The BIG question: Sell or remortgage?

[z106]

Yes - it does sound liek his book alright.

However - it is NOT a get rich quick scheme.
It's more of a get rich slow scheme - which over time would grow exponentially.

 

[ClubMan]

So you are a Rich Dad, Poor Dad follower then?

 

[robd]

Yes - it does sound liek his book alright.

However - it is NOT a get rich quick scheme.
It's more of a get rich slow scheme - which over time would grow exponentially.

Buying 5 properties in 3 years in London, Dublin and New York is not a get rich slow scheme. It ticks all the boxes of a get rich quick scheme. Unfortunately, you're about 5 years to late.

Have you attended any property investment seminars?

 

[z106]

No - I have not attended any seminars.
ANd no - I'm not a rich dad disciple.
I did read the book once many moons ago and only have a vague recollection of what his points were.

And in this climate it is a get rich slow scheme.

As I say - point me out a ten year period in history where nominal prices were less at the end of the 10 year period than they were at the beginning ?
ANd it is that fact alone which makes me think it's worth the gamble.

 

[robd]

As I say - point me out a ten year period in history where nominal prices were less at the end of the 10 year period than they were at the beginning ?
ANd it is that fact alone which makes me think it's worth the gamble.

You completely fail to understand what I have said again and again. Will a bag of sugar cost more in 10 years time than today. Most probably as it tracks CPI. Will a person (in the same job at the same level) earn more in 10 years time. Again most probably as wages track CPI. Inflation (albeit low inflation) is a macro economic requirement of every free market economy. As I have constantly said house prices in general track inflation (mainly wage inflation) so of course they will probably (leaving speculation aside) be worth more in 10 years time. So what, they're not increasing in relative money terms. Thus you are not building up any wealth.

To build up wealth you need to invest in assets that out perform inflation or invest in assets that have a yield greater than cost of finance thus gradually gaining ownership of them. Houses do not out perform inflation over a long period. You bought all your properties over the last 3 years, thus you are not getting a yield of 7% so you are not covering your cost of finance and you are not gaining greater ownsership bar buying more each month with your own money. They are thus bad investments and you should sell them. I suggest you research house prices vs CPI and equities vs house prices for further info.

I'm afraid your financial thinking is very warped. There is no basis to any of the arguments you have tried to put forward.

 

[z109]

As I say - point me out a ten year period in history where nominal prices were less at the end of the 10 year period than they were at the beginning ?

UK House Prices
1984-2000 % Real Change

Year % Change RPI % Change Real House Prices % Change
1984 ......7.2............... 5................... 2.2
1985 ......9.1 ...............6.1 .................3
1986 ......11................ 3.4 .................7.6
1987 ......5.4 ...............4.2 ................11.2
1988 ......23.3 ..............4.9 ...............18.4
1989 ......20.8 ..............7.8 ...............13
1990 ......0 ..................9.5............... -9.5
1991 ......-1.2 ..............5.9............... -7.1
1992 ......-5.6 ..............3.7 ...............-9.3
1993 ......-2.9 ..............1.6 ...............-4.5
1994 ......0.5 ................2.4 ...............-1.9
1995 ......-1.7 ...............3.5 ...............-5.2
1996 ......4.5 ................2.4 .................2.1
1997 ......6.3 ................3.1 .................3.2
1998 ......5.4 ................3.4 .................2
1999 ......7.2 ................1.5 .................5.7
2000 ......9.8 ................3 ....................6.8

Source: HM Treasury
From [broken link removed]
(Just to use the source info.).
(edit: apologies for the extraordinarily bad formatting - it was all nicely tabulated, but disappeared when I posted).

If you are talking about property as a leveraged investment, you should be worried about real returns, not nominal returns. Particularly if you are financing the properties on an interest only basis (i.e. you will have to sell them at the end of the mortgage term to pay them off). As far as I can see, you are praying for low inflation/low interest rates through the course of your investment to have a hope of return on it!

Or is my o-level economics letting me down again?

 

[z106]

You completely fail to understand what I have said again and again. Will a bag of sugar cost more in 10 years time than today. Most probably as it tracks CPI. Will a person (in the same job at the same level) earn more in 10 years time. Again most probably as wages track CPI. Inflation (albeit low inflation) is a macro economic requirement of every free market economy. As I have constantly said house prices in general track inflation (mainly wage inflation) so of course they will probably (leaving speculation aside) be worth more in 10 years time. So what, they're not increasing in relative money terms. Thus you are not building up any wealth.

Robd - I disagree.
WHat matters is nominal terms - not real terms.
E.g. Lets say someone has a property worth €1m.
Lets also say for the sake of argument that the rent covers the cost of financing.

LEst also say that inflation is 5% - and lets say that house prices rise with inflation.
Correct me if i'm wrong but what i gather from you is that in real terms the house price is flat therefore no gain.
(At least i think that's what ur point is - corerct me if I misunderstood)

However - quite clearly there is a gain of €50k afte the 12 months.i.e. If the property was sold it would go for an extra €50k.
Admittedly the €50k wwould only be worth around €48k in todays money when u factor in inflation.
(By the way - obviously if you owned the property outright then the real terms apply - however assuming you have a mortgage then it's the nominal terms that apply)

In teh above example you don't need the investment to out perform inflation. As long as it tracks inlation in the long term you will make money on ur investment.

To sum up - it's nominal terms that matter - not real terms.(Assuming a mortgage)

Robd - as far as i can see we are in agreement.
i.e. over the long term house prices will,at worst, track inflation.
I have also illustrated above how it's nominal terms - not real terms that are relevant.
SO -once the rent pays for the financing (which it pretty much should should do if it's a blue chip residential property),surely then the strategy surely holds ?

And even if there is a small shortfall in the monthly financing you can always hold back a few thousand from one remortgage to top up monthly.

 

[robd]

qwertyuiop,

I'm going to wrap this up. I did not say in worst case house prices will track inflation. I said that in the long term house prices track inflation. There are a lot of writings on this in book, magazine and online which you should look into. The worse case in any investment is that you lose all the money including that which you leveraged from the bank (negative equity).

Quite simply your hypotetical arguments have no meaning. Sorry. It really is just mary make believe stuff that you're putting forward as arguments/theories.

The yield you get from your 5 properties bought in the last 3 years is less than the general cost of financing on them at normal (90%) borrowing levels. No amount of sugar coating changes this. You are unlikely to generate weath with them due to poor yield and market conditions and there are better places to put your money.

This is my last post to this thread as I have nothing further to offer, I'm just repeating myself.

The end.

 

[z106]

Ok Robd - we'll leave it at that so.

Just one last one though.

Your key point that u mentioned in an earlier post is that the investment has to outperform inflation to be profitable.

As I have constantly said house prices in general track inflation (mainly wage inflation) so of course they will probably (leaving speculation aside) be worth more in 10 years time. So what, they're not increasing in relative money terms. Thus you are not building up any wealth.

To build up wealth you need to invest in assets that out perform inflation or invest in assets that have a yield greater than cost of finance thus gradually gaining ownership of them.

Clearly wealth can also be generated when the above scenarios do not apply.See my example in my earlier post.
Just to reiterate my main point - assuming a mortgage is in place,it is NOMINAL increases that are important - NOT real terms.
For some reason you seem reluctant to acknowledge this fact.

Also for me personally the rent does cover the interest due to fixing low interest rates at the time of purchase coupled with rising rents. (These 90% mortgages you mention simply do not exist for investors - 75% on a portfolio is closer to the mark) Also - 2 were bought off-plans => no financing required for a couple of years.(other than the interest on the released equity for thedeposit which is covered by rent anyway)
But even if there was say,1% point that needs to be covered (difference between interest rate and yield),assuming the portfolio rises with inflation over the long term(which you agree on - currently standing at 5%),then that is still a 4% net rise.(c. 3.8% after the 5% inflation is factored in)

And for the record - propery HAS outperformed inflation over the long term.