Tips On How To Cut Back Your Spending
Economy
Richard Surrey
Oct 15 2008
What you get out should only ever be assessed by what you put in. So lets look at
what you put in.
What You Put In
Well you can be assured that you’ll have to put in some of your hard earned cash!
But how much depends on what you’ve got and how much you’re willing to borrow. There
can only ever be two sources for investment – your cash and borrowed cash. Decide
which one of the three type of investors you are to then decide which yield calculation
is applicable to you. Lets look at the following table:
|
Investor
|
What you put in
|
Your Cash
|
Borrowed Cash
|
Description
|
|
High Risk Investor
|
Nil
|
None
|
Purchase price + Acquisition costs = Total cost of investment
|
Here you still put in nothing! The difference is that you borrow the whole of the
cost of the investment. That is the deposit, the mortgage amount, solicitor costs,
arrangement fees and valuation fees by way of a mortgage and unsecured borrowings.
On the surface the yield would again be infinity. However because you have borrowed
all the money your ability to service the debt will be dependent on the yield so
yield becomes very important. In fact out of all these three classes the yield of
the investment is the most important as it has to be compared to the average interest
rate you’re borrowing at. If the yield is lower than the average rate then the investment
will lose money. See further below.
|
|
Medium Risk Investor
|
Some
|
Deposit + Acquisition costs
|
Purchase price – deposit = Mortgage
|
This is the normal way people invest in property. You put in some but the bank put
in the lion share. Typical ratios of your money to the bank’s money are anywhere
between 15:85 to 40:60. So ultimately you want to know what return you expect to
get on your own money invested. This is called Return On Capital Employed (
ROCE
). Capital being another name for your own personal contribution to the investment.
|
|
Low Risk Investor
|
All
|
Purchase Price + Acquisition costs
|
None
|
If only! This investor is rich enough to fund the whole purchase price and acquisition
costs from their own savings. There are no borrowings. This investor needs to calculate
the yield so he or she can make a direct comparison with other investments.
|
So to calculate yield, as mentioned above, you simply divide what you get out by
what you put in and express it as a percentage:
What you get out x 100.
What you put in
So the magic calculations that need to be computed, based on what you put in and
get out detailed above, are:
|
Investor
|
Calculation
|
Description
|
|
High Risk Investor
|
(Annual Rent – Annual Mortgage Cost – Annual loan cost – Expenses - Tax) x 100.
Deposit + Acquisition Costs
|
This is the real cashflow inward to you after every expense including tax relative
to what you theoretically put in. It includes the borrowing cost of both the mortgage
and the unsecured loan obtained to purchase the property. Even though you have put
in nothing you have to assess whether the money you borrowed on an unsecured basis
is returning you a good yield.
|
