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When do I actually start making money?


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I'm preparing to buy my first property next year, and am getting my strategy together, and want to keep really good records from the start. I'm confused about when I will start making money. Let's say I need 30k to cover the deposit, legal etc costs, renovations, insurance, all of the costs, and then after paying the mortgage I make £100 per month. In my mind I don't make a profit for 300 (plus extra yearly expenses) months, because my initial outlay was so much, but I technically would have an income of £100 more than my wage. Is it a yearly thing, like i'd make a loss in the first year and then £1200 profit in year 2, 3....., etc? I'm thinking about it partly for tax, as that would become another expense that ate into my £100 per month, but also from a strategy perspective, for when I'd break even. I'm confused about when I call the £100 per month profit.

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  • 2 months later...
On 7/24/2020 at 10:23 PM, helenaaaa said:

I'm preparing to buy my first property next year, and am getting my strategy together, and want to keep really good records from the start. I'm confused about when I will start making money. Let's say I need 30k to cover the deposit, legal etc costs, renovations, insurance, all of the costs, and then after paying the mortgage I make £100 per month. In my mind I don't make a profit for 300 (plus extra yearly expenses) months, because my initial outlay was so much, but I technically would have an income of £100 more than my wage. Is it a yearly thing, like i'd make a loss in the first year and then £1200 profit in year 2, 3....., etc? I'm thinking about it partly for tax, as that would become another expense that ate into my £100 per month, but also from a strategy perspective, for when I'd break even. I'm confused about when I call the £100 per month profit.

The chances are that renovation costs to enhance the marketability of the property which aren't capital in nature will give you an income tax loss to protect ongoing profits from taxation for a while. An annual £1,200 profit on one property could quickly get swallowed up by accountants fees and those unexpected expenses. When you do start making a taxable profit, you may be adversely affected by the mortgage interest restriction which can make you a higher rate tax payer even if you don't feel like one so it is worth considering company ownership if you are likely to benefit.

All your other costs and the purchase price are capital in nature and tied in unless you can refinance at some point to get your capital out. Mortgage interest relief is further restricted by extracting over the original purchase price and capital expense unless you reinvest the equity released into further properties. If the property increases in value you can console yourself with the eventual gain you may make.  

So, on top of a profit for income tax which might get taxed, you do hopefully have capital appreciation to look forward to. Its debateable when you can say you're actually in profit. Many landlords consider it to be when they have got all their original capital back out and have positive yield from the rental income.

Jerome

Jerome@TaxAntics.co.uk

www.TaxAntics.co.uk
 

 

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  • 3 months later...

Hi helenaaaa

 

If I've understood your question correctly, there are 2 different things getting mixed up, the up front costs and the losses.

What I think is missing from your thinking above is that the deposit isn't really a loss, as it becomes your equity in the property rather than going to solicitors, builders, insurers etc.  So (ignoring changes in the capital value of the property) what you would really be looking at is how long before you have covered the initial costs excluding the deposit, because at that point you could (in theory) sell the property and you would have broken even.

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1 hour ago, tom_w said:

Hi helenaaaa

 

If I've understood your question correctly, there are 2 different things getting mixed up, the up front costs and the losses.

What I think is missing from your thinking above is that the deposit isn't really a loss, as it becomes your equity in the property rather than going to solicitors, builders, insurers etc.  So (ignoring changes in the capital value of the property) what you would really be looking at is how long before you have covered the initial costs excluding the deposit, because at that point you could (in theory) sell the property and you would have broken even.

Yes, you're right. i hadn't thought of it like that. I just thought of all the money I would have to live without, but it would still be my money, just tied up in an asset.

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  • 3 weeks later...

This is why I always look at ROCE as my main figure.  I would say with £100 a month profit I would not be touching that deal as that is to small a profit, it only takes 4 weeks void (what you should allow for) and you have just lost nearly half your profit, plus the cost of advertising for a new tenant.

If you are going for capital growth then you would buy below market value, add value through a refurb,  put on a 2 year fixed rate mortgage and refinance most of the deposit out in 2 years time.

Remember, you make money over time with property, it's not going to make your fortunes overnight unless you flip.

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