Recycling your deposits

Recycling your deposits

Posted on June 8, 2005 in Capital, Deposit, Educational blog, Finance, Property, Strategy, UK

Brett Alegre-Wood

This is a simple strategy that allows you to use the same money to buy many houses the only wastage is the costs associated with the purchase.

Let me explain!

You may remember my 10% rule of thumb which states you should never invest more than 10% of the valuation price into a property unless you can justify it. So a £300,000 property at maximum you should put in maximum £30,000. The reason l can work this rule of thumb is because of recycling deposits.

Recycling deposits depends on 2 things, how much discount you obtain and more importantly how you structure the deal. Lets look at each in turn.

How much discount you obtain.

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Providing you can obtain a 15% discount you can recycle your full deposit. This means you will have to pay the deposit but rather than leaving it in the property as equity you can recycle it as cash ready for use with the next property. If you recieve more than 15% then this simply contribute to your costs or provide you greater equity.

Normally when you purchase a new property at a discount you will be allowed a builders gift of up to 5% this will mean you require less money to complete the transaction.

How you structure the deal.

I say this is by far the most important as there are almost as many ways to structure a deal as there are houses. Normally though most people will talk about some form of cashback. Be very careful how this is structured as technically a cashback must be declared to the lender who will subsequently decrease your mortgage offer for anything over the allowable gift.

So how does recycling deposits work?

Ok in its simplest form you would contribute 15% as is required by most lenders. At some time after completion you would recieve an allowance equal to 15% back which you could then use for your next property. So this same money would be used for your second property’s deposit and allowed back after completion.

So your only investment will be the costs plus the ongoing costs associated with holding the property for two years. (See my 2 year Cashflow rule)

Live with passion,

Brett Wood

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