UK House Prices: Cash Flow VS Capital Profit

You might have in your head that you want to be in the property business for either regular cash flow or long-term profit. But why not aim to have both?

Sophisticated investors use strategies that allow them to benefit from sustainable cash flow at the same time as building long-term assets for the future.

Are UK house prices rising or falling?

Did you know that UK house prices rose at the fastest annual pace in 10 months in January, according to Nationwide?

But then it slowed in February and stayed steady in March. This illustrates the vagaries of the market, and why you must always be prepared to be able to ride out fluctuations and the dreaded negative equity (when a property loses value to the point that it is worth less than the mortgage on it).

Nonetheless, my thoughts are that, since we live on an island, there is going to be a limit to the number of houses that can be built. As we are a growing population, there is going to be more demand for properties. So, as a long-term asset for wealth creation, property remains a good choice.

Should I aim for positive cash flow or capital profit in UK house investment?

It is fairly common for people to focus on the idea that capital profit is made upon selling a property.  However, I don’t look at it like that.

I want to make a profit as soon as I buy, which is achievable in two ways:

  1. Buy below the market value
  2. Add value, for example by extending or modernising the property

That way, if the bottom falls out of the property market in the next few years, I have already made an – as yet unrealised – profit. I’m not relying on market conditions to build up my equity, making any capital growth a bonus.

Another widespread mistake when buying a house in the UK, is that of having to pay out more money than is coming in monthly, because the property needs expenditure on it – such as the mortgage, insurance, repairs, etc. – beyond that of the rent being received. You may argue that this is a loss leader – in 10 years the property will be worth double what you paid for it.

That’s a possibility, but how much will you have paid out in that decade? Far better to work out your sums properly to have positive cash flow, plus have the peace of mind of that earlier-mentioned profit achieved through buying below market worth and then adding value.

Then you have the best of both worlds – but there is one more caveat.

How does UK housing investment determine my profits?

How you choose to (hopefully) make money from property investment is critical in relation to your tax bill. As a property investor you pay income tax on your rental profits, whilst a property trader pays capital gains tax when selling properties. A good accountant will be able to offer you guidance on how best to set up your property business in line with your wealth creation goal.

*Please note, that the content of this article is for information purposes only and should not be relied upon when making business or legal decisions. It is recommended that you seek the help of appropriate professiinals to assess your needs fully, before making any decisions and/or making changes.*  

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