How to calculate profits on buying and selling

00ec25

robert_harper_2000 wrote: »

I'm pretty much a border line higher tax earner. So this would be tax at the higher rate. I don't know why I thought it was 20% but it would make it 28%? wow eats a lot of the profits then

Yes by the sounds of it most of yours would be 28%

depends on your outlook on life:
- 28% is better than being taxed 40% under Income Tax rules
and obviously
- 72% after tax is still a reasonable/lot of dosh

CGT used to be 40% until the last budget brought it down to the 18/28 rates (and was indeed once 20% in certain circumstances)

princeofpounds

If you are thinking about development as an economic enterprise you need to understand the idea of return on capital.

The *economic* profit of a development is not simply the revenue - cash costs. You also have an opportunity cost - the missed opportunity of doing something else with that money of similar investment risk.

There are two major ways to raise capital. Debt (which is easy to price as it has an explicit cost) and equity (which is not so easy to price in advance!).

In the case of equity, it is best illustrated by an example. Assume proeprty prices as a whole went up 10% over the period.

buy 100k
spend 5 k
sell 112k

Cash profit? 7k
But economic ('true') profit? Well you could have put the cash in the housing market in general and returned 10k over the same period. So you actually LOST money bearing in mind you missed this opportunity, and so your economic profit is really -3k.

It's quite amusing to see all these people during the boom times on homes under the hammer, thinking they were great developers, but in fact all the profit was simply due to the rapidly increasing market. All the time, effort and money they spent on materials was, if not exactly wasted, not in reality generating much return for them.

To an extent the same principle applies to your personal time and labour as well. It's great to make £1000 but not if it takes you enough hours that it pays less than minimum wage - you'd be better off taking a bar job.

You never pay cash for these costs but they are very real.

Also be familiar with the idea of gearing, which also boosted the illusion of returns in the boom. This is the use of debt to amplify profits. A quick example:

You have 10k
buy for 100k. use mortgage of 90k.
sell for 110k
pay 1k interest and mortgage off.
You now have 19k.
90% return! Magic!

Only it ain't magic. Because if things go wrong, it also amplifies losses. In the scenario above a similar move downwards would have wiped out ALL your money and more.

This was another reason people in the boom thought they were genius developers and in fact they were doing nothing more than betting with borrowed money.

robert_harper_2000

great stuff. I wished the program would explain abit more about the finance side of things rather than profit is £XTZ. I was just interested in how it all works and yields etc. I might be able to raise funds but I don't think I could make too many mistakes before losing a lot more -

Of course the other side is to rent the property - which no doubt brings a whole load more costs

You're right about the time too, sometimes they spend 6 months on a project day and night friends and family working for free and then they make £10k well... wages per hour... not quite Alan Sugar