Personal Money Management 101 Blog

Real estate has long been considered an attractive investment. The amount of land in the world (supply) is fixed and finite, whereas the population (demand) continues to increase. Though there may be the odd hiccup, the overall trend of real estate prices is and will almost certainly remain upward. Not only do capital values increase but real estate also generates a valuable yield in the form of rental income.

Having said that, simply buying somewhere to live can take most of our working lives. So purchasing a second property for investment can seem out of reach. Not only do we need to take a chance on finding the right property, get it in a state for renting, find suitable renters, hope they’ll pay the rent, keep it maintained etc etc etc. We probably also need to take on a mortgage and hope the rental income covers the repayments.

For a long time real estate investment trusts (REITs) have provided an answer in North America. These are essentially traded funds that invest in real estate. The rental income is shared among the investors, as are the costs of management, maintenance and voids (unlet periods). Sure, you might miss out on that exceptional bargain on which you make a killing, but you’ll miss out on the turkeys too. And you won’t get woken at 2am by some irate renter demanding you fix their bathroom.

In the past there were no generally traded UK funds investing in residential real estate. However, recent legislation permitting the creation of REITs is changing that.

Traditionally private sector rented housing has not enjoyed a good reputation in the UK with dodgy landlords renting out barely habitable accommodation at exorbitant rents. The sector has been small with those that could afford to buying their homes, and those that couldn’t relying on an extensive supply of reasonably priced and well-maintained subsidized “social” housing. As the stock of social housing has diminished so the private rental sector has been expanding to take its place.

As house prices continue to rise above the means of first-time buyers the trend is set to continue. A recent report by Market research organisation Mintel suggests the number of “buy-to-let” home owners may double in the next three years [http://news.bbc.co.uk/1/hi/business/6592663.stm].

http://www.thepropertyinvestmentmarket.com/featured in a recent article in the English newspaper The Daily Mail. The Property Investment Market allows investors to buy shares in one or more properties from as little as £1 (GBP). All properties are professionally managed and let out to provide an income for property investors. It also allows customers to spread risk across many different properties even with a very low initial investment.

While I don’t specifically endorse thepropertyinvestmentmarket.com, I do recommend that those interested in investing in real estate but unable or unwilling to take the risk of buying and managing property directly investigate this and similar opportunities further.

[NB I do not work for thepropertyinvestmentmarket.com and do not receive any commissions from them for business arising from this posting.]

The other day I received a renewal quote for my house insurance for £430-odd (GBP). I was somewhat taken aback to find that my very modest home was being insured up to the value of £1,000,000 (GBP)!

Once I got over my shock I discovered that this was the maximum figure and had been applied to ensure that I remained covered despite England’s current rampant house price inflation. Fast though the cost of housing is rising, I think something pretty dramatic would have to happen for the 500% increase needed for me to take advantage of the maximum figure.

Of course I am sure that the insurance company quoted this figure with my best interests at heart, but I can’t help thinking that it is the poor that are subsidizing the rich by paying premiums for cover far in excess of what they need.

Anyway, to cut a long story short, I decided to take advantage of the Internet to shop around. With a few clicks I found http://www.moneysupermarket.com/and in a couple of minutes was able to obtain a quote of £228 (GBP) including some very useful home emergency cover.

How many of us simply renew existing insurances and other contracts just because it’s convenient and we can’t be bothered to shop around? There may have been an excuse in the olden days, but now with the Internet, and the many fine price comparison sites we can find the best deal from the comfort of our armchair with a few clicks of the mouse and keyboard.

Inertia costs the consumer a small fortune and lines the pockets of service providers. Be a wise buyer, it’s easier than you think and may lead to significant savings.

[NB I do not work for moneysupermarket.com and do not receive any commissions from them for business arising from this posting]

There are many many books on personal finance and investment. Unsurpisingly, they are of very variable quality. From time to time we’ll be recommending those books we truly believe to be worth a read. We are proud to be able to offer these books in association with amazon.com, the world’s favorite bookstore, often at significantly reduced prices.

We begin with Robert Kiyosaki’s classic Rich Dad, Poor Dad. Kiyosaki entertainingly describes how he grew up wth two dads, his own highly educated but financially poor dad, and his friend’s rich dad who took the young Kiyosaki under his wing. The rest is history as Kiyosaki went on to become a multi-millionaire.

Kiyosaki says: “The main reason people truggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money… but never learn to have money work for them.”

The advice contained within these pages is invaluable. As the problem of consumer debt spirals out of control one can’t help thinking this ought to be required high school reading.

In a nutshell, Kiyosaki argues that we should postpone today’s extravagance in order to build assets that will provide for more than enough luxury tomorrow.

Rich Dad, Poor Dad went on to spawn a series of sucessful sequels:
Cashflow Quadrant: Rich Dad’s Guide to Financial Freedom
Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not! 
Rich Dad’s Advisors: The ABC’s of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss (Rich Dad’s Advisors) 

Last week it was reported that over 30,000 people became insolvent in England and Wales during the first three months of 2007 – a new record. Levels of consumer debt also represent a problem in the U.S.

The root of the trouble is that financial institutions are making it too easy for people to spend beyond their means. We are bombarded with offers of loans, overdrafts, credit cards, store cards…

It’s all too easy to hit the shops snapping up every “offer” we come across in the safe knowledge we can take it home today and pay (some time) later. Trouble is, when that day comes too many find it beyond their means and seek to take out further loans – and so the problem grows…

Prevention is better than cure. The golden rule, expressed so eloquently by Dickens through the words of Mr Micawber, is: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Or more simply, spend no more than your income.

Credit cards are a great invention. They’re highly convenient, avoid the need to carry too much cash and used properly allow us a discount on expenditure in the form of a (short-term) interest free loan. But the key to effective credit card use is DISCIPLINE.

If you do find yourself getting into debt that you think you can’t manage – do something about it. Tighten you belt, move your debt to the lowest avalable inetrest rate, talk to your creditors, get advice… but don’t whatever you do ignore it.

If you really can’t meet your repayment commitmnts there is an alternative to bankruptcy. It involves coming clean with your creditors and reaching an agreement with them as to what exactly you can pay. Very often creditors are open to such arrangements as it is better for them to recover some of their money than the likely zero they’d get in the event of your bankruptcy.