the same time, one to live in, the other as a buy-to-let, if you have at least 10 years before you are due to retire, as both houses will have doubled in value, you simply sell your buy-to-let, and use the capital to pay off the mortgage on your home!

I am not advocating that you reach for the phone, and order a property or two off me tomorrow! No, I must make it perfectly clear that there has to be a certain amount of financial ‘rigor’ taken in any such decision, What I would like to see you do is pick up the phone, and call a financial advisor, or locate an investment property club (there are plenty out there on the web).

As an alternative, I regularly offer free 60 minute workshops for groups of up to 25 at a time offering advice on building up a property portfolio suitable to be used as a pension replacement scheme, usually in conjunction with a local IFA skilled in this financial type of work.

Just send a blank email to geoff.morris.properties@gmail.com , putting ‘free conference call’ in the subject line, or just leave your name, phone number, and best time to call on my 24 hour phone line.

UK Freephone number 0800 458 9652.

This is not meant as some cheap gimmick to get some free publicity – far from it. I have a genuine concern that too many of us are meandering through life, and letting big opportunities just slip through our fingers, then, when retirement comes, we sit there, and think,

“Oh dear! Where have our nice holidays gone?”

“How can we afford to run the car? “

“How can we afford to see the grand-children?”

“Will we have to sell the house to make ends meet? “

“What about health care - will we get parted in old age if we need to go into a care home? - Divorced by Social Services?”

If these questions, or similar ones are nagging you now, I urge you to take a hold of your whole life, get out of the box you are in that says you have to pay off your mortgage at all costs (there is no divine creed that says this is what you have to do), and start to plan for your financially secure future.

Geoff Morris is not a licensed IFA, but can easily put you in touch with several local ones that can help you with the above topics.

Copyright 2006 Geoff Morris