How can Spanish Onions create a massive pension for you?

No, this is not some recipe for a good stew, rather a practical solution to removing your fears of a miserable old age. And what has caused this state of mind? How about total failure of governments, employers and the stock market to provide what we used to take for granted as our inalienable rights – a decent pension?Unfortunately, these days deplorably, due to many reasons, standard pensions are not going to produce that comfort zone we were all expecting,So – what has that got to do with Spanish Onions? Are we all going to cycle round the country, festooned with strings of these big, juicy vegetables, selling them at every opportunity?Nice thought, though not really the practical one we were looking for…No, the connection is the land that the onions were being grown on and some pretty nifty ways of growing some really fast instant equity for you, that could grow and grow and grow, with virtually no further action from you.

Now, what does the Spanish farmer do when he is growing his onions? Well, he starts with his seed onions, plants them, nurtures them, and at the end of the year he will have 4 or 5 times the seed he planted.

So, moving into the property scenario, you plant your first seed onion – the deposit on your first property, and at the end of a two year period, low and behold, you now have around 4 new seed onions. Continuing the onion philosophy, if you were to plant these new onions, in another two years time, you would probably get 4 new seed onions from each of them, or an extra 16 seed onions.

That’s enough to keep you in onion broth for the rest of your life!Want to know how to do this?The secret is to get in bed with a developer that is really top-notch at building houses, but absolutely pathetic when it comes to finding buyers. And would you believe, this is the scenario with many a good building company.

So, along comes a marketing company that has lots of people on its mailing list (you included). This marketing company sends out its top person to hunt for developments that have been started, but are not being marketed very well, or where the developer wants to sell his properties quickly to pull out his cash so he can start on his next project.

The marketing company gets a local Bank involved, and gets the properties valued. This will determine what the ‘loan-to-value’ of the property will be (i.e. how much the Bank is willing to lend against its valuation of the property).

Now, as there has probably been sufficient time between the development being started, and today, the value that the developer may be willing to sell is way below today’s valuation – especially where prices have been going up between 15 – 20 % every year in Spain – the marketing company manages to negotiate a really good buy price for these properties, which will be way below the actual bank valuation.

The players to date are the marketing company, the hungry developer, and a bank with money to lend.

Let’s take an example of a recent transaction. This particular property, near Murcia, one of Spain’s fastest growing economies, had a Bank valuation of €325,000, and the marketing company negotiated a purchase price of €244,000. When buying Spanish properties, there are a number of costs involved, which as a rule of thumb, come to around 11% of the bank valuation figure, which in this case was €35,750. The total cost you would have had to pay to buy this property would have been €279,000. Now that’s convenient, because the bank was wiling to lend 80% of the valuation, or €260,000, leaving €19,000 for you to find.

However, the bank being the bank, it wanted to see some commitment from the purchaser, so an 11% deposit of the purchase (which is the seed onion) would be needed from you. This would amount to €25,840 in this case. (This deposit may be increased by the Banks to 12% - you know what Banks are like).

So, at closing you would have the mortgage plus your deposit, which came to €285,840, less your closing costs of €279,000, leaving a cash-back of €6,840. You would also have had an instant equity of some €65,000 in your property.

If, however, you had then wanted to participate in the guaranteed rental income scheme, so you could easily get your rental guarantee, you will need to provide a decent comprehensive furniture pack. Solutions for these particular properties would be in the region of £€12,000, but, once again, with the power of numbers, these were made available for just €8,995, fully installed and cleaned by the provider.

So, summarizing, including the furniture pack, you would have laid out the seed capital of €34,835. (£24,532) on a property already valued at €325,000, in which you had an instant equity of €45,000. (£31,690).

Now, the way the rental scheme works is that it guarantees that for the 6 high season months of the year, it will pay you the equivalent of your mortgage for the whole year. For the other 6 months of the year you can either use it as a free holiday home, or rent it out at the lower off peak rate, and generate even more income.

Alternately, if you were in a position to do so, you could rent the property out yourself all year and probably make quite a lot more on rental income, but this would mean a lot more work on your part.

But – now examine this. By the time the property has been completed (early 2007), the value should have gone up by around 15% based on historical trends to date. So your equity would have increased by around €48,750, and your property would then be worth approximately €373,750.

By the second year (2008) your property would have gone up a further 10% say, so the value then would be €411,125, which means that you would now have accumulated around €131,125 (£92,342) equity.

So, your original investment of €25,840 (£18,197) would have created for you some 5 ‘Seed Onions’ in two years, and most, if not all, of your running costs could have been paid for by your rental guarantee, with perhaps a surplus by renting it out during the low season or, perhaps you wintered in it for several weeks yourself.

Now many of you may be saying ‘Well, that’s fine, and it looks exciting, but I have not got the deposit’.

Well, while that may be true of some of us Baby Boomers, as not many of us have these amounts stashed in our wallets, most of us already own our own houses, and to refinance £20,000 out of it will only cost around £68 per month, and up to say £100,000 out of it is only going to cost in the region of some £280 per month.

When you consider that, quoting figures from February 18th’s Telegraph Money section, top-performing unit-linked pension funds like the Invesco Perpetual Emerging Markets funds were producing ‘a whopping 34% a year’, and this little earner looks set to return over 400% in two years – where’s the comparison?But STOP – there is another angle here to be considered.

After you have owned each property for a period of two years, why not refinance it, and get a nice big TAX-FREE lump sum – either to give yourself and your family a big treat, or invest in yet some more property?A big tax free lump sum?How come?Simple. As the value of your investment has grown over say a 2 year period, from the original bank valuation of €325,000 to now closer to €407,000, the bank should now be able to offer you an 80% loan to value mortgage of €325,600 – pay off your original mortgage – and you are left with €65,000 in CASH and TAX FREE!The money is all yours and Gordon will not be entitled to a penny of it.

Why? Because even this government has not got round to taxing debt!Do you know, Spanish onions certainly have a far better taste now whenever I see them. How about you…