Category: London life

How to buy a house in London?

FIRE v London11 Comments

The calm long term stability of my financial life has just been severely threatened. My other half and I are seriously considering buying a house. Moving house, that is.  This leaves me floundering around wondering what to do with my investment funds.  I’d love any comments/suggestions readers have.

Broadly speaking, I have no plans to move house. For years.  I live in a house that is more than adequate for my needs.  If Warren Buffett has never moved house, why do I need to? And the great man’s house wasn’t in London.  My house is in London, and thus is worth at least £2m. This means the stamp duty involved in moving in the same neighbourhood is of order £200k+.  This is money down the drain, a tax on my mobility, many many months’ income, and so forth.

And of course my investment philosophy reflects my view that I have no foreseeable major funding needs in the next few years.  I.e. I don’t need to find a lot of money to buy a house.  So my cash holdings are <5%.  Most of my exposure is to equity markets.  In principle this means my firepower can drop by 50% in as little as a month.

And yet.

And yet an amazing house has just come on to the market.  Sort of (at the time of writing, the seller has withdrawn it).  A house which makes both my wife’s heart and my heart sing.  A house we can imagine living in for far longer than our current house.  A house in our area, an area we know well.  A house, in short, which is very tempting – if we could get an offer accepted and funded and ultimately completed.

The house in question is an upgrade from our current house.  It’s worth at least £3m.  The stamp duty is eye watering.  But I can afford it.  My investments can more than cover this.  But how to organise my investments for maximum flexibility while preserving the returns potential of those investments.  Can this be done?

I should say that I think the odds on me buying this house are no better than 3:1.  I.e. I have a 25% chance.

The real complication arises from the seller’s insistence that he only will consider cash buyers.  Cash buyers, i.e. no chain.  I.e. people who can put down £3m+ straight away, plus ~10% stamp duty plus costs.  Let’s call that £4m of readies.

This ‘no chain’ dynamic is in fact very common in the prime London real estate market; if I remember rightly over 60% of £2m+ London homes are bought by cash buyers.  So if you need to sell your principal residence to buy your next house, you are putting yourself in the <40%.  And it is an inferior 40% which leaves you at a disadvantage.

I am in the fortunate position where my investment portfolio is worth over £3m so I can afford the house. Or so I thought. But as I worth through the details, numerous questions arise:

  1. How much of my portfolio is Unsellable?  My pension is Unsellable.  I consider my ISAs Unsellable too.  I also have some private company shares which I can’t sell, or certainly not in a hurry.  And in fact I also have a disclosable investment in a public company and selling that would trigger Regulatory News Service announcements I don’t want to trigger – making this holding Unsellable as well.  It turns out I now realise over 25% of my portfolio is Unsellable.
  2. Should I use a mortgage?  I do in principle like using leverage with long term property investments.  I bought my current home for around £1m, with a 50% mortgage.  My equity in that home has quadrupled, even though my home has barely doubled. But that old mortgage is at <2% p.a. interest costs, whereas a new mortgage would be at 4%+ interest costs. This is less than my dividend income yield, and while it is less than the after-tax investment returns I make, such a mortgage would be cashflow negative for me.    And there is a question about how  much mortgage I’d get anyway; my earned income is pretty low in the scheme of this transaction and my investment income is about to be traded into a house, at least temporarily.
  3. How to rebalance my portfolio to provide me with flexibility?  Ordinarily, for funds I would expect (probabilistically, in this case) to access in the near term, equities would not be an appropriate place to store them.  Bonds would be better.  But with speculation of interest rate rises still front page news every week, upping my bond allocation feels very risky.  And my portfolio has proved surprisingly stable over the last three years.  So I’m minded to just risk a wholesale market rout, and forgo the house if it happens.  But is this risking a divorce?
  4. Where to assemble £3m of cash? Assuming I get an offer accepted, I need to start amassing £3m of cash. The deposit insurance limit has just dropped, in GBP terms, to £75k per bank (this being a €100k limit, and the Euro having fallen by 20% since the limit was last set at £85k).  Am I just paranoid to imagine that the moment I transfer £3m+ to a solicitor’s escrow account, that account’s bank hits its MF Global moment, and my funds blow up? Do I have an alternative?

 

Salaries in London: real life examples

FIRE v London25 Comments

I wrote a post some months ago about how London now requires £500k of income a year – at least according to some high-achieving friends of mine, based on the privileged way they live their lives.  They are one per centers who deserve their success but they do identify with ‘the squeezed middle’. But given the interest in that post I thought it worth discussing exactly what sorts of careers earn how much in London right now.

Obviously I don’t have full knowledge of every Londoner’s personal finances.  I do however help hire (and occasionally fire) people in London’s private sector on a frequent basis, and have experience of this in large companies and small.  This gives me some useful data points. I’m sure there are myriad exceptions to my general rules, but here goes anyway. I would summarise London’s current pay strata as follows: Continue reading “Salaries in London: real life examples” →

Lessons from a £1m divorce

FIRE v London3 Comments

The media has reported a divorce with fees of around £1m.  This is for a family with around £6m net worth.  This story sums up a lot of crazy London living to me. Notably:

  • The family has earnings of around £1.5m a year. Let’s call this £800k net of tax. This is very very high – it would put them in the top 5000 or so earners in the UK.
  • At this income level most FIRE eaters would say they would hit financial independence in months, not years. Yet the net worth has been reported at about £6.2m. Into which £1m legal fees carves quite a dent. A net worth of 4x gross income is surprisingly low for such a high earner, reflecting how their cost of living was enormous (and/or how terrible his investment decisions must have been!).
  • The family apparently spent £800k per year. And now the beauty queen wife will receive maintenance of £320k per year. For herself. Gulp. This is luxury living even by their own admission.
  • And by its own admission this family did not save any money.

These guys are those Jones that friends of mine ‘needing income of £500k to live in London‘ are striving to keep up with.

And a lot of the attitudes that drive the sentiment that £500k is a bare minimum were on display in the courtroom as reported by the media:

  • “There’s a limit to how far the wife can reasonably be expected to move from the centre of London”. The husband had proposed Battersea, which is walking distance from the Chelsea/Knightsbridge area they have been living in.  Nope, outrageously too far, was the reaction.
  • Eye-watering sums on bringing the kids up “appropriately”.
  • Eye-watering sums on annual holidays – the wife wanted £75k per year just for this.
  • Extravagance is the new normal.  Can anybody become a beauty queen, if they spend the £60k annually on hairdressers and beauty treatments asked for by the wife, I wonder?

The premise of this blog is that true financial independence entails being able to live where you want to live – central London included – and spend what you are used to spending.  I suppose in theory that means I need to respect the decisions of this couple on what they need to spend.  But they’re about £20m and some good tax planning away from where they need to be on the Save Hard / Invest Wisely front…. good luck to them.