Weathering the storm
There’s a Jewish family who has been lending for many many generations originally from Iraq. As well as lending they do their own property developments as well. Whilst purchasing a property I got to know that they are the freeholders for a block that we were buying in. Owning a freehold means you own the land the flats are built on. This entitles you to collect ground rents from the leaseholders. When the lease gets shorter you have the privilege of charging a large premium for the extension.
They’re old boys and so once we had done some business I sat down with them and asked them to level with me. Why on earth would they be interested in earning 12% on their funds, when clearly they are able to earn much more money on their developments.
It was then I discovered this was a side business for them, the money they were lending out was not even in the country, it was off shore. Off shore money earns a paltry rate of interest but the aim is to leave it off shore. The bank cross guarantees the funds and then the loan is given. These are old school boys who like to look you in the eye and also look at the projects themselves. The fact they had been lending for generations made me think of the story in the bible wherein Jesus enters the temple and throws out the money lenders:
12 Jesus entered the temple and drove out all who were selling and buying in the temple, and he overturned the tables of the money changers and the seats of those who sold doves. 13 He said to them, “It is written, ‘My house shall be called a house of prayer’; but you are making it a den of robbers.”
I’m pretty sure these were the same people whose ancestors had been lending during the times of Jesus and quite possibly in this temple!
Interestingly the charging of usury or interest is prohibited to other Jews but is allowed to non-Jews. Biblical law forbids taking or giving interest to “your brother” (a fellow Jew), whether money or food or “anything”.
In Islam charging interest is forbidden. They get around in two ways, one is very simply by calling it rent instead of calling it interest. So you carry on paying ‘rent’ until you pay the principal back. The other way is the bank purchases the property and resells it to you at a higher price.
In both of these methods the prevailing interest rate is used in both calculations. The change of name changes something from Haram – forbidden, to Halal – permissible.
Going back to my meeting, in short they were engaged in two main activities: money lending, and ground rents. Clearly I was missing a trick, I don’t have this ancestry; mine are famers.
This is a long term almost infinite formula, not the boom and bust the property wave which the masses engage in. So what’s the reasons for the focus on these two aspects?
Ground Rents are interesting. There is almost zero default on the collection of this, if the leasee refuses to pay the ground rent, the freeholder simply informs the lender, they will then pay the freeholder the ground rent and then add it on to the outstanding mortgage along with an admin fee for doing so. You do not have this level of security for rents. The level of ground rent payable is fixed in advance so it does not change with the market force, it is predefined in the lease. Unlike rents which can change according to the season and market forces.
From a security point of view the ground rents top the rental for properties. Furthermore when the lease gets smaller you can charge a lump sum to extend the lease. Over a medium to long term property prices will rise therefore the amount you charge will rise as time goes on. This is the cherry on the pie.
Looking at the second investment of money lending, the loan to value is 60%-70%, furthermore they lend only on prime assets. Meaning if the property is worth £1m the risk will be £600k to £700k. On a property downturn particularly in prime parts of London the prices will rarely dip this low. Most of the loans are done with personal guarantees, this means in the unlikely event they fail to recover the money loaned they have the right to claim the rest from the borrower.
These investments are designed to weather a storm and to survive for generations, unlike those surfers who surf a rising wave, which of course you can do only whilst the wave is rising.
The practise of money lending has been around for thousands of years, and has been frowned upon by most of the Abrahamic religions.
Language can be very revealing if you decipher the true meaning of the words we use.
The simple definition of mortgage is: A financial instrument by which the deed to real property is held in lieu of payment.
However in this article we want to examine the root meaning of the word mortgage, which is ‘death grip’. Upon closer examination we find that mortgage is made up from two words: ‘mort’ and ’gage’. Mort comes from the Latin word mortuus from which we get ‘mortuary, mortal, death’. Gage means ‘hold or grip’. Therefore, mortgage is a death grip!!
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!Tips of the Week
When renting a property tell agents you’re only prepared to take 12 month contracts with no break clause, this will reduce void periods and expenses.
As a pension property makes a lot of sense, it gives a stable monthly cash flow, and you can understand the expenses and income easily, unlike many pension fund terminology.