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My 1st investment property, but the BREAKEVEN point... Seems so far away!?


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Hi All,

New to Property Hub and Prop Investing in general, just posted an intro within the relevant forum if you'd like to say hi!

There's a burning question which has been on my mind since I dipped my toe into property investment (and probably should have sought an answer to before taking the plunge)....
The 'Breakeven Point' - How long should it take? 

Recently i've purchased my first BTL (£68k 2 bed). So as not to bore you, I won't give exact financial specifics, but to summarise:
£2k Stamp
£5.5k fees (includes sourcing fee)
£5k refurb

Total initial outlay therefore = £12.5k

Assuming zero capital growth and assuming I receive the rental income I expect to receive, and deducting expenses (including a 10% allowance for repairs, Thanks Rob) i'll net circa £240 per month.

This means it'll take 52 months to hit breakeven. Nearly 5 years!?

Overall this just seems unviable.
It seems too long to be waiting to reap the rewards of a significant financial investment that frankly could be put to work elsewhere (ie Stock market) and also, once I do hit month 53, the market may well be in decline (ie recession) and I wont even have chance to enjoy the passive income, or at least not as much as I might have hoped.

I'm hoping that somebody may be able to reassure me and tell me that I am looking at this completely wrongly, ie not as an investor should?
Maybe 'Breakeven' isn't something that is even considered in property investing, as I did struggle to find a forum that addressed it.

Or is this just the nature of the beast, and patience is key in this game?

Any honest and frank responses absolutely welcomed!

Thanks
Dan

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I think you have hit the nail on the head with the comparison with the stock market - I believe you can get better long term returns in the stock market than just by renting. However the unknown & unpredictable benefit is the capital growth of property, plus with the gearing of a mortgage & rising rents with, hopefully, static mortgage payments, the longer you hold the property the more it makes!

For me, property produces the income, Stock Market the capital growth & holding both gives me diversification.

Property is definitely a long game (as is the Stock Market) but 20 years into my journey I am making a good income from my property portfolio which was definitely NOT the case at the beginning.

Good luck on your journey :) 

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Hi Dan,

The secret appears to be to find a really great deal which is either for sale below market value or to which you can add value. Because then you can buy at one price but remortgage on the actual value or new price. As you've paid a hefty sourcing fee, I'd hope you got a deal below market value. So for example, let's say although you paid £68k , maybe it's actually worth £80k. Therefore you can mortgage it based on the £80k value (75% mortgage would be £60k). So you can clear the original mortgage and still have some left over. That way you're getting some or all of your initial investment back immediately.

Also remember property is not a get rich quick scheme. That £240 per month should be added to your normal savings rate to accelerate your next purchase.

You do raise a fair point though that the stock market is an alternative investment mechanism which might return an average of 8-10% per year. If you're after something truly passive to build wealth then this is a good option. If you're seeking cashflow then buy to let is a good option. As always it comes down to your personal goals.

Regards,

David

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1 hour ago, tracey said:

Hi Dan,

What location is the property in? Could you run it as Serviced Accommodation? Better yields, tax advantages, etc? Worth a go, nothing to lose!

Hi Tracey,

Property is in the North East, and as it's a mid terrace house, with  2 beds, there is no possibility of serviced accom.

My concern isn't so much the need for better yields, I'm happy with this yield, but simply to understand how a break even point can be so far away.

Thanks
Dan

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12 minutes ago, julia urquhart said:

I think you have hit the nail on the head with the comparison with the stock market - I believe you can get better long term returns in the stock market than just by renting. However the unknown & unpredictable benefit is the capital growth of property, plus with the gearing of a mortgage & rising rents with, hopefully, static mortgage payments, the longer you hold the property the more it makes!

For me, property produces the income, Stock Market the capital growth & holding both gives me diversification.

Property is definitely a long game (as is the Stock Market) but 20 years into my journey I am making a good income from my property portfolio which was definitely NOT the case at the beginning.

Good luck on your journey :) 

Thanks Julia, makes sense, and I assumed may be the case.

The long game is fine with me, and it's absolutely my intention to hold possibly forever.

The gains just seem minimal, when there is so much money to be made out there!

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13 minutes ago, david graham said:

Hi Dan,

The secret appears to be to find a really great deal which is either for sale below market value or to which you can add value. Because then you can buy at one price but remortgage on the actual value or new price. As you've paid a hefty sourcing fee, I'd hope you got a deal below market value. So for example, let's say although you paid £68k , maybe it's actually worth £80k. Therefore you can mortgage it based on the £80k value (75% mortgage would be £60k). So you can clear the original mortgage and still have some left over. That way you're getting some or all of your initial investment back immediately.

Also remember property is not a get rich quick scheme. That £240 per month should be added to your normal savings rate to accelerate your next purchase.

You do raise a fair point though that the stock market is an alternative investment mechanism which might return an average of 8-10% per year. If you're after something truly passive to build wealth then this is a good option. If you're seeking cashflow then buy to let is a good option. As always it comes down to your personal goals.

Regards,

David

Thanks David,

You're right, I believe the property will be worth more once the £5k refurb has taken place.
Actually, somewhere closer to £80k as you have suggested - You must be a mind reader :D 

Stocks investment is a vehicle I use, property is simply to diversify and give myself a solid foundation.
No doubt we'll see another recession within the next 8-15 years, so i'm looking to future proof my investments.

Thanks for taking the time to reply.
Dan

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24 minutes ago, dan osx said:

Thanks David,

You're right, I believe the property will be worth more once the £5k refurb has taken place.
Actually, somewhere closer to £80k as you have suggested - You must be a mind reader :D 

Stocks investment is a vehicle I use, property is simply to diversify and give myself a solid foundation.
No doubt we'll see another recession within the next 8-15 years, so i'm looking to future proof my investments.

Thanks for taking the time to reply.
Dan

No worries Dan. I wish you success. Probably not a topic for here but I'd enjoy a conversation with you about your stocks investments as I also invest in the markets. I'd enjoy a discussion about your chosen strategy, stocks Vs bonds, do you select your own stocks or employ an active manager or invest in passively managed index funds. Personally I'm the latter. As I say probably not relevant to this forum.

Good luck,

David

www.property-connect.co.uk

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Hi Dan,

You have said that your property will net £240 a month, or £2,880 a year. Based on an investment of £12,500 this is a 23% return. In other words, as you've said, you'll recover the equivalent of your money in the deal in less than 5 years (from rental profits alone). That's an incredible return, and its not clear why you find that disappointing?

That said, your initial outlay doesn't appear to include the deposit for the property? As such, your ROI is probably much lower.

However, most investors look to improve their ROI and accelerate things by refinancing quickly. You can often refinance after a refurb, or once you've seen some capital growth in the area. It sounds as though you may be able to look at refinancing your property?

Capital growth is where the bulk of the wealth in property is made, and should not be disregarded! Furthermore, it is easier to accelerate your wealth in property compared to investing in stocks, because you can leverage easier in property. For example, with £100k you can buy £100k worth of stocks. A 10% rise in value will achieve you £10k.

Whereas in property, £100k will buy you £400k of property (using 75% LTV mortgages). A 10% increase in property prices means a whopping £40k chunk of equity.

I hope the above provides some reassurance!

Rachel Watts
Portfolio Manager

https://propertyhub.net/service/invest/

05_invest.png.4f4b850c28738693115789e0cbc020a7.png

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1 hour ago, rachelw said:

Hi Dan,

You have said that your property will net £240 a month, or £2,880 a year. Based on an investment of £12,500 this is a 23% return. In other words, as you've said, you'll recover the equivalent of your money in the deal in less than 5 years (from rental profits alone). That's an incredible return, and its not clear why you find that disappointing?

That said, your initial outlay doesn't appear to include the deposit for the property? As such, your ROI is probably much lower.

However, most investors look to improve their ROI and accelerate things by refinancing quickly. You can often refinance after a refurb, or once you've seen some capital growth in the area. It sounds as though you may be able to look at refinancing your property?

Capital growth is where the bulk of the wealth in property is made, and should not be disregarded! Furthermore, it is easier to accelerate your wealth in property compared to investing in stocks, because you can leverage easier in property. For example, with £100k you can buy £100k worth of stocks. A 10% rise in value will achieve you £10k.

Whereas in property, £100k will buy you £400k of property (using 75% LTV mortgages). A 10% increase in property prices means a whopping £40k chunk of equity.

I hope the above provides some reassurance!

£12.5k was refurb, stamp and fees. There would also have been a £17k deposit. So approx  £3k per year out of £30k is 10% but that's before tax. With the stock market and a stocks and shares ISA the growth is tax free. Hence the debate, I think Dan is wondering why property and not stocks. Stocks also compound more readily.

You are correct about the leverage. The question is how long will it likely take for house prices to go up by 10% versus the stock market which averages 8-10% per year.

In my mind once you refinance the house and pull the money back out, that's when your return is more likely to be 25% which is an amazing return. Property rental income is likely to be predictable cashflow where the stock market is volatile. It is also possible to use other people's money in property via joint ventures. I think these are the real advantages of property over the stock market.

The stock market is however excellent for long term wealth accumulation and can be completely effort free.

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