There's more to earning wealth than PAYE

When I left home it was to live in a shared room in a rented house occupied by six other people. It was a risk, living there, as the distractions that it offered were hardly conducive to the attainment of a reasonable degree but it was affordable and it was close to the polytechnic, the pub, the kebab house and the cinema. We saw the first Highlander film at that cinema. Then we went back and saw it again, this time with plastic swords.

After leaving college I moved, with my wife to be, into the house of a friend who had kindly offered us room and board. We were there for six uncomfortable months while we worked hard to find and secure our first home, a dull little place in a rather rotten area of a rotten town in Bedfordshire. It was the right sized house for a price we could afford and we took a risk, hoping that the depressed area we had bought it in would not remain so for very much longer.

We were there for five years or so, scrimping and saving what we could to ensure that we could move on to the next rung of the property ladder, at the time probably a smaller property in a nice area of a nicer town in Hertfordshire.

You see, it was a plan we had. A plan shared by millions of people in the UK. A plan to improve our lot, over a period of many years, through hard work, careful planning and some not too small risk taking.

We suffered the crime, the vandals, and the noise but we knew all about it really before we bought the house. We’d also seen that some of the houses in the road, old council houses, had been improved by their owners and it was a trend that we hoped would continue. New windows, new drives, nicer gardens. Some of the signs were there and gradually, over the next five years, we saw further improvements. We thought things were going to pan out and that it would be reflected in the value of our home, allowing us to eventually sell up and move to a less affordable location.

However, before we were able to move we were devastated by the high interest rates caused by the ERM debacle. Our mortgage suddenly took more than the bulk of our wages leaving us to spend what little we had left on rice and the TV license fee. Our plans were in tatters and the risk that we had taken in buying the property that we did, at the price that we did, when we did had failed. If risk was a dog, ours had just turned around and bit us hard on the backside.

Some properties near us were repossessed and the road seemed to free fall. We lost nearly one half of the value of our home and there seemed no chance of recovery. Such a tale of property woe you would be hard pushed to beat I can tell you.

And there we were, floundering in a mess not wholly of our own making, but accepting the fact that not having taken account of government mismanagement in our risk assessment was our own lookout. It was us who stood to gain had our plans panned out, and it was us who stood to loose if they did not.

So what did we do? We tightened our belts, worked hard and took more risks. We spoke to our employers about our great worth to their companies and negotiated more appropriate pay packages, fully aware that we were taking a risk in a depressed employment market that could probably fill our positions with cheaper (though I would say paler) young hopefuls had our employers seen matters differently. We could not afford the luxury of laying low.

We then formulated another plan, to turn our liability (a house we could not sell for what we bought it at) into an asset. We rented it out. It was a family home in very good order near a couple of rather large industries and the gamble paid off. We had tenants.

At the same time we rented a house in the area we wanted to live in, the extra required each month covered by our increases in pay.

We were no richer, but we still owned a property (investment failure that it was) and had eventually ended up where we wanted to be though not in the position we wanted to be in ie home owners in that area.

Then, a couple of years or so and a pay rise or two later, my good lady was flicking through the local property newspaper when she noticed a house for sale. It was derelict, without heating or even a gas connection, it had a sink for a kitchen, powder for plaster and spiders for company. But it had potential and, more to the point, we could see that potential. It was near a main road, the interior was a horror to behold and it needed everything doing to it but we were convinced it could be turned round into a lovely place to live.

Yes, it was a risk. Another one. But we decided it was one worth taking.

We eventually ended up in a bidding war with three other potential buyers when it got to the point when the estate agent (and the bank through which the house was offered probate) said enough is enough! Tomorrow is the weekend; on Monday morning we want your final offers in sealed envelopes delivered to us. We will let you know who has secured the property on Monday evening.

We were buggered, we thought. We had secured the maximum mortgage that we could and only managed to get one at all due to a rather astute business plan put together by my wife, necessitated by the fact that we already owned a property and, consequently, had a mortgage on that. Getting banks to take into account such things as rental income was very difficult in those days.

So what did we do? Well, we took another risk. We got our credit cards together, worked out how much we could take out in cash and added that amount to our brown sealed envelope bid. Thousands of pounds. In cash. From our credit card accounts. To spend securing a derelict property on a gamble that we could turn it around. These people who take risks on property investments these days have no idea of the meaning of the word.

We popped the envelope into the estate agents and waited for Monday evening.

Imagine, if you will, the mixture of emotions someone might go through when they realise they have won a bidding war on a derelict property secured using cash from credit cards while living in rented accommodation due to the fact that they hate living in the house that they already own, which can’t be sold, is worth less than the mortgage they have on it and is only affordable due to a rental income that could end at any moment.

That’s risk baby.

So, we had debt to pay, a derelict house to do up and not enough money to cover the project and our living expenses. So what did we do?

That’s right. We gave up our rented accommodation and moved into the derelict house freeing up the monthly rent. It was the middle of winter and we were bitterly cold but we were paying back what we owed on credit card. Each month. Every month. Month by month. Without fail, every penny we had went into paying back the cards. Luxury spending was buying coal to keep the small open fire in the lounge burning. Then eventually, one fine summers morning, the credit cards were clear.

That’s hard work baby.

It was then that we started on the project. Heating, roofing, electrics, kitchen, bathroom, walls, carpets, gas, windows. doors, garden. Hard work, but all part of the plan. All part of the risk.

And we were right. It made a lovely home. It was everything we ever wanted and it was also an investment success. Not by the terms of some, perhaps, who would not contemplate going through the difficulties that we went through but each to his own I suppose.

And then the property market started improving, which added to our feeling of success because this was part of the plan. Part of our risk assessment and something we most definitely were counting on in the project long term. We had manoeuvred ourselves into a position where we had two properties, both increasing in value, one paying for itself through rental income (though gradually requiring more and more repair) and one worth much more than the mortgage we had on it.

We owned both these houses through a combination of hard work, careful planning, imagination and risk taking. Not a single person (except family and friends) would have wept a tear for us if we had been left financially ruined and destitute by the failure of our decisions and that, I can tell you, was well and truly on the cards.

So then we started a family and guess what. We decided we needed to move. Why? Because we both wanted my wife to stay at home and bring up the kiddie. Yes, I know, how quaint.

This meant that we could not afford the house we lived in. Well, we could, but only just and it would have meant going back to the bad old days of rice and TV. No thanks. So we looked for a less expensive place in a quiet part of the same lovely town and put our pride and joy up for sale.

It sold and we found a decent place that we thought was undervalued because there happened to be an unusually high number of similar houses on the same road for sale at the same time for a long period. We took a risk on that, buying a house in a road where it seemed like no one wanted to buy a house and it was another one that panned out. We saw a rapid gain in its value as soon as the slack was taken up. I wish I’d bought two, even though it would have meant bread and woodlice for tea for a while.

We eventually sold the first house, receiving a few thousand more than we paid for it. It was not a financial success but I think that we eventually recovered most of what we put into it. We dug ourselves out of negative equity on that one by effectively forcing ourselves into the buy to let market before anyone, including the banks, had even heard about it.

So here we are and there we have it. The story of how we have ended up in the home that we find ourselves in today. Why, you might ask, am I telling you all this? Well, because some socialist freak in the Guardian says that my family and I did not earn the fruits of our investment in hard work, planning, frugal living and risk taking. You see, the government deserves to take a 40% share in a substantial amount of our hard earned rewards as inheritance tax because:

Unlike PAYE, it is mainly a tax on unearned wealth, since it results from the fortuitous recent rises in house prices caused by too much money chasing too few houses.

You know that old adage, don't believe everything you read in the papers, well I think it’s becoming increasingly obvious how generous that adage really is.

Posted by John at August 19, 2004 03:21 PM | TrackBack