London property prices to fall 30%....

chucknorris

Generali wrote: »

What you're measuring isn't yield, its ROE.

Yield measures income against current value. ROE measures returns versus equity.

The whole point of yield as a measure is that you can compare it across different asset classes to see whether they still make sense as an income producing asset.

There's little point in holding on to a house with a yield of 1% if you can get 10% risk free for example (not that you can right now).

To tread water I would need to make 7.5% on the equity released, and I wouldn't want anything too (I know that is subjective) risky. So there is no chance of achieving that, but there is also something to be said about making your life easier, owning property comes with hassle that owning shares does not. So I do appreciate that it isn't as simple as thinking along the lines of: 7.5% less say 4% (share dividends) = a 3.5% less 32.5% tax = 2.36% net reduction per annum. It could be argued that a 2.36% reduction, with a more peaceful life represents value, especially if I end up building my own house (which would also reduce that 2.36%), which I couldn't really do without selling some of the property. This is why I am too'ing and fro'ing at the moment.

It actually helps to write all this down, because it helps me to realise that selling isn't such a bad idea, it gets me over the 'but it will be a hit on income' hurdle. Furthermore it opens up the possibility of new opportunities (building our own home).

wotsthat

chucknorris wrote: »

CGT is an issue only in that it is significant (over £800k), I do like to be hands on, and I find tax interesting, but I have been thinking about consulting a tax specialist, but there isn't that much can be done to mitigate CGT

You've mentioned leaving your estate to dog charities in the past. If you sell in advance of your demise you'll trigger a CGT bill which means more money to HMRC and less to the animals.

What you could do is keep the properties and at the point you can't be bothered with the hassle anymore donate one of them to charity in your lifetime. You'd have no CGT to pay.

With the consent of the charity you can sell on their behalf and donate the cash. Maybe you could just donate the capital gain and retrieve your initial capital?

mwpt

chucknorris wrote: »

I could sell up now, but as I mentioned above, to tread water financially I would need to gross 7.5% with the equity (ignoring any capital gains). So for the moment I am not selling, but I'm not that far away (in years) from doing so. It just seems daft to sell up and take about a 3.5% reduction (assuming about 4% achieved elsewhere, as I'm not going to invest in something too risky), so at the moment I am delaying the inevitable selling in the short term.

I seen to recall you saying that your properties generated over £100k in income pa (I regard income as rental profit, not capital gains). If that is correct, why are you even considering selling? That's a huge pension if you are mortgage free in your primary residence and only likely to go up as the properties are paid down (presuming they're not on IO) and rents go up. Even if you have to go to a managed model someday the income will still be large.

wotsthat

chucknorris wrote: »

To tread water I would need to make 7.5% on the equity released, and I wouldn't want anything too (I know that is subjective) risky.

If you're currently getting a yield (I think you mean yield) of 7.5% then whatever you're doing isn't low risk unless you've found an asset class where risk is being mis-priced.

chucknorris

wotsthat wrote: »

You've mentioned leaving your estate to dog charities in the past. If you sell in advance of your demise you'll trigger a CGT bill which means more money to HMRC and less to the animals.

What you could do is keep the properties and at the point you can't be bothered with the hassle anymore donate one of them to charity in your lifetime. You'd have no CGT to pay.

With the consent of the charity you can sell on their behalf and donate the cash. Maybe you could just donate the capital gain and retrieve your initial capital?

It is certainly an idea, but the money I leave to the Dog's Trust and The Last Chance Animal Rescue Centre will come from funds that result from dying younger than my optimistic planning of my finances until death. As obviously I wouldn't want to be pessimistic about my longevity, and end up spending all my money and end up poor in the latter years of my life.

EDIT: The Blue Cross has recently come onto my horizon too, they seem to be doing great work in easing the suffering and improving the life of dogs (and other animals), I will probably start giving to them too.

chucknorris

mwpt wrote: »

I seen to recall you saying that your properties generated over £100k in income pa (I regard income as rental profit, not capital gains). If that is correct, why are you even considering selling? That's a huge pension if you are mortgage free in your primary residence and only likely to go up as the properties are paid down (presuming they're not on IO) and rents go up. Even if you have to go to a managed model someday the income will still be large.

Our income (including spending capital) in retirement will be far greater than that. The main point is though that the equity has to be realised and spent, we don't have children, and I really don't want to leave it all to the Gov (there will be something for friends and charities, wotsthat raised an interesting suggestion about setting aside one property for such a purpose, that is something that I will consider).

chucknorris

wotsthat wrote: »

If you're currently getting a yield (I think you mean yield) of 7.5% then whatever you're doing isn't low risk unless you've found an asset class where risk is being mis-priced.

No, my current gross yield is only about 3.75%, but as I said above, that doesn't mean anything (in terms of profitability). The 7.5% is very meangingful, it is my ROI (return on investment, funny Gen mentioned that above, as I am actually giving a lecture which covers ROI on Monday) on the equity that would be released when selling.

But as I said above, there is something to be said about accepting the reduction in income as payment for a less hassled lifestyle. It was only this morning that I said to my wife before she left for work 'if we completely sold up our income would drop by over £50k', she answered 'so it is a no brainer then'. But I don't think it is, but we wouldn't completely sell up anyway, she is 11 years younger than me and wants to keep her properties for longer.

What I am having to do, and it isn't an easy transition for me, because it doesn't come naturally to me, is to accept that I now have to switch from being an investor to much more of a spender. It should be easy, but after many years of investing for my future, I am only just starting to come to terms that that job has now been done, and it is time to move on and retire and start spending it. I have always worked hard (and played hard too), but I am now about to enter a different phase of my life.

wotsthat

mwpt wrote: »

I seen to recall you saying that your properties generated over £100k in income pa (I regard income as rental profit, not capital gains). If that is correct, why are you even considering selling? That's a huge pension if you are mortgage free in your primary residence and only likely to go up as the properties are paid down (presuming they're not on IO) and rents go up. Even if you have to go to a managed model someday the income will still be large.

I had you down as the bearish type but interested to note you think rents are only likely to increase and didn't mention the risk of falling capital values. Maybe we're near the top?

Let's face it - as far as problems go Chuck's is right at the top of the first world list. He'll work it out.

I listen and read quite a few early retirement podcasts/ blogs which can be characterised (especially US focused) by spend little, save hard, be a landlord, live off the rent.

It seems to me a high risk approach to cut spending to the bone, pack up work, and invest a high part of one's net worth in a rental property because if something goes wrong you don't have a job to fall back on and you don't have a big lifestyle to cut back on.

Landlording risk hardly gets a mention in UK financial independence circles and never in the USA.

chucknorris

wotsthat wrote: »

I had you down as the bearish type but interested to note you think rents are only likely to increase and didn't mention the risk of falling capital values. Maybe we're near the top?

Let's face it - as far as problems go Chuck's is right at the top of the first world list. He'll work it out.

I listen and read quite a few early retirement podcasts/ blogs which can be characterised (especially US focused) by spend little, save hard, be a landlord, live off the rent.

It seems to me a high risk approach to cut spending to the bone, pack up work, and invest a high part of one's net worth in a rental property because if something goes wrong you don't have a job to fall back on and you don't have a big lifestyle to cut back on.

Landlording risk hardly gets a mention in UK financial independence circles and never in the USA.

I completely agree, it has never been my philosophy to plan to enter retirement with the view to scrimping and saving, and continuing with the hassle of being a landlord, that doesn't sound good at all.

I remember sort of having this discussion with my mates when I was 18. They all said that it was best to party when you are young, and leave work/careers/staring businesses (I had already started 2 businesses when I was 18 in addition to my job) until you were older. But my view was the opposite, which was to work hard when you are young, to give yourself an easier time in your latter years, plus when you are young you can also play hard as well as work hard.

chappers

chucknorris wrote: »

CGT is an issue only in that it is significant (over £800k), I do like to be hands on, and I find tax interesting, but I have been thinking about consulting a tax specialist, but there isn't that much can be done to mitigate CGT:

1. We considered a move to the Isle of Man (that tax loophole has now been closed).
2. There isn't much point in sharing ownership of our properties, as both my wife and I usually use up our entire annual CGT allowance when bed and breakfasting our shares annually. The annual allowance difference would just be peanuts anyway.
3. We wouldn't want to disrupt our lifestyle by moving back into some of the properties (which would mitigate some CGT).
4. The bottom line is that although it is a lot of tax, I wish it was twice as much (the more you pay, the more profit you have made).
5. I have been thinking about (significantly) extending our home, selling it, then building a home (then repeat after a few years), that would give a return greater than 7.5%. So being a bit more creative with the equity is something that needs exploring, when I retire next year, I will have more time to look into this.

Yeah I agree, there isn't much you can do about it, initially we spread our assets between us and a Ltd company, but at this point it is pretty much irrelevant, I am over the allowance limit most years from developing property and our incomes are both over threshold too. How we release our equity is something I need to seriously think about now, our future plans also preclude the residential options too and as I said I am similarly minded as to your point 4.

With regards to the property developing it's something I get the impression you would enjoy, I certainly get a kick out of it and am of similar mind to you, I'm not ready to just sit around doing nothing.

What I am having to do, and it isn't an easy transition for me, because it doesn't come naturally to me, is to accept that I now have to switch from being an investor to much more of a spender. It should be easy, but after many years of investing for my future, I am only just starting to come to terms that that job has now been done, and it is time to move on and retire and start spending it. I have always worked hard (and played hard too), but I am now about to enter a different phase of my life.

Ditto to all of that, after spending years of being prudent it's hard to be a little reckless, but we are in exactly the same situation as you, with really no one to leave anything to and I am slowly coming round to the idea that there's no point dying rich, the challenge is judging your spending right to leave that zero balance when you check out.

With regards to the Blue Cross, we support them too, its where our current mutt came from, they do good work.

I remember sort of having this discussion with my mates when I was 18. They all said that it was best to party when you are young, and leave work/careers/staring businesses (I had already started 2 businesses when I was 18 in addition to my job) until you were older. But my view was the opposite, which was to work hard when you are young, to give yourself an easier time in your latter years, plus when you are young you can also play hard as well as work hard.

I wonder what would have happened if I hadn't been so wreckless in my earlier days blowing a weeks wages on a Saturday night running up debts etc. To a certain degree my sensible head came at a very lucky time, we bought our current house in 1996 when I was 27 and by the end of 1997 we had tapped into the emerging BTL market with two properties and by the end of 1998 had five, the same five we still own. In 2007 we somehow managed to get a mortgage on another property, despite me just having recently become self employed again, we initially rented with a view to developing, we fought the planners for ages finally selling the developed property in 2011, at the end of the property slump, for a substantial profit and have been developing since.
I have never considered myself lucky but have always seemed to jump into things at just about the most profitable time, and can assure you there hadn't really been that much forward planning, so luck must have played a big part.

To be fair we still party pretty hard and I don't plan on stopping just yet.