A person recently asked the following question. They were posting to the Motley Fool UK’s Property Investing – Practical forum.
I’m looking for a long term investment and have a 25% deposit. If the rental covers the mortgage is now as good a time as any? Have read many posts suggesting not to do it at this time.
Am a complete newbe and think I may have made a mistake by reserving a new build leasehold costing £200K
What would you suggest!?
One response was:
If the rental covers the mortgage, the voids, the repairs, the insurance, the agent’s fee and the advertising then yes, now is as good a time as any.
Otherwise you are speculating on a capital gain getting you out of the mire.
By mire I believe the person was referring to the negative cash flow that will ‘accumulate’ if you are not covering all the running costs from current income. The running costs includes property management.
Note: In the UK hiring a property manager is much more common than in the US. The cost for a property manager is about the same or slightly higher than in the US for a residential property.
The next response was from someone who I know is an experienced UK property investor. The UK term for down payment is deposit.
Don’t forget that even if it covers those things then you are also missing out on interest on the 25% deposit. Does the rent cover the loss of that too ?
I followed up with comments that are more directed towards the initial response.
Unless you are buying a property that will never go up and the yield is high to compensate, a property investor is almost always speculating on the future appreciation.
Like buying a really solid stock on the stock market you buy with the assumption that the value will increase over time (at the rate of inflation or better). You might be counting on some good yields (dividends for stocks or gross income yield for UK property).
One slight difference with property is if you use debt and the value never goes up but the rental income pays off the debt then you can still be ahead. A rather simple and maybe slightly dumb story highlights the point.
Dumb only because a lot of detail is left out to make the point.
Atlanta investor and I are having dinner. The guy is not the brightest person in the world. He was dealt slightly less than a full deck upstairs and he free points this out.
He figured that if he can buy a property that with zero down payment (think deposit) and the tenant pays off the mortgage over 30 years it does not matter that he paid 100,000 but sold for 50,000. As he did not have the 50,000 when he started he is ahead compared to not buying.
How to report the tax loss, the time invested, etc is not his point. He just likes the odds given that even if he gets the market timing completely wrong he can still win.
The Atlanta investor has been actively investing in real estate for over 30 years and is rather wealthy. Continuing with the post…
For building society think bank savings account.
In this case if someone puts down the 25% deposit and earns a return after all costs that is equal or greater than what the same amount will earn at a building society then they could make the same bet as above. Buy for X, sell for less than X after earning a good return on their deposit and still have more profit.
The following is very UK centric though the principal is the same. Over long periods of time real estate holds its value and will rise if the local economy is healthy.
Housing going down and staying down over a long period of time (20 years) is not that likely unless the industrial sector that dominates the area closes (coal industry in parts of the north, tin in parts of Wales). A wise person would keep an eye on things and switch areas. Buying in a prime area with a diversified economy is a hedge that can also work.
So, what do you think?
Is now a good time to start investing?