Profiting from property - or really a myth?

[Deleted User]

I had a bit of a heated discussion with a friend of mine and would be interested to hear others' thoughts.

My friend bought a property for £218k in 2004. He took out a mortgage for £205k and provided the rest through his deposit.

He's now thinking of selling, and - ignoring for a moment the fact this is a pretty bad market - is looking to put the house on the market for £240k, in line with what other similar houses in the area have recently sold for.

The argument I had with him centred on an interesting issue. He told me that if he sells the property, he'll have made £22k equity on the property - and he seems pretty pleased with that.

But it seems to me - not sure if anyone agrees - that whenever people talk about house prices they always ignore the mortgage interest cost when analysing their investment. They always say things like 'well, we bought it for £110k twenty years ago and now it's worth £190k, so we've made £80k".

Everyone seems to talk like this.

But they haven't MADE £80k, because a massive chunk of their mortgage payments go towards interest, so actually most property owners end up making a loss in the long term, surely?

Or, in other words, very few people 'profit' from rising house prices, but all that happens is they exchange cash for bricks and mortar over a long period. To put it simply: the amount of money you pay in interest normally negates any increase in house price value, surely, so overall, you're not much better off.

Just thought I'd get it off my chest. I hate hearing people talk about rising house prices and how they've 'made £XXk' when in fact they ignore the interest they've paid which normally outweights that price increase!

_Andy_

Totally agree - also not factored usually is sols fees, val fee, mortgage fees, decoration, moving costs etc.

gizmo111

If your friend had been paying rent then he would have made nothing over the period, interest is just rent otthe bank.

[Deleted User]

gizmo111 wrote: »

If your friend had been paying rent then he would have made nothing over the period, interest is just rent otthe bank.

Yes, that's the argument my friend used too. But these are relatively unusual times, what with interest rates being low (he is on a very low interest-only tracker and pays only £200pcm I believe - at one point he was paying £29pcm!) - when the mortgage was taken out he was regularly paying £1,200 a month, so actually you could argue that if he were paying rent then at he would have surplus cash and all he's doing is swapping notes for bricks.

dunstonh

He told me that if he sells the property, he'll have made £22k equity on the property - and he seems pretty pleased with that.

He wont have made £22k though. He had purchase costs and he will have sale costs. He will also have to pay capital gains tax as the gain is over the annual threshold. There is no taper relief anymore although with just 5 years it wouldnt have been much anyway and the new single rate would probably be just about the same.

[Deleted User]

dunstonh wrote: »

He wont have made £22k though. He had purchase costs and he will have sale costs. He will also have to pay capital gains tax as the gain is over the annual threshold. There is no taper relief anymore although with just 5 years it wouldnt have been much anyway and the new single rate would probably be just about the same.

Yep, that's my point: does anyone actually profit from property?

SimbaSimon

Deleted_User wrote: »

Yep, that's my point: does anyone actually profit from property?

Redevelopers profit from property all the time. The average joe with his mortgage? Not really. But it sure beats renting!

Cannon_Fodder

And of course with the restricted lending market, he needs all of the £22k, and another £2k, to get a 10% deposit on that same house.

Charterhouse

dunstonh wrote: »

He wont have made £22k though. He had purchase costs and he will have sale costs. He will also have to pay capital gains tax as the gain is over the annual threshold. There is no taper relief anymore although with just 5 years it wouldnt have been much anyway and the new single rate would probably be just about the same.

Well, from the sounds of things it's his home, in which case it will be CGT-exempt. Worst case he can move in for 3 months before he sells it, then it will be.

maninthestreet

22K profit over 5 years on a property that cost 218K is 2% per year return - nothing to write home about, and that's before EA and solicitor fees have been taken into account.

FraudBuster

I keep reading about property multi-millionaires in the media.

They then go bankrupt.............

and actually have nothing.