Property - A nett zero investment

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19 Jun 2008 00:00 by TJ222 Star rating. 317 posts Send private message

If there is one myth I hear more than anything else at the moment, its that property is a great investment. The truth is a little different. Over the long run propery is a nett zero investment, ie you stand neither gain nor lose.

Shock horror !!!

"But my Mum, dad, auntie etc bought their house in 1956 and they paid 5k for it, and its now worth 200k etc etc ..........

Yes very well, but how much was a loaf of bread in 1956, or a litre of petrol and so on, unfortunatley we can't buy things at yesterdays prices, certainly not those in 1956.

So the returns from this 200k property have to be adjusted for inflation, economists call this the real return as opposed to the nominal return.

http://www.allagents.co.uk/house-prices-adjusted/

If you follow the above link its shows house prices adjusted for inflation ie real house prices.

What you will note is that the real trend is a doubling of house prices in 27 years, which is jsut over 2% a year. However there are costs associated with owning houses, probably at least 2% a year when you take into account maintenance and insurance and general upkeep.

So over the long run houseing is generally a nett loser albeit a small one.

"But my mate has made a fortune in houseing in the last 8 years so have loads of other people I know, especially in Spain."


This is the interesting bit.

What is it that determines the real trend in house prices - its wages. Wages go to pay mortgages that buy houses. Long run wage growth has been somewhere in the region of 3% depending on inflation.

If you look at the chart again you will notice that prices go both above the trend line and below it. After the boom in the late 80's prices fell from above the trend line to below it for nearly a decade. When prices are above the trend line they tend to be ecpensive and when they are below the trendline they are cheap.

Prices can remain both above the trendline and below it for extended periods of time, but eventually they have to return to teh trendline. Why?

Because wages pay for houses, its as simple as that.

From the chart its now easy to see why people have doen so well investing in houseing in the last decade. The prices started really taking off in 2000, why is this date very interesting?

Because 2000 marked the end of the dot com bubble and the start of the 2000 recession, which was a mainly business lead recession.

Authorities particularly in the US were keen to avoid a nasty downturn, so that dropped interest rates to dramatically low levels in the hope of restoring the economy.

Mortgages of 2% started a property bubble as all this ezy money flowed into houses.

For the last ten years this dramatic and dangerous increase in the money supply has ignited a property bubble of monstrous proportions and enabled the price of property to remain well above the trendline.

Unfortunately as well as fueling house price inflation it fuelled economies around teh world, particularly the US UK and club mjed countries providing a totally unrealistic and dangerous growth in activity all based on debt.

Fast forward to 2008 and its now easy to see what is going to happen. This debt has created an illusion of prosperity. Now it has to be paid back with interest and the opposite effects are occuring. Economies are going into recession and house prices are coming crashing back to the trendline.

Unfortunately history shows ( look at the chart again) that prices won't just return to the trenline, but they will come crashing through it. Property will underperform teh trendline for years by giving negative returns for probably atleast a decade.

In this way prices eventaully return to teh trendline, young people can once again afford houses and the whole system returns to equilibrium.

Prices are once again inline with wages.

So yes you can make a fortune from property, but you have to get your timing right. If you buy well above the trendline you stand to get roasted. If you buy well under it, you may do quite well with patience.



This message was last edited by TJ222 on 6/19/2008.

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19 Jun 2008 11:30 by Eva2008 Star rating in Reading. 155 posts Send private message

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Another great posting TJ. I wish I'd bought a house in 1996!



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19 Jun 2008 12:29 by semijubilada Star rating in London/Torrevieja. 1052 posts Send private message

I bought mine in 1984, reading the link I've invested my money well.  

Even allowing for the predicted downfall in the property market I should still sell it for more than the blue line on the graph.



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19 Jun 2008 12:31 by TJ222 Star rating. 317 posts Send private message

Lets hope so for you

Sage investing! - well done

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19 Jun 2008 12:43 by John Currie Star rating. 8 posts Send private message

Blinking 'eck. Never mind me thinking about getting a place in Spain this year, i have just found out that i bought my house in England above the trend line in 2003. It all seems negative again, are there any benefits to owning properties as investments?



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19 Jun 2008 13:14 by georgia Star rating in Algorfa (As seen on .... 1842 posts Send private message

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the other side of the coin..............
 

The most common mistake in property is not having any"

Raj Shastri is a self-made property entrepreneur who began his career with £950 to his name and has grown a multi-million pound property portfolio in just 5 years.

On Raj's fortieth birthday he began giving his life a lot of thought and realised that with pension schemes going nowhere, the next ten years would financially have a great bearing on his later life. He resolved to change his life for the better. He had an interest in property, but knew nothing about it.

Raj recalls "My father told me that if you want to do something, find the best person in the field, then copy and learn from them". And that's exactly what Raj did. Five years ago he met a property multi-millionaire at a seminar, copied his formula and immediately started climbing the ladder to success. "They say that knowledge is power – well I can tell you that it's not", claims Raj. "It's only when you act on that knowledge that it becomes empowering".

His first taste of success was with a £33K return from an investment property worth £144K. Since then his success has been based on networking and finding the right properties at the right price. "If the right property deal comes along I’ll take it. It only takes a phone-call to make vast sums of money tomorrow".

Raj's services as a guest speaker at property investment shows have been in constant demand over the last few years. He has now spread his words of wisdom to over forty thousand people around the UK. Raj has always been eager to share his much sought-after advice with anyone interested in property. "I am delighted to offer my advice to anyone and everyone who desires it. I am lucky to be where I am today and relish the chance to offer my professional opinion on successful property investment. I made myself into a very wealthy business person in only five years and armed with the right know-how you can do it too!"

Raj's dreams have quickly become realised. He now collects classic cars, lives in a house next to the River Thames and enjoys the fruits of a multi-million pound property portfolio. His simplistic yet engaging approach and affable manner makes him the ideal TV or Radio programme guest, to give opinions on the best mortgage for a changing market, an overview on property purchase abroad or the ins and outs of buy-to-let.

Raj's Top Tips:

  1. Don't wait to buy property – buy property and wait
  2. With a good mentor I believe anyone can be a successful property investor
  3. Make your money on the way into the deal, not just on the way out
  4. Whether you think you can or think you can't do something – you're probably right
  5. A bad property deal is like a bad haircut – given time it always grows out!
  6. I'm dyslexic – if I can do it, anyone can. I'm doing the same deals today as I was five years ago. Nothing has changed!

www.rajshastri.com



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19 Jun 2008 13:37 by VickiT Star rating in Bournemouth. 121 posts Send private message

Have I got this right - I bought my apartment for £92k at the end of 2001 (below trend I think!) Put down £10k and then spent around a total of £10k on improvements.  The apartment upstairs sold 3 months ago for £210k (and mine's much nicer! and ground floor which in Bournemouth is desirable!) so I reckon that my £10k investment has done rather well - or am I being blonde?

(Annual maintenance averages out at around £550 per year and I have an interest-only mortgage on a tracker rate)



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19 Jun 2008 13:40 by TJ222 Star rating. 317 posts Send private message

Georgia

No - this is not the other side of the coin, its the same side.

Re read my thread.

"So over the long run houseing is generally a nett loser albeit a small one."

"But my mate has made a fortune in houseing in the last 8 years so have loads of other people I know, especially in Spain."

Substitute for my mate this Raj character.

Raj Shastri is a self-made property entrepreneur who began his career with £950 to his name and has grown a multi-million pound property portfolio in just 5 years.

The clue is in the first sentance - the last five years.

Its clear from the article Raj doesn't even understand his good fortune himself. He clearly thinks these returns are going to go on, they are not.

Look around you and at the credit crunch and the impending recessions in western europe. This was a massive bubble and now its got ot be paid back. The end result of all this borrowing is not prosperity, its going to be poverty.

Raj was unwittingly on the right side of a massive credit expansion, the like of which we are not going to see again for another 50 years. Because it will take that long for the markets to correct themselves and recover and for people's memories to forget how horrible debt can be.

There is a saying in the financial markets, actually it attributed to Buffett, the world's most admired investor.

"Its not until the tide goes out, that you see who is wearing any trunks"

And another - "Everyone is a genius in a bullmarket"

Georgia don't you remember all the genius whiz kids during the dot com boom, 21 yr olds making more money than CEO's = leaving theri city jobs to trade full time.

This bubble is alot more dangerous than the dot com boom, in the dot com boom people lost their savings, in this one people are going to lose alot more than that.




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19 Jun 2008 13:45 by TJ222 Star rating. 317 posts Send private message

.........................who began his career with £950"

That about sums this article up - remind you of anything?

100% mortgages - no money down !!

Those times are gone and they won't be back in a hurry. You know when someone bought houses for 950 GBP down it was bubble time.

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19 Jun 2008 14:10 by TJ222 Star rating. 317 posts Send private message

VickyT

No not blonde - fortunate perhaps!

"The apartment upstairs sold 3 months ago for £210k "

Slightly concerning there is a big difference between now and 3 mnths ago. The estate agents I speak to tell me property in the UK has completely jammed up - there is a standoff between buyers and sellers. Sellers are still expecting 2007 prices, buyers are nervous. Buyers will win out.

Even so you have a lot of margin to spare, so well done!

" I reckon that my £10k investment has done rather well - or am I being blonde?"

This is the other part of property investing that needs covering. You have done so well because for most people buying property involves frightening leverage, the kind of leverage that would make a hedgefund manager shake in his boots.

You put down approximately 10% so any gains you amke are leveraged up by about 10 times, because you used someone elses money.

In this scenario you need only make a 10% gain on the property to make 100% gain.

Unfortunately leverage is a double edged sword.

It only needs for the property to drop by 10% at the tiem you bought and you are in for a 100% loss.

More than 10% and your in for a loss much greater than 100%.

This is how the US hedgefunds went bust overnight and lost their clients all their money.

And this why now banks want you to have more of the risk, ie 95% mortgages are mostly no longer available esp in Spain.

Banks know what is blindly obvious - that property is going to fall heavily.



This message was last edited by TJ222 on 6/19/2008.

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19 Jun 2008 16:10 by georgia Star rating in Algorfa (As seen on .... 1842 posts Send private message

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I know what you are trying to say TJ but i have met Raj Shastri and he didnt get his Ferraris on 100% finace he bought them out of his profits made within property.
There are people who do very well from property and others that fail.
Donald trump has prospered slightly from property,Perter Jones,Alan Sugar and on and on.
Dont take this the wrong way but Raj is worth £5,000,000 unless you can match his bank balance i will take his advice.
You can dress anything up to confirm any fact,the dot com was a whim and wasn't actual purely speculative.
The good things about bricks and mortar is they keep the rain off.(or the sun off)
I wouldn't advise anyone to INVEST in property in Spain at the moment but there are still some countries that will give you a reasonable long term return.
What i would advise people to do is still buy a HOME in Spain.
As long as you have the means to survive comfortably and dont overstretch yourself i cannot think of a better place to live.
Just one question,have you never bought property yourself  at any time and do you mind me asking your approximate age group.

Vicki- i would say thats not a bad return myself,i know what i would rather be staring at 100k profit than some chart by NATIONWIDE who were publicly ridiculed by journalists this week for their poor market projections.



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19 Jun 2008 16:33 by John Currie Star rating. 8 posts Send private message

Georgia & anyone else with opinion. A question you might not be able to answer but, i am looking to buy 2nd home in spain. I have found one, it is what i want, in nice area frontline golf etc. The price is 60-70k euro cheaper than others in development so looks good value. Anyway the question should i buy now or wait for a year or two? will i see these huge price drops that are talked about? TJ did convince me yesterday to wait, but after a drink last night i am thinking about progressing again. The buying and running the property is not really a problem to me, but just interested in getting best deal.



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19 Jun 2008 16:35 by TJ222 Star rating. 317 posts Send private message

"Dont take this the wrong way but Raj is worth £5,000,000 unless you can match his bank balance i will take his advice."

Lol - I might be worth 10quid or 10million, but it makes no difference to my advice. 

Recently a middle east soverign investment fund made a multi billion dollar investment in Citgroup a large US bank in trouble. In a short few months they have lost nearly 50% of their investment. Hundreds of banks around the world made billion dollar investments in mortgage backed securities, they all got fried, some of these investments are now worthless. This is what the credit crunch is all about.

Sadly having billions not millions of dollars doesn't stop you from stupidity, or not reading and understanding the market.

"Just one question,have you never bought property yourself  at any time and do you mind me asking your approximate age group."

No not atall. I bought my first property in the 1990's. Apart from my UK home I am now (hopefully) out of the property market. I say hopefully because I still have one going thru - fingers crossed.





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19 Jun 2008 16:42 by samson Star rating in Solihull/Benalmadena. 126 posts Send private message

Hi Georgia

Ive been wanting to ask TJ exactly the same questions as you. Has he never invested in property? me personally i could never live in rented accomadation for a long period of time as it would feel just like a roof over your head rather than a home which is what you make it f you own it. There is no motivation for me to spend my money on someone elses property for there benefit. Which would mean me living below a standard i would like as i would be holding back on purpose on decoration etc. Besides i own two rental apartments and i dont even allow them to hang pictures on the wall!
Whenever i have had spare cash i have always put it into property, tried all other methods for investments and have always lost money i.e endownment pollicies,pension,stocks and shares etc and this is using the advice from IFA's yet when i have done things on my own instinct i have not lost.
I bought my first property in 1988 at 19 paid 26k for it watched it rise to 61k in the boom it dropped back to 37k and i ended up selling for 55k in about 1996 (current value of that home is about 145k) i did not buy with the intention of trying to make a large proffit i bought it because i needed somewhere to live and it gave me 8yrs of happy living and my first child being raised there so lots of memories. Put the proffit down on a plot of land and raised finance for the build. In total it cost me about 200k with 70% mortgaged. I moved in there 2000 and its gave me so much pleasure and memories that you could not put a price on it. But in todays market it would fetch about £850k so even if it drops by 50% there is still a proffit but i have also had 8yrs of enjoyment from it.
In England we have always been bought up as a nation of homeowners so people will always rather buy than rent. The same will apply to them same people who want to move or have a home in Spain.



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19 Jun 2008 17:12 by TJ222 Star rating. 317 posts Send private message

Samson

Fire away I am all ears lol!

I am glad you have done well over the years, however figures of profit from many years ago need adjusting for inflation. The little old lady next to me in cmabs bought her house for 800quid. However you could do alot with 800quid in those days. The figures are a bit meaningless unless adjusted.

Actually apart from here in Spain and during my student years I have never rented property. I have always prefered to own my home for all the reasons you have said.

Its precisely because property has so outperformed in the last few years and because of the debt crisis which is basically thesame thing, that I now would not buy any more property. I imagine that in a few years time I may well be tempted again altho I will have to see how things plan out.

People over stay their welcome, its been like that since time began. Very few people in teh dot com boom knew when to get off, greed got the better of them , they thought they were geniuses. Consequently very few people made any money from the episode.

It will be a mistake to think that property will be any different. By the time every tom dick and harry is telling you how they made a fortune in property, you know its time to get off. Thats how markets work, property is no different.

Property has been very kind to me over the years, and I'm not saying its not good to buy your own home, or even to invest in it. But at the end of a decade long boom, with property so above the trend, it would be unkind of me to recomend buying.

I'm saying not now - for no other reason than I care about what happens to people. Don't you think there is enough misery in Spain with property, just trawl thru this very site?. You aint seen nothing yet.



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19 Jun 2008 17:14 by georgia Star rating in Algorfa (As seen on .... 1842 posts Send private message

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Hi John,
Well that is the 24 million dollar question, i have a general rule of thumb,can you comfortably afford it now?,could you comfortably afford it with a hike in interest rates,do YOU think it is worth it? how long do you intend to keep it,do you measure value from the enjoyment you will get from it or the size of the bank val.
I have a far easier job than advising investors,i find Homes for people,different ball game all together.
I think i missed where the apartment is,that may help in the decison making process.

Hi Samson- I predominantly deal with retired couples or families looking to relocate,if i got one sniff that they couldn't afford it and were pushing themselves i would advise them against the move to Spain,all of the people who i deal with are looking to buy because if you have worked all your life you want to continue to call somewhere home then that is what you do.
Most retired people have been careful with their money and saved,they have MADE money on their UK property ALLOWING them to have a nice place here and stick the rest in the bank to live off plus the pensions.

TJ-what ever possessed you to buy a property in the 90's and sell it now,my god, how much did you lose?????????
Unfortunately TJ when giving financial advice,the proof is in the pudding,would you consider advice from a tramp in the street or Alan sugar to be the most reliable.
Advice is great and beleive me i mean no disrespect from this statement but there has to be some foundation to it,would you take bomb disposal lessons from a man with no arms?!!
For all we know you may be Nick Leeson.
Unfortunately in the finacial markets wisdom is measured in pound notes.
Whether the banks are losing Millions at the moment is surely testament to the fact that they had the intelligence to make millions in the first place.


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19 Jun 2008 17:24 by TJ222 Star rating. 317 posts Send private message

"Unfortunately in the finacial markets wisdom is measured in pound notes."

Georgia

I give up. You win.

Lets meet back here in 6 months time and let time be the test.

"Whether the banks are losing Millions at the moment is surely testament to the fact that they had the intelligence to make millions in the first place."

Is that why the top bank CEO's are getting the boot? lol





This message was last edited by TJ222 on 6/19/2008.

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19 Jun 2008 17:26 by advisor Star rating in London most of the t.... 311 posts Send private message

Interesting posts, as ever it is all a matter of opinion, for John who is considering purchasing I would be aksing the question Why is this particular property 60-70k less expensive than its neighbours?
In relation to Raj and his £5m over the past 5 years more self porclaimed guru,s have made more profit form talking about property and selling courses than from property itself. In fact the most well known of these actually went into administrationn about 2 months ago , in thier heyday they had 1100people paying circa £2,750 for a two day course from which 66% took up membership at a further on average 6k per annum and who then would purchase anything thrown at them!
What is a property millionaire? I ask as one company made in excess of 100 people "property millionaires" where as I personally do not consdier having property worth £1m and mortgages of £950,000 to be any big deal.
 Historically property has run in five year cylces thrown out of sinct at times by other happenings ie the credit crunch (ultimately caused by banks own greed!).
That said historic lows have always been the time that the best opportunities present themselves, it is now possible to purchase property at upto 40% below its value, value simply being the price placed on it by a mortgage valuation as these are all currently being downvalued by at least 15%.
A simple and effective way to purchase an investment property is to work it backwards starting with the yield attained from rental income this will in turn give you a price at which it is viable to purchase at, it will eliminate dubiuosly discounted properties and can easily be compared against both the cost of borrowing and the interest attainable from a safe investment.
My personal opinion being that if you manage to hold onto a property long enough you will not lose money, simply it is all about timing.



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19 Jun 2008 17:35 by TJ222 Star rating. 317 posts Send private message

"A simple and effective way to purchase an investment property is to work it backwards starting with the yield attained from rental income this will in turn give you a price at which it is viable to purchase at, it will eliminate dubiuosly discounted properties and can easily be compared against both the cost of borrowing and the interest attainable from a safe investment."

Atlast some sense. This is what I have been saying all along ref my credit crunch thread.

Property yields in Spain are probably nett 2% if you can get it. My house would cost double to buy it than what I can rent it for. The market is so saturated that most people don't seem to be able to rent their dubious apartments. Spanish tax law is so rap[acious to expats its not even worth it if you can.

Advisor is spot on, this is telling you property in Spain is the most expensive in the world vis a vis net yields. It won't stay that way.

Time for tea and some sun.



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19 Jun 2008 17:43 by georgia Star rating in Algorfa (As seen on .... 1842 posts Send private message

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TJ,
I have no doubt that your facts and figures are correct and you are obviously well versed and educated in this matter.
In six months i will still be happy with my HOME and this is the point i am making.
Lets meet back here in 10 years and i will still be happy with my HOME,and you never know i might have maid a few quid as well.
on seconds thoughts lets not leave it six months as i do enjoy the banter.
To summarise,if you are looking to buy a home for the long term and you can afford it,no problem,if you are looking for a quick buck,get yourself a telescope.
Regards
Georgia


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