Today’s final post is a letter which I dearly wish I could send back in time to myself in the past; a younger me from ten years ago when I first made the leap from permanent employment status to Freelancer. I think it will be useful to other freelancers who are either just starting out, or are struggling.
Without any further delay or waffle…
Dear younger and more inexperienced me,
As you read this, you will be just starting out freelancing. It’s a scary experience. There is nobody to hold your hand, or guide you, or give you advice. At least, I know it seems this way. But I wanted to drop you a quick line to reassure you about a few things. Plus I wanted to include some really good advice, which will stop you making some silly and expensive mistakes.
It may seem that you are own your own, but there are a lot of great resources out there. The web is full of freelancers who have gone through what you are going through, and some people have been kind enough to write those experiences down in books or web blogs (such as this one) – all it takes is for you to take the effort to read them, understand them, and follow the advice. But remember, if you don’t bother looking, or take that advice, and you make the mistakes other are trying to help you avoid – then there is nobody to blame than yourself.
I am sorry to say that there will be hard times, and tough times, times full of worry when you wont be able to sleep at night, times of self doubt, and times where things seem very unfair. All freelancers and small business owners go through this, but at the end of the day, you will do OK. Anybody who makes the effort to rise above the average, who has put in the hard work, and uses the resources that are out there will do OK – better than OK in fact. In the end, choosing a freelance life will be one of the best decisions you will ever make.
But there are things that will help you on your way. Dear younger me, please listen to these, because these are nuggets of wisdom from years of experience. These tips will save you time, money, effort, and will make the whole thing so much more enjoyable. They will also allow you to rise above the troubling times.
My advice to you as you start out freelancing is:
- When times seem tough, don’t sweat the small stuff. If things seem unfair – that’s because they are – nobody ever said life was going to be a fair game. Either accept those things as unfair and move on, or change them. But don’t lose sleep about the small or unfair things
- Build up your list of supporters from the start. Have a good bank manager who you can contact whenever you want, an accountant who will explain things to you in detail, and make sure your partner (wife/husband) is included in everything you do
- Do not let the accountant run your finances. Keep everything close. Don’t let the accountant charge you too much or have your accounts vanish in to a black hole. Instead, use online accounting from day one (the accountant should be there to sign off the accounts and save your money). Having a clear picture of your accounts and cash flow every moment is key not only in making decisions, but allowing you to sleep at night.
- Know what you are doing it all for. Have a set of goals, and review them regularly. Get hold of a copy of the success principles, and read it – twice a year. It’s the best book on the planet! Trust me on that
- Do not waste effort trying to keep everybody up to date on project progress – you will end up stressing about projects and being overworked. Instead, invest in a cloud based project management system – the moment you do, your business world will change in leaps and bounds. You will never look back
- Don’t chase the money. Customers will try to take you in directions you are not prepared to go. It’s ok to say no if the work does not interest you, is not inline with what you want to do, or how you picture your small company. Be strong with customers.
- Don’t be scared to take on work involving skills you don’t have. Whilst you will be reluctant to do this initially, eventually you will come to realise that this will lead to you growing in skills and confidence, which will make your time more valuable.
- Invest in time management tools. Your time is money, so use tools like Evernote to keep track of everything you do and create, and re-use it over and over again. When you start doing this, you will see your worth grow.
- Get everything down on paper – simple terms, agreements and contracts – and get them signed. This will get you out of more problems than you could possibly imagine.
- And get a mentor. Approach your old bosses, or a local mentoring group, and become accountable. It’s also a great way to make new friends and stay in touch with what is happening ion the business world.
Younger me, its important to remember to enjoy the ride. Yes, times will be tough, customers nasty, and sometimes money will be tight – but nether the less, enjoy the ride. Getting where ever you are going is half the fun.
A more experienced Me
And that’s It!!
At the start of 2012, I said that this blog would finished at the end of 2012 – and as I type this, it’s December 2012. So that’s it – the blog is done. There is no more.
Dear reader, whoever you are, I really hope that you have found this blog useful. I have found it fun to create, and get my thoughts, systems, and processes down on (electronic) paper. I hope that you have gained something from reading my advice.
My advice does work. I am not perfect, I do not run the perfect company, I make as many mistakes as any other person out there, but my company has grown year in and year out using the tips I have written down. Most of my advice comes from people who are far more experienced and successful than me – so if any of my advice, or systems I describe feel right to you – give them a try – see if they will help you grow your own company.
As I sign off from my blog, I wish you dear reader well. I hope your company grows as you want it to, and I hope to meet you in the real world at some point.
As for me, I will continue on with growing my business, heading towards my goals, but now without the need to document it here. This blog will remain on the net until the end of 2013, at which time it will then be consigned to the great internet dustbin.
Goodbye and good luck.
Author of this Web site , Freelancer, Small Business Owner and passionate goal setter/achiever
December 20th, 2012.
In the penultimate entry in my Freelancing and Small Business Blog, I would like to return to the subject of quotations (or proposals). Having spent the last week sending out a dozen or so quotations, I have been reviewing my quotation template to make sure it is up to speed.
Quotation or proposal templates are great; they provide a base format for providing your prospects with estimates for your work, whilst reducing the amount of effort needed to put them together, and at the same time ensuring that no important element is forgotten (easily done when churning out multiple quotations).
My own template is in the form of two word documents – one called “Quotation Template – Basic” and “Quotation Template – Full Proposal”. The two versions carry almost the same elements, it’s just that the Basic version wording is cut down to a minimum whilst the full proposal has more details, more examples and provides more information.
As an example of the differences between the two versions, the “basic” version has a section called “How we work” which says (in a nutshell), “here is the quote, you order, we confirm order and delivery, we do work, we deliver, you pay”. The proposal has multiple paragraphs about all of this, but includes breaking the project into stages, use of my on-line project management system, staged payments, etc. In both formats, the text is pretty set, and very rarely do I need to amend these sorts of text blocks for a new quotation.
Which brings me to the subject of todays (almost last) post….
10 Things that your quotations may be missing
So as part of my review of my templates, I checked that my quotation templates covered in some way these important but often forgotten pieces of information that a client may need before raising an order:
- Currency – Let’s start with an obvious one, the currency of the quotation. It doesn’t matter if you use a £, $ or € symbol in the prices or state explicitly “All prices are in British Pounds”. A lot of companies are multinational, so prices can get confused as they move around.
- When can you start the work – Rather than putting in a specific date (and so making the quote invalid once the date is reached), it’s better to put something generic like “Generally work can be started within 4 weeks of an order/payment being received. But the exact date will be specified upon order confirmation”
- When the job should be complete – This will vary from quotation to quotation (unless you provide the exact same service each and every time), so you just need to check you have a heading or note for this area – and cover it when you put the quotation together in the format “…and will take approximately 7 weeks to complete”
- How long is the quote valid for – Your prices will change (I hope) from time to time so it’s no good your prospects trying to order a 4 year old quote expecting the same prices. My own templates state that “This quotation is valid up to the first day of September following the quotation date at which time we perform an annual price review. After the 1st September, the prices in the quotation may need review before an order can be accepted”
- Does it affect any support arrangements including cost – I have some customers who pay me a support and maintenance payment each year. For these customers, I have a clause (which I remove for non S&M customers) which says if/how it effects this years or next year’s support.
- Does it need any up front actions by the client- payment, hardware, specs, etc – Be clear as part of the quotation what is needed in addition to the order for work to start.
- Who owns the changes, code, designs – It saves the customer having to ask or make assumptions – if making designs, have template text which says who owns the changes, designs, code, files both before and after payment.
- When will you expect payment – In my quotation templates, I include a summary of my terms and conditions, which includes my payment terms, ownership, late payment penalties and other information. Don’t wait till the time of invoice to tell them what your payment terms will be.
- You have the right to reject the order – This may sound odd, but I have a sentence which states in a fluffy way, that I have the right to reject the order. Just because I quote and they raise an order, does not mean I always want to do the work. I may have fallen out with the customer (lots of bad payments), have more important work to do, or am no longer capable of doing the work (2 broken arms?!?).
- What you need to start work – The final thing worth adding to the very last part of your quotation template is the call to action – or what is the next action that you need in order for work to start. Be explicit, even if you have said it earlier in the quotation. Such as “Thank you for the opportunity to bid for this work. In order for me to get started, please send me a bundle of cash as soon as possible” (or whatever your next action is).
The history and popularity of every company can be traced on the curve of a hill. At the start, nobody knows who the company is, they have very few customers and they struggle. Then the hill grows as the customer base grows, and soon they are at the top of the hill, looking at all their competition below them. They are popular, their products sell well, they are at the top of their game.
Sometimes the downward trend is brief, the company can turn things around and it turns into a bump in the hill rather than a descend onto the other side. But sooner or later, ALL companies will find themselves on the downward path.
For some companies, especially the smaller, newer, or one man bands, the hill can be very small indeed with almost no growth before they die. For some companies, the hill can be fairly flat, yet it can be years before they start to go downhill and die.
In the UK, we have seen many household names recently reach the other side of the hill; Jessops and HMV being headline news. But we have also had other companies vanishing without too much of a fanfare despite being big names – examples include companies such as Phillips (who no longer produces consumer electronics) and Kodak.
So let me give you a prediction for the demise of a MASSIVE company which is on the other side of the hill and is sliding down fast….
Microsoft have made massive announcements in the last 12 months of new products. We have Windows 8, Office 13 (or Office 365 if you prefer) and of course the Surface tablets.
Now putting the Surface aside (which I personally think is too expensive, too heavy and has a confusing OS), let us look at the business model of Microsoft in terms of Windows 8 and Office 2013.
I am going to suggest to you that in terms of functionality, reliability, cost, and ease of use – Windows XP and Office 2003 was as good as it needed to get. Windows 7 looks nicer, and Office 2007/2010 has some nice features – but in terms of actually doing anything you need to do, they really do not offer anything above and beyond XP and office 2003. I would agree that Windows 7 provides new features like widgets and taskbars, and office 2010 offers mini graphs in excel and online presentations – but are these worth the upgrade?
But now we have reached the crux of the matter. Windows 8 and Office 2013 are not upgrades – they are replacements. If you have office 2003, for the 20 or so new features in office 2013, you have to throw away your original investment and repurchase a completely brand new licence. Windows 8 did give a discounted upgrade path, but even now – that option is gone.
Or put it in money terms, if you are using Office 2003, 2007 or 2010, are you really going to spend another £700/$900 for a handful of new features which you may not ever use?
I would so dearly love to be a fly on the wall at an Office development team meeting and in the CEO offices – Microsoft must realise that the world has reached a point of ‘it’s good enough’ and despite all the glamour of the trade shows and press announcements, there must be panic in them there offices.
In a nutshell, asking people to pay the same again for something they already can do – is just not a sustainable business model.
What does this mean for your company?
So why am I talking about Microsoft and their inevitable doom? Well, first let me say I am not bashing Microsoft out of hate. I make my bread and butter using Microsoft products including office, SQL Server and the like – but I also recognise they are on the crest of the hill and are heading downwards. The same will be true of Apple in a few years – after all, how much of a higher resolution does anyone need before they say ‘that’s enough’ (unless Apple come along with a totally new product!)
The reason I wanted to talk about this today in relation to your own company was three fold:
- When working ON your business (rather than for your business), whatever technology you use, it is worth giving due thought to the fact that one day, that technology will no longer be around. When this happens, what will be your backup plan?
- Everybody demands value for money. If you are the size of Microsoft, you can get away with selling the same stuff over and over – but only for so long. What you need is innovation. And I am not talking about taking what somebody else has done and adding an extra widget or a bigger screen or a go-faster stripe – I am talking about something new.
- Nothing lasts forever – and all companies will eventually fit into the hill curve of growth and decline (including mine). Be smart enough to recognise where you are on the curve, wise enough to do something about it if you are on the wrong side, and brave enough to walk away and try something new if you have reached the bottom of the hill.
According to the Federation of Small Business, the economy across Europe and the USA is continuing to ‘fail to improve’.
In a new year report just published, the FSB says that whilst more jobs are being created (which is keeping unemployment down), wage levels are declining and the amount of money that businesses and individuals have available to spend is declining every month – with no end in sight.
As a result, companies and individuals continue to tighten their belts and are on a constant lookout of ways to cut costs.
Whilst I am constantly reviewing all of my spending (both personal and within my Small Business), we as small business owners always need to be wary of cutting costs too far and on the wrong things, which can lead to damaging the cornerstones of our business.
Keeping our Business Cornerstones Intact
Regards of the type of business you run, the size, how successful your business is, or the services/products you offer, there are a few things which every company needs to do to stay viable; marketing, sales, invoicing, accounts, payroll and paying taxes. Without any one of these, a business will soon hit problems and start to die.
So whilst cutting costs are fine, trimming the fat in any of the cornerstone activities can lead to problems. Take marketing….
When times are tough and money short, it’s a very easy decision to cut back or kill any money spent on marketing – adwords can be cancelled, postage is saved by not sending out mailshots, transport costs reduced by no longer attending networking events. Or we may just decide to stop marketing to spend 100% of our time doing billable work. Cutting costs in marketing can see an instant win in terms of cash flow and reduced costs – but what will be the impact in the future?
You may have work at the moment, but what happens if one or more of your existing customers cancels work, goes under or cuts their own costs (with less work for you). Marketing effort takes time, and by the time you realise you need more work, the damage will be done and it may take months or years to start finding new customers again.
Taking advantage of the downturn and avoiding the future hits
One of the advantages of the continued down-turn is that with other companies cutting costs, competition is fierce. This competition produces a double win for a company willing to keep investing in their cornerstones.
Firstly, with less companies spending money, there is less demand for services so offers are on the table. If you use services such as Google Adwords (or the Bing/Facebook equivilants), this reduced competition means that advert placement is cheaper, which means you can now get more exposure for the same money (in my own adwords campaign, I am getting almost 13% more exposure for the same money as last year simply because there are less companies bidding on my key words).
In addition, the fact that people are spending less means that for the savvy shopper, there are plenty of deals to be snapped up should you need to invest in outside services, training, hardware, rental or finance arrangements. You just need to be wary of headline ‘discounts’ which are not quite as good as the advert pretends to be.
But the main concern in cutting costs on the key aspects of your business is that it could lead to more costs down the road. For instance, trying to save costs by putting off paying taxes (PAYE, VAT, corporation tax, etc.) will lead to all kinds of future pain including additional late payment penalties, interest charges and more detailed scrutiny in the future on top of the actual taxes which still need to be paid.
So by all means, continue to review your costs and outgoings and trim the fat where it makes sense to do so – but always have another eye on the cornerstones of your business, and the ability to take advantage of the downturn where your available cash allows.
In the last post on the series regarding my freelance Passive Income project, I wanted to wrap it up with where I am now, and how it all worked out for me (so far).
I started my passive income Buy-To-Let project in the spring of 2012, and I am writing up this wrap-up entry at the end of December 2012. So in theory, the project has been running for 8 months.
How long before I made Money?
As I said in my previous post on my buy to let project, the purchase of the rental property completed on Wednesday, 25th July. We spent the next week with decorators in making the place fit to live in – they decorated the walls and ceilings, we replaced all the light fittings, replaced the curtain poles, purchased new white goods (washing machine, fridge freezer, put in a dish washer). We then selected the property management company, and on the July 30th, the agents went in to take pictures and advertised the property.
The management agency initially advertised the property at a rate of £750 per flat per month. We had budgeted for £700 a month, so we were initially delighted. But a week of no interest and a bit of right move research showed there were a lot of similar properties for rental at £725 – so we instructed the agents to reduce the price to £720 a month per flat.
That was the right move – within days, viewings had increased through the roof, and by the 8th August (2 weeks after completion), we had tenants agreed on all flats. In fact, on the majority, we had multiple offers and we were given different options about which tenants we wanted – all tenants were offering the £720 asking price – so we were above budget. Happy Days. On two of the flats, prospects got into a bidding war, on on these flats, we ended up accepting a higher offer of £750 a month. Even better!!!
How The Money Works
At the start of the project, I created a spread sheet with the budgets for the project (per flat). But, now that money was coming in, I double checked the income, which worked as follows:
Each month a tenant would pay £720 (2 were paying £750). Of this, the funds initially worked out as….. £520 went back to paying back the loan on the property – interest and principle (so the tenants were paying off our loans – nice!), £49 went to the managing agent (their fee for dealing with finding the tenants, collecting rent, dealing with any tenant problems), which left £151 profit per month per flat.
However, we decided that ever 4 months, the extra income money would be then transferred back to the loan payments. Our lender had a clause which said when we pay off a chunk on or above £500, the interest is recalculated. So paying the additional income not only reduced our debt amount, but also changed the monthly payments back to them. So on month 5, the £520 loan payment reduced to £507, which means that each month our profit increased to £164 per flat. It may not seem a massive leap – but its compounded – every 4 months the loan payments went down and the profit went up – exponentially.
And of course – this is cash in profit (from rent). On top of this, our share of the property increases (as the loan is repaid) so that increases the net worth, and if the properties increase in value, that’s triple bubble on the passive income.
It’s a rocky Road Ahead
Of course, is a great picture now. My company owns more property, which hopefully will increase in value, and in the mean time, my tenants pay off my loans which means that in a few years, I will own the property outright (and so will double my originally invested money). Once the loan is paid off, all rental income is then passive income.
BUT, despite all the efforts of the central banks, Europe, the USA is in a desperate financial state (and soon Asia will join them). This means that interest rates could change very quickly from the current historical lows to shocking highs – who knows. My own predictions are that in the next 6 to 12 months, interest rates will drop further (to ZERO %?!?), before starting to grow – but that is why we are keen to reduce the loan amount as quickly as possible.
However, if you are thinking about following me into the Buy-To-Let passive income route, careful consideration should be given to the turmoil which may follow in a few years time.
when I started this project, I was looking for a passive income stream, and I found one that I am happy with. Yes, its not as ‘freelancery’ as say writing e-books, or developing a sell-able software product or generating money through advertising, but all of these seem to be hard work for little return. For my investments, I am already generating a reasonable amount of money. And whilst the monthly income may not be shockingly high, it compounds up very nicely and very quickly, and will generate a big pile of catch with little no no risk or work – just what I was looking for.
It’s still early days in this project. I am not looking for a quick win or to make millions – but it is going to generate cash over my ten year plan. If things continue in the future as they have done in this project, I will certainly be looking to expand into more properties whenever a major non-passive (regular day job) project generates sufficient cash to allow additional investment.
So, that’s it – that’s my passive income project.
What do you think??
I have talked about wanting my passive income buy-to-let project being as low risk as possible – and for me, having somebody to manage the whole thing from start to finish was the best way to de-risk the project. It also means that the project really is passive – I have very little to do to make it a success.
Different Levels Of Service
Letting managing agents can be found on most high streets. They will all offer a full range of services – you simply pick the level of service that you need.
Services offered will range from finding a letting tenant (usually for a fixed amount around £600), to moving the tenant in (for a fixed amount, typically around £250) through to a fully managed service. A fully managed service covers everything – finding a tenant, running a credit check, moving them in (including doing a property inventory), dealing with the deposit, collecting rent, chasing late payments, eviction and moving them out at the end of the lease term.
For it to be passive, with as little involvement as possible (other than some initial project management to get the property decorated and fit to live in), a fully managed service was the preferred option. For this, you (and I) are charged a % of the rent collected.
The charges – Factoring them in
One thing I did from the start (as I do with anything to do with money), is that I factored the charges in from the management company into my maths (see the original spread sheet for passive income growth).
I have heard some horror stories about landlords who have based their calculations on the assumption that they would be getting all the rent charged from the tenant, only to be disappointed and stretched when the money hit their bank accounts (minus the management fees).
I factored the management fees in from the start, and even with those fees, it still turns a nice healthy profit.
What I pay, and What it means
Now different leasing companies will charge different percentages depending on the level of service and their own success (at finding and managing tenants). For my passive income buy to let project, I was happy to pay the 8% of rental income that was asked.
Yes, it means that 8% of the rental charge is not hitting my bank account, and yes, this means that the profit from the project is 8% less than it could be.
BUT, for this 8%, a lot of worry is taken off of my mind. If the tenant doesn’t pay, the letting agent does the chasing. If a pipe bursts, the letting agency will send in a person to repair it. If the tenant has a query or a problem, I do not have to deal with calls in the middle of the night. In short, the 8% is money well spent in terms of peace of mind.
Now it may be worth haggling with property managers. There were cheaper ones than the one we selected (some down at 6%), but we felt happy with the service being provided and the money asked in return.
The other De-risking options I took
In addition to the managing agent, the other two items I purchased prior to a tenant moving in was:
- Landlord Rental Insurance – Full landlord insurance was not needed as my company already had personal and public liability cover. But I did pay £99 for a year of rental insurance – if my tenants fail to pay any of their rent, the insurance will make up the difference.
- British Gas Management – I signed up for the British gas landlord managed service – which provides me with the yearly service, the certificate of safety for all the appliances, plus a call out service should anything go wrong (which the tenants call). For £18 a month, its great value for money (no 2am calls about water leaks or heating not working).
Continuing on with my passive income Buy To Let project, I wanted to touch on some of the problems I encountered on the first part of the project – which were all around finding and buying a property to let.
On Wednesday 17th July 2012, the exchange and completion on the property took place. Because we were keen to get cracking on finding tenants (and start earning money), we made sure that we exchanged and completed on the same day.
We also did this as we had a schedule of work to do to make the property letable. Keeping the fact that empty (or void) days means a loss whilst a filled (or let) day means a profit, we scheduled everything around this day. We had arranged a week before the exchange/completion so that the moment we completed, our work force went in with a list of items to do.
The Work to Make Good
For our first buy to let property, we wanted a mix of the easy things that we could do ourselves (and so save time and money) and those that we would just pay for and get the professionals to do. Our list consisted of:
- Paint all the walls and repair ceiling cracks (professionals)
- Service the central heating and report (professionals – British Gas – on a landlords service/maintenance/certificate deal)
- Put up window curtain poles and curtains (us)
- Replace worn out taps, a new radiator and other plumbing jobs (professionals)
- Purchase and install new dishwasher, washer/dryer and fridge freezer (us)
- Fit coat hooks and shower screen (us)
- Clean the carpets and oven (professionals)
- General clean (Windows, sinks, etc) (us)
We timed all of this so that the moment we got the keys – the various people would arrive and start work. It was an interesting week of project management to make sure everybody could do their part over the next few days without stepping on each other or getting in each others way.
We created a mini project plan for all the teaks, including the purchasing of the required items (from white goods, to a kitchen sink, to radiators and even paint) so that everything should (and did) fall into place.
The Problems and Advice
Of course, up to the exchange and completion, things did not always run to plan. We hit no end of problems in the purchase which included:
- Having to change lenders 3 times – each lender had strange made up rules on what they would lend to (for instance, the original Bank Of China would not lend on any property within 5 miles of a train station – which of course ruled out almost all towns and cities in the UK)
- Delays in funding meant delays in purchase, which meant somebody else came sniffing and we got ourselves into a mini bidding war (which increased our costs slightly)
- Delays in funding also meant that more work was needed by the legal bods, which added some more cost onto the purchase
And of course the delays also added to a little bit of stress to our own activities
Bending and Flipping Back
In the end, we completed on the purchase (and I had a cup cake to celebrate). And the work kicked off on the rapid refurbishment project.
Whilst a lot of people go through a property purchase, its better with a Buy TO Let, as we wont be living there so there is no emotion involved. If the numbers still made sense and worked – the answer was always going to be yes – if not, then we would have canned the project.
So it was a question of just rolling with any setbacks, and snapping back (like grass) once they had passed. Oh, and remembering to get on with the day job whilst all of this was going on.
This is the next in my series about my freelancing based passive income project.
Today, I want to talk about a documented but not often talked about rule of the universe called “the compound effect”.
This fundamental rule has been talked about by some very wise men; people like Tony Robbins, Jack Canfield, John F Kenedy and even Albert Einstein talked about compounding at great length. This rule says (in a nutshell) that whatever you have, attracts more of what you have.
In terms of money, when you are in debt, debt will attract more debt (in terms of interest charges, late payment fees) which will add to your debt. When you have money, money attracts more money, and your money grows. I never really noticed this before until I started the passive income Buy-To-Let project – let me explain.
A leaflet and How it all started to Fall Into Place
When I created the passive income Buy To Let projection spreadsheet, it was based on the worst case scenario (or as worse case as I would allow without getting into the realms of fantasy). The interest rate charged on the finance was initially projected as high, the rental received as low, the costs charged to us as high, the property growth as low – with this pessimistic view point plugged into my spreadsheet, the numbers still worked. But then, the numbers got better as the project progressed.
An example is the rental management fees. During the initial investigation, we spoke at length to another person who was renting a Buy-To-Let property, and they advised to budget for a 9% management fee by the estate agents (the % of every monthly payment by the tenants that the estate agent would take for managing the property).
Using this advise, we put into the project projection spreadsheet a management fee of 10% – as I say, the numbers worked and looked good.
On the day that the project was given the green light by the Chinese financiers, we came home to find a leaflet posted through our house letterbox. This leaflet was on its own, and had clearly been pushed through by somebody distributing flyers around our neighborhood.
What did the flyer say? It was from one of our local bigger state agents, offering a fully managed service for 7.5%. Oh – what timing!! Yes please.
The effect is that we are saving 2.5% on our fees, and therefore are making an additional 2.5% above and beyond our existing profit projections.
As I say, its funny how money attracts money.
Today I want to continue talking about my Passive income project for my company, which as I had described earlier, was taking shape in the form of the purchase of property and then generating income through the Buy to Let market. Today, I want to talk about the project finance.
In 2011, my company had done rather well, and was sitting on a pile of cash. However, it was not sufficient to purchase a house (or other residential property) outright. Therefore, my company needed further finance – in the form of a bank loan.
When it comes to finance, there are a lot of options available:
Loan, Interest Mortgage or Repayment Mortgage
Clearly, the three main options that were open to me was a banking business loan, an interest only mortgage or a repayment mortgage. In terms of the maths, there is really no difference between a business loan or a repayment mortgage – on the amount of money I was looking to borrow, it would still need to be secured against the rental property we would be buying.
In my Buy-To-Let growth spreadsheet that I had put together earlier, the maths suggested that a repayment mortage was the way to go rather than an interest only. After all, with interest only, I would still be left with the value of the original mortgage to pay back at the end of the loan period – so growth would be less. So in my mind, a repayment mortgage would be the way to go.
Also, I liked the idea that the rental for the property would basically be paying off the loan (with the risks of months without rent and bad tenants accepted).
UK Bank Backing – They don’t really want to know
So with the decision made, we went off to see our friendly business bank – the Natwest (who we had banked with for 10 years). We met with the business manager, who was more than happy with our maths, more than happy that it worked, and was more than happy to lend us the money we needed (to top up our own cash into the project). After all, the UK government had introduced Project Merlin a year or so ago, which was a banking incentive to lend to small business with projects such as this, so the project helped Natwest meet their own lending goals.
However, the interest rates quoted by Natwest were shocking. When the UK base rate was at 0.5%, Natwest wanted to charge us just under 6% VARIABLE. We questioned this high interest rate (after all, Natwest were borrowing the money from the IMF at less than 0.3%), and the manager was very frank with us – because there really was not any real need for a UK bank to generate money from UK customers. They were already making so much money elsewhere.
Good old UK banks – you have got to love them.
I was also not very happy about paying a variable interest rate. Yes, interest rates had been at a record 0.5% for the past 3 years, but sooner or later they would be heading up, and I wanted to keep the risk of the rental not meeting the monthly repayments to a minimum. This project after all was all about minimum risk for maximum returns.
Luckily, there is a good table of BuyToLet mortgages and loans listed on the internet, and there was some cracking deals to be had – if we looked further afield.
The Final Solution – from an interesting source
In the end, the finance came from…. The Bank of China. And what a cracking deal it was – 3.88% for the TERM OF THE AGREEMENT. Interest rates could rocket – and it would not cost us a penny more. Our tenants would never have to worry about us charging them more rent to meet the monthly payments because our own payments would be fixed – it was a win for all concerned.
We had to do all the financial applications (and provide 6 months of personal and business bank statements, 3 years of company year end reports, credit checks on all directors (free from Experian)) and a couple of other bits of information. Then, on Monday 16th April, the Chinese Bank said yes to the finance. The project was green-lite (lighted?!?) and we could really get cracking on our passive income project.
Today I am going to continue talking about my Passive Income Project, and expand in detail about why the maths worked for me and why I selected Buy To Let as my method of generating passive income.
As I said in the original post (when I made the decision to start a passive income project), I had already done the maths of general investing via savings accounts and bonds– and it really did not look good. Frankly, no bank or investment account out there could beat inflation without taking some very serious risks.
So I looked at the maths of other passive income projects – and without going into the maths of the other 3 or 4 options I looked at, Buy To Let had the best balance between risk (almost none) verses return (a very good return). But more analysis was needed.
My Buy To Let Maths
So I created (yet) another spreadsheet to work out the return. There was one spreadsheet for each passive income project, but the calculations for the Buy To Let passive income project can be viewed here (all the figures are the actuals – I have not tweaked this spreadsheet to hide any figures). See some notes below on the spreadsheet.
Now there are few things to consider when thinking about a Buy To Let option within a company (note, I am not a financial expert, so PLEASE check your own facts if you decide to move in this general direction):
It has Never Been Done Before
One of the things that was pointed out to be fairly early on (by a so called business expert I had a coffee with in the early days of looking at various passive income options) is that no companies in the past had invested in residential properties. Commercial property rental, yes, but not residential.
Well let me put that issue to bed. There are lots of companies that under a Limited Company, purchase residential properties and then rent them out. The bigger ones are called Housing Associations – and I have done freelance work for one or two in the past. And I can tell you, they make A LOT of profit. Actually, the returns that they make are staggering.
When you make a profit in a company, you pay corporation tax on the profit. And you have to pay corporation tax twice. First, you pay it each year on the rental income. This equation is (in the UK) RentalIncome minus (InterestCharges + ManagamentCharges). Note, that the deduction is on Interest charges only – if you have a repayment loan or mortgage, then you can only deduct the interest changes, not the full repayment per month (see the calculations in my spread sheet).
Also, when you eventually sell the property, you have to pay corporation tax again on the profit from the sale. From the profit, you can deduct the cost of purchase and sale – so all the legals and duties. Again, the spread sheet covers this quite well (I hope).
There is Growth Tax to Pay – one way or another
The other thing (and this is critical) is that there is personal tax to pay – at some point. If you want to invest in a Buy to Let project under your own name, then there is tax to pay on the cash that you withdraw from the company at the start. If you invest in Buy To Let through the company, then after the sale is processed and the corporation tax is paid, you still have to pay the personal tax to get the money out of the company. Which ever time you do it, there is tax to pay (unless you have a ‘get out’ plan – which I have – and a clever accountant).
Now there is some good news in the form of VAT. If you do a Buy To Let through the company, then those bills you get (such as decoration etc) can be reduced by the VAT element – so there is a saving (and therefore profit) to be made there.
Clearly there are lots of other factors to include – how many months you will not get rental income for because of a tenants change (my spreadsheet is based on 1 month a year as ‘void’), property value growth (or decline) over time (I hope I am buying when things are their worse and properties can only go up in value), decoration costs etc. You will see most of these listed in the spreadsheet.
Notes on the Spreadsheet
In the sheet, you will see notes next to each item on what is covered. The two yellow boxes are (for me) the big numbers which change all the rest of the values – the purchase price of a property and how much rental I can receive per month – from these most of the maths are then calculated. The blue boxes are the other variables – such as amount of redecoration per month etc. In my spreadsheet, typical values have been used.
Getting in checked
Once I had completed my spreadsheet for the properties I was interested in, I had my maths checked by other people. The numbers were checked by my business bank manager, my personal Independent Financial Adviser (IFA) and my accountant. All agreed the numbers looked sound. Not one of these individuals asked for payment to check my spreadsheet.