Cashflow bad, capital good
Diane asks:
You mentioned that sometimes there will be periods where the rent received on a property is less than the outgoing mortgage payments so the shortfall has to be factored in. Does this happen often and why? To my (inexperienced) way of thinking why would I want to buy into a property if it was going to cost more than it earns, or is that only a short term problem?
Brett’s Answer: OK so we have a few questions to answer here. Yes sometimes the rental received against the mortgage payments and related expenses will mean a shortfall, especially in times of high interest rates.
This does happen in most off plan and newly built properties in the United Kingdom. You should be allowing between £50 and £350 although I have a property in Newcastle that I must supplement the cashflow by a whopping £556 per month. Yes thats every month it costs me £556 out of my pocket. So how do I make this work.
Imagine this the cost to me is £556 per month x 2 years = £13,344 or if we look over ten years it becomes £66,720. So the cashflow side of this property is not looking too flash at the moment.
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Now let’s look from a capital appreciation perspective.
The property is currently worth £265,000 if we assume that it doubles over the next 10 years it will be worth £265,000 x 2 = £530,000. Not a bad little earner for 10 years.
So if I take the £265,000 increase in capital less the cashflow it cost to hold onto the property £66,720 = £198,280. So in ten years I have made almost £200,000 clear funds.
But it doesn’t end there. Over the period I have been able to refinance the property and purchase other properties and do the same on these.
Now a couple of things that we haven’t considered. I have assumed that interest rates will remain the same high rate throughout the 10 years. This is highly unlikely. I have also assumed that the rent I will receive has never increased. This is highly unlikely.
The final thing to consider is this: I only paid £209,780 for the property and because it actually had a 15% discount I actually didn’t have to put any money down, the only costs were £5000 for furniture.
So all in all I have put down £5000 then £556 per month for 10 years and made £200,000 plus. There are obviously massive assumptions made in these figures but the principle holds true.
Live with passion,
Brett Wood
