Evaluating Property Investments a Black Hole and Some Good News on Mortgages
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When evaluating property investments, too many landlords fail to take account of the “opportunity costs” of their own money sunk into any project. Indeed I meet a lot of people in my consultancy who have hired me to assess an investment or set of investments but have forgotten to account for the opportunity costs.
I explain this in “Successful Property Letting”, but maybe my explanation there needs to be made even plainer. Buy the Book at Amazon
It’s simple really. If you have to put up say, £50,000 as a deposit for a property to let (with a bank putting up the rest) and you have transaction costs of say £6,000, then you have put up £56,000 in total.
That £56,000 could have been sitting in the bank earning say 4% (and 4% could be about right because, as a buy to let investor you are presumably putting away money for at least 5 years and 4% is attainable right now on 5 year fixed term bonds.)
4% of £56,000 is £2,240 – that amount is the opportunity cost. It’s basically like saying, “What could I have earned by doing nothing?” and it should be added to the cost side of any investment, thus reducing the potential profit for each year of the investment going forward.
Lost Money on Failed Property Transactions – The Black Hole
Very few landlords running residential property investment businesses and letting to tenants (as opposed to property traders and developers) realise that if a property purchase falls through, they cannot claims the costs of that abortive expenditure against rental property income or as a deduction before capital gains tax is levied either.
Yes, the money is lost. It’s a black hole which HMRC is aware of and it seems very unfair, but hey, that’s the situation.
Property transactions that fall through are especially common for landlords buying property at auctions for example where you can be more easily outbid. HMRC and my tax advisor are both clear on this– if this happens you cannot claim abortive costs like the cost of the survey valuation if you are a property investing landlord.
Good News on Buy to Let Mortgages
Landlords seeking mortgage finance and still smarting from Lloyds Banking Group’s odd decision to stop lending new money to landlords who have more than 3 properties across the group (which includes Lloyds, C&G, Halifax and BM Solutions brands) will be pleased to see that Paragon have started lending again. Some good news at last!
MORE ABOUT LETTINGFOCUS AND WHAT WE DO
LettingFocus.com is the home of Private Rented Sector and Landlord Information.
I’m David Lawrenson, a landlord and property investor myself for over 25 years and author of “Successful Property Letting” – the UK’s top selling commercially published property book for the last 3 years with 25,000 copies sold.
Services to Businesses and the Public Sector
Primarily I am a consultant to a range of organisations including banks, building societies, local authorities, social housing providers, institutional investors in build to let and insurers – helping them with their landlord facing or buy to let product strategies, marketing and services.
For example, I help banks improve their buy to let mortgage lending practices and I help generic viagra 100 housing associations / local authorities find private landlords (private rented access schemes, local letting agency models etc.)
I also write for property websites and am regularly quoted by the media.
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We also find a limited amount of time to help landlords and property investors by coaching them in how to make money in the private rented sector using ways that work, which are ethical, fair to tenants and which involve minimal risk to the investor. We pride ourselves on giving independent unbiased Buy to Let Advice on a one-to-one mentoring / coaching basis or through our (very occasional) group seminars.
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