X

Sign Up

or

By signing up I agree to Property Tribes Terms and Conditions


Already a PT member? Log In

Sign Up

Sign Up With Facebook, Twitter, or Google

or


By signing up, I agree to Property Tribes Terms and Conditions


Already a PT member? Log In

Log In

or


Don't have an account? Sign Up

Forgot Password

To reset your password just enter the email address you registered with and we'll send you a link to access a new password.


Already a PT member? Log In

Don't have an account? Sign Up

  • Stickies & Evergreen

    Landlords going head to head on the topic of leveraging!

    Jonathan Clarke and Daniel Booth have started a very interesting discussion on the pros and cons of leverage on another un-related thread.

    I thought it made sense to move the existing comments over to a new thread and continue the conversation here.

    Jonathan Clarke:

    (20-03-2014 08:33 PM)Vanessa Warwick Wrote:  At a 9% growth rate, the average £1.5m flat will fetch £6.3m by 2030 and £36m by 2050.


    A great argument for the high leverage investment model.

    This demonstrates the excellent effects of compound interest over time
    And it also supports the argument for taking out an interest only mortgage as opposed to a repayment one. It also makes a nonsense of paying down the odd 20K capital here and there. Use that money instead to save for future interest rate rises or use it for lifestyle choices now in case you die tomorrow.

    Just get your own personal balance right

    A 75% LTV on 1.5 mil is about 1.1 mil . It may seem a lot now but fast forward to 2050 it will be relatively small change. You just sell and pay it off pocketing the remaining 35 mil. Happy days

    Let time and inflation erode your debt

    Leverage

    Jonathan Clarke.
    .
    0
    0

    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director, site owner and moderator - propertytribes.com

    Daniel Booth:

    (25-05-2014 09:03 AM)Jonathan Clarke Wrote:  A 75% LTV on 1.5 mil is about 1.1 mil . It may seem a lot now but fast forward to 2050 it will be relatively small change. You just sell and pay it off pocketing the remaining 35 mil. Happy days

    Let time and inflation erode your debt

    Leverage
    .

    As long as between now and 2050, the banks don't call your loans in!

    Don't leverage!

    Daniel Booth
    0
    0

    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director, site owner and moderator - propertytribes.com


    Jonathan Clarke:

    (25-05-2014 02:20 PM)daniel_booth Wrote:  
    (25-05-2014 09:03 AM)Jonathan Clarke Wrote:  A 75% LTV on 1.5 mil is about 1.1 mil . It may seem a lot now but fast forward to 2050 it will be relatively small change. You just sell and pay it off pocketing the remaining 35 mil. Happy days

    Let time and inflation erode your debt

    Leverage
    .

    As long as between now and 2050, the banks don't call your loans in!

    Don't leverage!

    About 5 people who take their car out today will tragically die on the roads
    I dont think it will be me but it may be
    It wont stop me taking my car out
    Some risks have too be put in perspective.
    Being disproportionately fearful can sometimes hold you back
    ..

    Jonathan Clarke.
    0
    0

    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director, site owner and moderator - propertytribes.com


    Daniel Booth:

    (26-05-2014 04:25 AM)Jonathan Clarke Wrote:  Being disproportionately fearful can sometimes hold you back

    Not about fear, it's about control of my destiny.

    Wouldn't really say I'm held back either, not doing too bad!

    I left corporate world and set up my business, because I didn't want to carry on having a BOSS's decisions potentially dictate my destiny.

    I'm now deleveraging my portfolio, because I don't want to carry on having a BANK'S decisions potentially dictate my destiny.

    Once I've achieved my goal, I'll only have to answer to my customers/tenants (and I suppose the taxman!)

    Example of a decision:
    If all your lenders suddenly enforced a rule that they don't want portfolio landlords with more than three properties, at a time when you need to remortgage, is it safe to say that decision would affect you?

    Daniel Booth
    0
    0

    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director, site owner and moderator - propertytribes.com

    Jonathan Clarke:

    (26-05-2014 04:38 AM)daniel_booth Wrote:  I'm now deleveraging my portfolio, because I don't want to carry on having a BANK'S decisions potentially dictate my destiny.

    So you leveraged at one point
    And now you are deleveraging
    Thats fine. That takes out a risk factor i agree.
    Why did you go against your own advice in the first place?

    Should a newbie investor not leverage at all then because of what you are doing now
    Or should they leverage for say 15 years and then start to deleverage

    Banks have lent for the past 100 years and will lend for the next 100 years.
    Is there something so special in history about 2014 that should have everyone rushing to deleverage or is more the case that this just happens to be the right time for you as an individual in your investing career.

    Jonathan Clarke
    .
    0
    0

    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director, site owner and moderator - propertytribes.com


    Daniel Booth:

    (26-05-2014 05:35 AM)Jonathan Clarke Wrote:  So you leveraged at one point
    And now you are deleveraging
    Thats fine. That takes out a risk factor i agree.
    Why did you go against your own advice in the first place?

    I've said dozens of times if you read my historic posts on Tribes - "I wish I'd done things the other way round".

    I.e. it's my own advice with hindsight, if I knew ten years earlier what I know now etc. etc.

    (26-05-2014 05:35 AM)Jonathan Clarke Wrote:  Should a newbie investor not leverage at all then because of what you are doing now
    Or should they leverage for say 15 years and then start to deleverage

    Well firstly it's nothing to do with what I'M doing now.
    Secondly, I can understand people using leverage for a small handful of BTL.
    Lets take someone earning 60k per year, they'd be able to save deposits and use leverage for a few BTL for their pension.

    I've no problem with that, they'd more than likely survive any minor issues.

    (26-05-2014 05:35 AM)Jonathan Clarke Wrote:  Banks have lent for the past 100 years and will lend for the next 100 years.
    Is there something so special in history about 2014 that should have everyone rushing to deleverage or is more the case that this just happens to be the right time for you as an individual in your investing career.

    Nothing special about 2014, I've been saying this for at least 4/5 years since the aftermath of the financial crisis and seeing several big players being taken down with the banks.

    I'm encouraging people to look at the risks, because I've seen the devastation caused to people.

    My advice is to be cautious and aware of risk, yet still make good money from sensible strategy.

    Daniel Booth
    0
    0

    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director, site owner and moderator - propertytribes.com


    Jonathan Clarke:

    (26-05-2014 05:42 AM)daniel_booth Wrote:  Secondly, I can understand people using leverage for a small handful of BTL.

    Lets take someone earning 60k per year, they'd be able to save deposits and use leverage for a few BTL for their pension.

    I've no problem with that, they'd more than likely survive any minor issues.

    So we both agree that leveraging is ok
    I`m glad you are coming round to my way of thinking
    All we are discussing then is how much leveraging is appropriate
    You said `Dont leverage `` though earlier
    I`m confused - mixed messages

    Whats a few BTL`s in your eyes - 3 / 5 / 9 / 15 ?
    Whats your definition of a ``small handful``
    Whats a minor issue .
    What if they call the loans in when you have 5 BTL`s
    Why is that somehow ok but not ok if you have 100
    Its all about getting your leveraging structure right.

    As I see it - Leverage is like a mountain.
    People who buy cash stay at the bottom and admire the summit but only get to look up at it. Some will climb to the first base camp but climb no more.
    Some will scale the whole mountain and borrow at 80% LTV to do so.
    They then see the summit in all its glory for themselves
    Yes it has its risks. But wholly acceptable proportionate risks
    Yes its hard graft ( just like your success in your job)

    But if you are prepared fully fit well trained you can do it

    Leverage

    Don`t stay at the bottom of the mountain
    Climb it
    Why ?
    Well as George Mallory said in 1924

    Because its there :-)
    .
    Jonathan Clarke
    0
    0

    [Image: 4995468760_6be86655d4_t.jpg]
    general operations director, site owner and moderator - propertytribes.com


    (26-05-2014 09:52 AM)nick tadd Wrote:  Jonathan Clarke:
    So we both agree that leveraging is ok
    I`m glad you are coming round to my way of thinking
    All we are discussing then is how much leveraging is appropriate
    You said `Dont leverage `` though earlier
    I`m confused - mixed messages

    Firstly, when I ended my post with "don't leverage" it was in jest because you'd ended your previous post with "leverage".

    I'm not saying it should NEVER be used, but it should be avoided if possible.

    So yes we're discussing how much leverage is appropriate.

    Definitely not coming round to your way of thinking haven't changed my position.

    (26-05-2014 09:52 AM)nick tadd Wrote:  Jonathan Clarke:
    Whats a few BTL`s in your eyes - 3 / 5 / 9 / 15 ?
    Whats your definition of a ``small handful``
    Whats a minor issue .
    What if they call the loans in when you have 5 BTL`s
    Why is that somehow ok but not ok if you have 100
    Its all about getting your leveraging structure right.

    Ok, my stance really is it depends on the individual's circumstances.

    How robust are they to stand up to the challenges that can come? You don't know you're naked til the tide goes out.

    So lets look at 2008.

    Prices in some areas crashed 20%, people were mortgaged to 85% of precrash price.

    Therefore people found themselves effectively in 5% neg equity.

    Now lets say they had a covenant with the lender to stay at 85%, then they would quite quickly have to pay down the 20% difference or be in breach of loan.

    It is therefore advisable to have a cash reserve for this purpose, so your question as to how many is a handful - (lets take a 100k property, so you'd need a 20k reserve) would depend on how much reserve you're sitting on. I.e. if you're sat on 200k, ten properties would survive an LTV covenant cash call, 40k two properties etc. etc.

    Now, lets take a different scenario, same thing happens to prices as above, LTV covenant is left alone by your lender, so you sit on an SVR rate as not enough equity to remortgage away.

    In 2008, people in this position had their arses saved by record low interest rates. (This is what Paul B refers to as zombie landlords i.e. trapped with their current lender).

    Incidentally many of these zombies think theyre geniuses and one who was a prolific poster on here wrote a book about their genius, has been very quiet this last year I suspect due to their bankruptcy, but I digress.

    Now, these "genius zombies" how long would they have lasted if rates had gone the other way, even now after having 5/6 years of having breathing space to put their house in order, I bet 80% of them would still be f**ked if base rate hits only 5%.

    So again, a "handful" is relative to how much fallout they can handle.

    (26-05-2014 09:52 AM)nick tadd Wrote:  [b]Jonathan Clarke:

    (26-05-2014 05:42 AM)daniel_booth Wrote:  Secondly, I can understand people using leverage for a small handful of BTL.

    Lets take someone earning 60k per year, they'd be able to save deposits and use leverage for a few BTL for their pension.

    I've no problem with that, they'd more than likely survive any minor issues.

    So we both agree that leveraging is ok
    I`m glad you are coming round to my way of thinking
    All we are discussing then is how much leveraging is appropriate
    You said `Dont leverage `` though earlier
    I`m confused - mixed messages

    Whats a few BTL`s in your eyes - 3 / 5 / 9 / 15 ?
    Whats your definition of a ``small handful``
    Whats a minor issue .
    What if they call the loans in when you have 5 BTL`s
    Why is that somehow ok but not ok if you have 100
    Its all about getting your leveraging structure right.

    As I see it - Leverage is like a mountain.
    People who buy cash stay at the bottom and admire the summit but only get to look up at it. Some will climb to the first base camp but climb no more.
    Some will scale the whole mountain and borrow at 80% LTV to do so.
    They then see the summit in all its glory for themselves
    Yes it has its risks. But wholly acceptable proportionate risks
    Yes its hard graft ( just like your success in your job)

    But if you are prepared fully fit well trained you can do it

    Leverage

    Don`t stay at the bottom of the mountain
    Climb it
    Why ?
    Well as George Mallory said in 1924

    Because its there :-)
    .
    Jonathan Clarke

    h

    (26-05-2014 09:52 AM)nick tadd Wrote:  Jonathan Clarke:
    As I see it - Leverage is like a mountain.
    People who buy cash stay at the bottom and admire the summit but only get to look up at it. Some will climb to the first base camp but climb no more.
    Some will scale the whole mountain and borrow at 80% LTV to do so.
    They then see the summit in all its glory for themselves
    Yes it has its risks. But wholly acceptable proportionate risks
    Yes its hard graft ( just like your success in your job)

    But if you are prepared fully fit well trained you can do it

    Leverage

    Don`t stay at the bottom of the mountain
    Climb it
    Why ?
    Well as George Mallory said in 1924

    Because its there :-)
    .
    Jonathan Clarke

    Not true that people who don't use leverage stay at the bottom of the mountain.

    To get involved in the mountain analogy, I'm basically saying to people it's great to get to the summit, but more important that you don't fall off and die on the way up, whereas you're basically saying to people it'll be fine, because I've climbed it myself.

    So you're a champion mountain climber telling people to go for it without sherpas or equipment!

    (26-05-2014 02:58 PM)paul_barrett Wrote:  No OR or whatever would find any cash stash I might have
    You have to be a fool to make it easy for the ORB to track cash down easily
    Not that I am presently in such a situation but. I can easily book gone if I choose

    All very illegal though!

    (26-05-2014 02:58 PM)paul_barrett Wrote:  High leverage though is not an aspirational thing
    I actually would like to lowly leveraged

    I would like to be voluntarily highly leveraged but with sufficient stashed cash to cover worse case scenarios

    Contradictory statements in the same post there Paul, which would you prefer out of the two.

    (26-05-2014 03:39 PM)john_corey Wrote:  So, is there an LTV that makes sense to you Daniel when someone is building a portfolio?

    Well firstly John as I said replying to Jonathan, it would depend on the individual in terms of earnings and other wealth / cash reserve.

    Secondly I'd still suggest 0%LTV i.e. create wealth elsewhere (business ownership or well paid job) and hold wealth already created in property further down the line.

    But a more realistic answer is two fold based on what I've seen happen to people since 2008:

    70% LTV maximum, should allow you to prevent negative equity and becoming a zombie, i.e. it's enough buffer to be able to sell.

    But caveat - have a cash reserve PER property, this would also mitigate the stress of voids/maintenance.

    So yes I would advocate 40% cash (30% deposit, 10% cash at a bank reserve) and 70% LTV.

    Let's not forget Mortgage Express were dishing out 90% LTV at height of the last boom against inflated prices.

    (26-05-2014 03:56 PM)Jonathan Clarke Wrote:  Some quote i recall seeing along the lines of . If you got 50K of debt and you cant pay you got a problem- However if you got 5 mil of debt though then the banks got a problem.

    Absolutely not true unless you're talking billions.

    I know plenty of people who were around the 5-20 million level, all taken down by the banks since 2008, most of whom had never missed a mortgage payment in their life.

    These chaps lost everything, wouldn't say that's the bank's problem!
    0
    0

    (26-05-2014 11:06 PM)daniel_booth Wrote:  Now lets say they had a covenant with the lender to stay at 85%, then they would quite quickly have to pay down the 20% difference or be in breach of loan.

    Which lenders do this? I have loans across 10 mainstream lenders. I bought several at the peak and was cash flow positive with all but in negative equity on some for a period. None of the lenders contacted me asking me to pay down due to a covenant.

    The lesson is not to use lenders who have this covenant or if you do to ensure your cash stash can cover the T&C`s it imposes.
    Then your fears of a bank calling in a loan can be allayed. Its all part of DD
    You are then free to leverage away to your hearts content
    .

    (26-05-2014 11:06 PM)daniel_booth Wrote:  I know plenty of people who were around the 5-20 million level, all taken down by the banks since 2008, most of whom had never missed a mortgage payment in their life.

    These chaps lost everything, wouldn't say that's the bank's problem!

    So did the people who have a 20 mil portfolio all just happen to buy 20 mil of property at the peak and then all that stock have a lender(s) who used a covenant to call in all the loans. What exactly happened ?
    .
    0
    0

    Jonathan Clarke. http://www.buytoletmk.com


    (26-05-2014 11:06 PM)daniel_booth Wrote:  To get involved in the mountain analogy, I'm basically saying to people it's great to get to the summit, but more important that you don't fall off and die on the way up, whereas you're basically saying to people it'll be fine, because I've climbed it myself.

    So you're a champion mountain climber telling people to go for it without sherpas or equipment!

    No no no - you`ve put words into my mouth and are rather selective in your quotes and interpretation
    I obviously dont want to send people to their death .
    But I do encourage people to go climbing
    Dont be too gung ho but likewise
    Dont be scared of success

    I said this in my post alongside it as a balance but you kinda missed that bit out

    ``Yes it has its risks. But wholly acceptable proportionate risks``
    ``But if you are prepared fully fit well trained you can do it``

    Nothing about going for it without sherpas or equipment. You just made that bit up

    Me - A Champion mountain climber -
    Ok I can live with that bit :-)
    .

    (27-05-2014 01:51 AM)daniel_booth Wrote:  Pretty much all commercial lenders have that clause.

    With 20 mil of loans your friend then sounds as if they were poorly advised as to the potential consequences

    If you re read my post, being called in due to LTV covenant is just one of many many things that can happen.

    I`m just picking them off one by one. Whats next

    you say you're with mainstream lenders, if when your fixed rates run out, they have stopped lending and there's a crunch going on, you won't be left with much choice other than commercial for a portfolio of your size, meaning you may be forced to accept an ltv covenant and / or pay down.

    No they just roll onto the SVR. Ive stopped buying now so unsure whether they would lend again. Last one was with TMW so dont see why they wouldnt again and why i would suddenly have to go commercial. If I did and there was a covenant i would ensure I had a cash stash to cover the potential claw back

    The fact is you don't know what will happen.

    agreed - nor do you - but no one does either so all you can do is just take educated business decisions

    You're gambling on the market going your way.

    Call it gambling if you like or call it astute business decisions
    keep the odds in my favour
    I believe the market in 20 years will be double what it is now
    Is that gambling or is it an investment
    Only time will tell I guess

    You on the other hand may be missing a golden opportunity to leave the rat race earlier than you otherwise will by not leveraging any more . Your mates experiences have probably had a disproportionate negative effect on you. Leveraging is fine honest. Keep your safety hat on yes but hey Keep the faith


    I'll see if I can get the 20 mill chap to come on Tribes and tell his story or if not permission for me to write a summary.

    That would be great thank you
    .
    .
    0
    0

    Jonathan Clarke. http://www.buytoletmk.com


    (27-05-2014 02:07 AM)Jonathan Clarke Wrote:  Nothing about going for it without sherpas or equipment. You just made that bit up

    Me - A Champion mountain climber -
    Ok I can live with that bit :-)

    I can see where I've caused confusion, the bit about lack of sherpas is to do with lack of cash reserve - a few weeks back when we were debating, you were advising around 2%, which for the reasons I've mentioned in this thread is dangerous in my view, should be 10-20%

    You are a champion as you're very good at what you do, I'm not questioning that whatsoever, just obviously leverage where we disagree.

    (27-05-2014 02:07 AM)Jonathan Clarke Wrote:  With 20 mil of loans your friend then sounds as if they were poorly advised as to the potential consequences

    Quite possibly, but look at it from their point of view(I appreciate I haven't told you full story yet) they bought well, were only at around 65%LTV, cashflowed nicely, never missed any payments, yet still a "default" was engineered by RBS.

    No they just roll onto the SVR. Ive stopped buying now so unsure whether they would lend again. Last one was with TMW so dont see why they wouldnt again and why i would suddenly have to go commercial. If I did and there was a covenant i would ensure I had a cash stash to cover the potential claw back

    So rolling onto the SVR, potentially in neg equity if the market downturns. Most people survived that in itself since 2008, but because of the record low rates.

    What if rates are in double figures? How long do you keep going?

    Call it gambling if you like or call it astute business decisions
    keep the odds in my favour
    I believe the market in 20 years will be double what it is now
    Is that gambling or is it an investment
    Only time will tell I guess

    You on the other hand may be missing a golden opportunity to leave the rat race earlier than you otherwise will by not leveraging any more . Your mates experiences have probably had a disproportionate negative effect on you. Leveraging is fine honest. Keep your safety hat on yes but hey Keep the faith


    I already left the rat race, then jumped back in because I like it! Well I enjoy working, not being a rat!

    Really don't think I'm missing out on anything, my portfolio is only about 20 behind yours if I recall correctly, but I'll be down to about 55% LTV by end of this year. If you work out the cashflow it will make about the same as a higher leveraged portfolio as the mortgage costs will be greatly reduced, so similar cashflow for less hassle.

    The reason I class it as gambling, let's say by 2020, I've got a medium sized unencumbered portfolio and you've got a larger leveraged ones.

    We're both way past the ratrace stage i.e. only work if we want to.

    Then the next crash hits.

    I'll be sitting back, not too bothered, worst thing might happen is some tenants default, but as I've got no mortgage payments and income from my other business, it won't affect my lifestyle.

    To be fair, it might not affect your lifestyle either, but then again it might. A whole range of things could happen, most of which you'd have no control over, lets face it, who'd heard of subprime lending and ltv covenants pre 2008. Don't think I'd even heard of Lehmann Brothers if I'm honest.

    This for me is about control, not fear of what's happened to my pals, like I've said before, I left corporate life to not report to a boss, I'm now leaving leveraged life to not report to lenders or indeed have to even care about BoE base rates.

    Great sparring with you Jonathan!

    Should add for anyone reading in the quoted text above Jonathan's questions are in bold and my responses are underneath - I ran out of editing time.

    Nick can we do anything about the 15 minute editing rule?
    0
    0