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Your House: A Liability or an Asset?

Owning your home is defined as a liability by some individuals including author of Rich Dad Poor Dad, Robert Kioysaki. This statement may seem surprising as the value of your residential home has increased, right?

The reason why it is not seen as an asset by some is because it does not put cash in your pocket. Instead it strips money from your income.

There are only two ways to make money from property one is income and the other is capital growth. Owning your own home strips you of income. However, although it is true the mortgage payments do come off your income, a deeper look at this may mean all though it strips money from your income on a monthly basis, over a 10 year period the underlying asset is likely to increase by more than what you contribute to the mortgage.

The alternative to owning your own home and paying the mortgage is to rent. This however also means your monthly cash flow decreases.

There are two advantages to owning your own home. One, there’s a strong chance medium to long term your house will increase in value, secondly the rent will be paid in perpetuity, however the mortgage payments will hopefully drive your debt down to zero.

So saying your own home is a liability is not quite so black and white. Thinking in terms of cash flow however is a good way to think.

Rather than purchasing items which drain your monthly cash flow such as a car which requires monthly payments, purchasing properties with a positive cash flow instead will give you an income and instead you can use this income to purchase whatever you fancy. In this way your net cash flow is never decreasing.

And increasing your cash flow may not be the best idea for everyone, as if you’re a high rate tax payer gaining extra income and having to pay almost half to the government may not appeal to you and many other people. We have a scenario where a two bedroom property was sourced along the canal of Little Venice and purchased for £290,000. The property could be purchased in two ways: one, to get a mortgage on the property itself and raise the 25% from a draw down from the purchaser’s main residential home, the other was to raise the whole funds from the draw down. It makes sense to use the cheap money first and so the full amount of £290k was used from the drawdown of the client’s main residential home. The borrowing was only 1.5% so the cost of finance was only £4,350pa while the rental income was £495pw giving an annual income of £25,740. So there’s a net income of around £20k.

They are very happy with the purchase and wish to do the same again rather than having a fully paid property, they are in a dilemma, on one hand they like the idea of developing strong income streams on the other they don’t want to give half away to the tax man!

So they have a choice either to do the same again and pay the taxman or focus on capital growth properties, where the net income stream is very little or even soaks up money so the current stream of income can get sucked back in.

In this scenario concentrating on capital growth may suit the client more, as there is a tax break of £10,600 per tax year, and a flat rate of18% after. The biggest and simplest point to bear in mind is you only pay capital gains tax when you sell. If you never sell you will never pay. That does not mean you cannot extract the gain, you can take out the gain by refinancing your property.

I have met many successful property people who have followed the basic strategy of just never selling their property, reasoning what do you do with cash? Except look for another deal to put it back into.

The first step in property investment is trying to decide what you require in terms of capital growth and income. This must be decided in consideration of you tax situation and future plans. If you would like help defining these why don’t you give our office a call?

The Real Deal

Real scenarios from the street

A client came to see me who had held assets in central locations such as Pimlico and Kings cross. He had focused on the council houses and picked up 4-5 properties over a few years all with extremely high yields. This was in the 80’s when you could get stonking rental yields of 12% to 20%. At the time these properties could be picked up for around £45,000 during this period ex-council properties really did have a stigma attached to them and not many people were touching them, now the stigma has decreased but still exists. The client sold these properties many years go, they were all sold because financing was difficult hence you could not be remortgage them very easily.

The client runs an import/export business in north london, and is aged 50, he plans to retire in 10 years and wants to develop an income stream of about £30-40k by the time he retires. He again like the idea of purchasing ex-council with the intention of streams cash flow. On retirement he wishes to spend his time helping his local temple, so he has a noble intention. Sow & Reap will be sourcing properties to ensure he meets his aim. In my opinion this is a very achievable goal given that he has £250k in cash and a commercial property worth £500k fully paid for. I couldn’t help but tell him how much the flats would be worth now if he had kept them and I bet he hasn’t managed to save this much!

The Victorian House

Types and Styles of Housing

The terraced house is the most economical use of the land to build a house. These were built with great quantity during the Victorian period. The dimensions were two rooms deep and one room a corridor wide. You can see rows of these types of properties all over England, normally the front garden is non existent and they have small back yards where sometimes the toilets were located and they are packed as tight as sardines, like the ones you see on Coronation Street.

In early Victorian houses the kitchens and associated service rooms were in the basement. Later on these had disappeared with the kitchens being relocated to the rear of the houses. The size of the houses got bigger too. In the 1800’s the poorest house consisted of only one room whilst in the 1900’s the minimum would be 4 rooms.

Terraced houses, in order to look more affluent, used various techniques to give the appearance of semis. One would be to stagger the houses on a curved road, another would be to have subtle decorative differences. Another popular method was to be used in the 1840’s were bay windows. Bay windows were associated with seaside towns like Brighton. They were done to maximize the sea view. These were used in terraced houses to increase their appeal.

Suresh Vagjiani

Managing Director

Sow & Reap

A Property Investment & Financing company.

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