Property investing – milestone or millstone
We are in a terrible mess economically at the moment. What started out as a hairline fracture (a credit crunch) rapidly became a hefty old crack (or financial downturn). Then of course the whole thing shattered into recession.
At the heart of the current recession is property investment, and dodgy lending practices, with the invention and almost viral distribution of complex derivatives called collateralised debt obligations (CDOs). The solution is to cool off demand for property, and allow an orderly correction of property prices. This would require a further drop in prices of 50% or more, which would certainly not be a vote winner! And so everything possible has been done to patch up the property bubble, rather than letting sanity prevail.
A more profound question is whether property investment is a wise option, either during a recession – or at all. So let’s look at property as an investment vehicle. Firstly, it is important – despite all the hype – to understand that there are three kinds of people in property: homeowners; people who rent from a landlord; and people who rent from a mortgage bank. So to be clear, homeowners have no interest in the interest rate – because they are homeowners, not mortgage-payers!
So it is fairly obvious that the aim is to become a homeowner, but there are various routes to this particular destination. In his book Rich Dad Poor Dad, Robert Kiyosaki writes about the difference between assets and liabilities. He goes on to explain that many people spend their time unwittingly buying liabilities.
Contrary to what you might think, getting yourself a mortgage means adding to your liabilities. It costs you in interest payments, and anything you acquire that adds to your outgoings is bad. A lot of people bought buy-to-let mortgages over the last decade, and if done properly, produces a worthwhile asset rather than a liability. Instead of having to fund interest payments until the mortgage is paid off, your tenants pay your costs as rent. In this way, you have instantly converted a liability millstone into a useful investment milestone.
Finally remember to think creatively about your investments, and that things are not always what they seem. Ever heard of Ray Kroc? The man behind McDonalds. A man made wealthy through burgers, right? Wrong! The real money was made by leasing or buying store properties and then subleasing them to McDonalds franchisees at upto a 40% mark-up. So Ray Kroc was actually a savvy property tycoon, rather than the king of burger-flippers.
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June 24th, 2009 at 12:26 am
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