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TPP328: The investments you must avoid- QUESTION

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Hi Guys, 

I am after a sanity check of my understanding of the following please!

Number 3 in todays podcast regarding 'Investments to Avoid' was: 

-Investments that cost you money [I understand it as a negative net monthly profit]

This does makes sense to me but what are your thoughts on the given 2 scenarios with the same property with differing LTVs:

1) You have a £200k property on 75% LTV that rents for £500 pcm, management is £50 pcm, interest only 4% mortgage is £500pcm.

£500 - £50 -£500 = -£50.  So you're losing £50 a month= BAD 

2) You have the same £200k property but on a 50% LTV. Rent £500 pcm, management still £50 pcm but mortgage is £333. So with a 50% LTV you have a positive cashflow of £500- £50 - £333 = £117 profit a month = GOOD

So, this tells me that the same property can be a good or a bad investment (regarding monthly cash flow) depending on how much money you put in the deal.  This is because reducing the LTV reduces your mortgage repayments which could turn a neg cash flow into a pos cash flow.  

Have I got this right? 

Thank you,

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In short, yes. If you're making a profit, even at a higher interest rate hence the stress test, then you should be able to keep the property and sell it when you want. If you're losing every month, then it's dependant on you having the money to keep it afloat. Lose your job and you'd lose the house as well, potentially whilst in negative equity.

Appreciate your figures are an extreme for ease of calculation, but I'd say that even 2 isn't a great deal, as you'd be basing everything on capital growth, otherwise you could get much better returns on the £100k. It COULD work now, with growth about to start (maybe), but do it in 2 or 3 years and you may hold on too long. 

Personally, I'd always go for a reasonable yield whilst trying you pick an area that should increase in value i.e. around a big city like Manchester, Leeds, Liverpool rather than a smaller town in say Cumbria or Wales. Ultimately, they're always going to expand as cities, so the growth will come, even if you have to wait 20 years. Go for a small town and if the local main employer closes (coalmines previously, steel, nuclear plants etc) you could have a property that'll probably rent but will probably never see growth in real terms

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