Put some of the money away for a rainy day and instead of buying one property for cash consider buying as many as you can with BTL mortgages and use the rest of the money for deposits.

You may generate more cash flow this way and spread your risk.

Agree with Simon completely . Great idea

(19-10-2012 12:24 PM)Simon Allen Wrote:  Put some of the money away for a rainy day and instead of buying one property for cash consider buying as many as you can with BTL mortgages and use the rest of the money for deposits.

You may generate more cash flow this way and spread your risk.

I agree with your theory but what percentage of rainy day funds to your overall debt would you put away?

To modify Ian's point slightly, the interest on debt which is used for investment purposes can be deducted as an expense item. Income minus expenses to compute profit. Profit is taxed.

It does not matter if the loan is secured on your primary residence or on an investment property. The deciding factor is what was the money used for. In other words, you can borrow money secured by your primary residence and still deduct the interest paid as part of the debt service.

Mike, What you invest in needs to fit your objectives. If you have a long time horizon and no need for the cash then real estate can make sense. If for some legitimate reason you will need the cash in the short term, the transaction costs associated with real estate plus the lack of liquidity could be a problem. In that case you need something that is valued daily and where there is a deep, liquid market. Or just stay in cash.

Real estate favors a more hands on approach unless you can find a really good JV partner or scheme provider where their track record balances out the risk of a passive investment.

The fact that paying down the debt on your primary residence does not produce much of a cash flow impact could be from many things. I am going to guess it is because the interest rate is not high. At the same time, paying down the debt might have a bigger impact on when the loan finishes and less of an impact on the monthly before the end date.

Sticking to UK real estate, you could decide to buy rentals or you could decide to fund short term projects. A buy, fix, sell situation where you get to recycle the capital more often without using leverage. If the deals stack, you might even use debt to help fund the projects.

What is best? Hard to say without a fair amount of personal detail. Some of that detail might be better kept private or discussed with an advisor of the forum. Not that there are any secret methods. Just that over sharing can attract the wrong sort of interest. More so if someone was to be sued and the information was used by a lawyer to justify taking on the lawsuit on a no win, no fee basis. Best not to provide bait.

Mike

There is no right or wrong re percentage to put away.It depends on your outside income,spare cashflow and debt repayment both secured and unsecured.

I met a client on Friday who has has sold their house. They need £4k per month to live. They are putting three years expenditure away and are going into rented accommodation.Others will have six months cash or plenty of credit available on their credit card.

How long can you survive if something goes wrong and what would you do to correct it? Answer that and you know how much to put away.

(20-10-2012 02:12 PM)mike_jones Wrote:  

(19-10-2012 12:24 PM)Simon Allen Wrote:  Put some of the money away for a rainy day and instead of buying one property for cash consider buying as many as you can with BTL mortgages and use the rest of the money for deposits.

You may generate more cash flow this way and spread your risk.

I agree with your theory but what percentage of rainy day funds to your overall debt would you put away?

Peoples view on this vary greatly and it depends partially on how risk adverse you are and what your own definition of putting funds away for a rainy day means.

Some say keep 20% of debt liquid. This is far too much for me personally. I float at around the 2% mark. By putting money into property that to me is cash Im putting away for a rainy day. I could convert it to tangible cash within a week if I wanted to or really had to. I might take a hit on it but its not much different really than putting it into a building society account which requires a months notice. The hit i would be take would over a period of years be cancelled out nicely by the cash flow and capital growth of that property which would compensate in the unlikely event i would suddenly need it as hard cash

To me all assets are liquid - its just they are held in slightly different jam jars

If I have bought an unencumbered `rainy day ` property worth 50K a few years ago and its now worth 75K I could sell it within a week for 50K cash if I had to. But I still get to keep the £5000 rent pa its been generating over the years. So 5 years I break even

Therefore I could argue then that that 50K should be included in my liquidity rainy day fund. But rather than keep it in cash / building society / bond / gold i chose to keep it in a property and earning me 10% yield and maybe 5% a year on its capital growth in `normal` times.

A mortgaged property is the same. You may have a 5% redemption fee but you can still sell it BMV tomorrow pay the erc and have your cash within 4 weeks or sooner. Rainy days by their nature do not often come about. And if you cant plan your life 4 weeks ahead then something has gone seriously wrong with your forward planning.

So leverage to the max and keep your rainy day cash in property -
Its the new liquid asset

Jonathan,

Your definition of liquidity is interesting. Many bankers through AAA rates CDOs were good investments as they also never realized how liquidity could dry up.

Each person has to make their own choice as you noted. That said, I still think believing a property is liquid and it could be sold quickly is not the same as actual in the bank.

(20-10-2012 08:03 PM)Jonathan Clarke Wrote:  To me all assets are liquid - its just they are held in slightly different jam jars

So leverage to the max and keep your rainy day cash in property -
Its the new liquid asset.

Jonathan,

I expect that you have a lot of unallocated cash flow so if your expensives are higher for a month or two you just don’t save the deposit for the next property. So your safety is in excess cash flow, this is not the case for a lot of people.

I don’t like the safety funds in property, as property value are likely to go down just at the time I need it the most. Say LHA was cut by 30%, what you that do to both your cash flow and your property values?

(22-10-2012 09:12 AM)ian2128038772 Wrote:  

(20-10-2012 08:03 PM)Jonathan Clarke Wrote:  To me all assets are liquid - its just they are held in slightly different jam jars

So leverage to the max and keep your rainy day cash in property -
Its the new liquid asset.

Jonathan,

I expect that you have a lot of unallocated cash flow so if your expensives are higher for a month or two you just don’t save the deposit for the next property. So your safety is in excess cash flow, this is not the case for a lot of people.

I don’t like the safety funds in property, as property value are likely to go down just at the time I need it the most. Say LHA was cut by 30%, what you that do to both your cash flow and your property values?

Ian

Its very true that my cash flow per month is factored in as part of my liquidity. So my need for cash reserves (not accounting for that monthly income) maybe I agree less than others. Its getting the balance right. Mark Alexander I recall keeps 20% liquidity on debt . That is 200K cash for 1 million pound of mortgages! To me that excessive but fair play to him if that is his comfort zone thats fine. He knows without a shadow of a doubt hes covered. There was a guy on here the other day (sorry i forget who) who had 4 properties and a 22K safety fund which was about 10% I believe of his debt. Again too much for me. That could be held in another property.

If your finances are in order and your credit rating is sound then applying for a pre approved 25K personal loan could be classed as your rainy day emergency fund. In addition an overdraft facility with your bank of say 10K can be negoiaited to also act as a buffer. Likewise a property can be included in your safety net. Its of course arguably more complicated to access but if needs be contracts can be exchanged in 48hrs with the right buyer if your world caves in unexpectantly.

With regard to property values going down yes you have to factor that in. The longer you have been in the game the easier it gets. The way i see it is that if you bought a 100K BMV property 5 years ago and added some value to it it maybe worth 150K now so you could treat it as a bonus liquid property.

You have a 75% LTV mortgage on it. Lets say property prices go down 10% and you need to sell it quickly to a cash buyer for 20% BMV to release some emergency cash to fly your friends daughter back by air ambulance from Australia .
10% of 150K is 15K = 135K - 20% BMV = 108K
You sell cash for 108K to an investor and get 33K ( minus costs ) to pay for your friend.

Hopefully one never never has to do that but it is an option.
Some people save buckets of cash and insure themselves up to the eyeballs all their lives but never have the need to spend the cash or claim and so their investment opportunities or their premiums are wasted. Some pay £300 pcm into BUPA in case they are run over by the proverbial bus. I dont but its a personal choice of course.

LHA is fixed for a year so from April to April I have a fixed income. A 30% reduction is not possible. Next year it will be set again. Putting aside UC for one moment the rents have gone up over the past year so its simply not realistic to expect a 30% cut. If there was due perhaps to vicious capping then I would adjust accordingly. The simple answer would be I would make 30% less money. By stress testing your portfolio whether you have 4 or 40 properties you can cover yourself and forward plan for these mishaps if they occur. I would look to top ups more. I would look at natural wastage of LHA tenants when there contract is up or they move on or look to Sec 21 or Sec 8 those who will struggle to pay the contractual rent

All said and done its ye ol `cash flow is king` proverb which stands firm throughout and sees you through the good and bad times.
Get it right for your own individual circumstances and the world is your oyster!