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Friday, June 24, 2011

24th June - Wall Street Shuffle

Yesterday was spent on a Business Start-Up course. I am trying to work out in my head, if a couple of deals will come off, I'd be better off self employed rather than employed.

I have a simplistic view of money and risk when it comes to business. Loans are OK providing you know how to pay then back within your business model. You lend what you can pay off. Simple.

On this course was a man in a similar position to me. About to be made redundant, he too was looking at setting a business up based on his skills. He has a spare house bought on a 'Buy to Let' Mortgage. He earned a bit of profit, by selling at the right time. He believes that there is still a market to be had out there, and so while he has still got a job, he has maxed out the mortgage on his house to get a deposit to do it big style. Apparently his wife is, in his words, is close to suicide. Somehow he had persuaded her to sign off the forms as well.

With this deposit, he took himself off to a bank and lent £200,000. (yes that number is correct). He bought a re-possession for £60,000 - terraced house, 2 up 2 down, and a detached for £104,000. Neither are in a desirable neighbourhood, (sorry if that sounds snobbish), but true. It is unlikely that re-selling will make him much, especially in the current stagnant housing market, should his business need to release cash quickly. He has rented both out, but in the glut of rentals, the tenant managed to force his rent down by £25 a month. He reckons that he will make £100 a month, from both, so not really very much for the level of debt taken on. (I mistakenly believed that, as a ball park figure, you should expect a return of at least 15% on the value of your business each year. In my eyes, unless he is earning £20,000 a year, then the money would be better off sitting in a bank. (That figure would also be after loan payments).

As the day unfolded, it appeared that he had thought about his business model less and less. He had no real steady income (losing his job soon) to pay off the loan, so would need to work to pay off what his business needed. It also appeared that he was 'doing' up the houses to increase the re-sale value. All on £100 a month profit.

Interest rates at the moment are 1/2%. Fantastic rates never to be repeated again. The banks are charging businesses horrendous rates, both for small and large businesses, mostly into double figures. Most reasonable businesses see the base rate and say 'On your Bike'. In my head, only the idiots would accept such horrendous terms, knowing that the low rates will not be around forever, and the interest rates may rise again. Most people are trying to get rid of debt at the moment, as they too believe that rates will ventually have to rise, and or want to off-load their own personal debt. However, it appears that the banks are still prepared to lend on what appears to be flawed logic.

We are now in a world where legitimate businesses are not prepared to lend at usuary rates of interest from the banks. The risk stupid are still lending. I thought that caution was the word on the streets as far as lenders and borrowers are concerned. It appears that is not the case. Like Greece, there maybe an after shock to follow.

PS I would just liek to state on record that I think the Buy to Let market is morally corrupt. In a world where first time buyers led the property buoyance of the market, i.e. the young, they are faced with a world where independence costs. They now have to find 20% deposits rather than 5%. They now have to pay sums greater than a mortgage replayment would have been, to live independantly, and also have to try and save for their own chance to get on the property ladder. Many that would have got on in their 20's 20 years ago, find the door shut. Possibly forever. Meanwhile, their parents' generation has dried up the source by exploiting them. The market is stagnant and this is economic progress?

'Wall Street Shuffle' - 10cc. a song about corrupt markets. I believe that we have more 'hurt' to come.

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