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bushblairandbrown

Btl accounting profit or loss

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A question really on how an investor would accurately deduce their return on investment in the first 5 years. With shares, its straightforward. Just calculate your outlay vs current value plus dividends. However, with btl, there are costs involved with maintaining the property. Many of these costs are irregular expenditure that is required once every 10-20 years eg a new boiler. How does one account for this?

On one hand, i would put it in capex, and depreciate over time. However, this is bs because the capital outlay is only weakly correlated with sale price and ripping a boiler out to sell second hand is pretty much a no starter afaic. So i think this has to be some sort of recurring cost. Now i would estimate in the case of a boiler it lasts 20 years before replacing so maybe I would amortise the cost over the 20 years, much like a capital depreciation. But then again i think this is optimistic. With property, many maintenance costs are once-a-blue-moon to the extent that you will have something as expensive and irregular as a boiler need doing every year. So perhaps the honest thing is to stick the whole boiler cost down as a recurring cost. 

This may seem like an odd irrelevant question but if you put these costs down as capex it's pretty much impossible to make accounts that recognise a loss since almost all your costs become investments. Could this be one of the reasons people are so unable to recognise the risk of investing in property and why they tend to have overblown expectations when they come to sell? 

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12 minutes ago, Drummer said:

(Annual Rent/purchase price)*100%

Ignore expenses in the equation

Dont bother completing a tax return.

Job done.

Nope

(Annual rent/(purchase price - deposit) )*100%

 

Agreed on the rest

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47 minutes ago, bushblairandbrown said:

That gives pretty spectacular returns. I assume sarcasm

Nope. Just superier inteligense.

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Good question. 

Most of the BTL'ers don't account for these costs correctly. They just see the gross yield on paper and treat it like a bank interest rate. 

I guess it would be easier if you had a pool of say 100 properties because the "average life" of say a boiler would stay relatively stable over time. 

Depreciation is a tricky one as it's very easy to get wrong either over or under depreciating. 

Personally I think I would calculate the service life of the short life fixtures in the house so boiler, kitchen,bathroom,carpets.  Calculate the replacement cost of the items and come up with a "Depreciation charge" to count against the rent. 

If the current market value of the house was less than the original cost + undepreciated improvements I would record that as an asset impairment on the balance sheet. 

 

Figures lie, Liars figures. 

As the crafty accountants have proven with a little creativity you can make the numbers what you want them to be. 

 

 

 

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I've often imagined such an entry appearing on @jiltedjen's brilliant leveraged BTL going bust thread: 3 months till boiler packs in; 2 months till storm blows tree on to roof, etc. 

But it's the sort of thing that could be on there as some imputed cost. If you bought a place to rent out, say, 10 years ago how much stuff would be teetering on the verge with no provision for it? Not even the landlord class is immune from the second law of thermodynamics.

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People also don't factor in the alternative investment return, benefit/happiness of spending that deposit on you and friends and family and the liquidity risk that comes with houses 

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Isn't it something like

% yearly gross yield  = (rental income - cost of debt servicing - insurance - maintenance - other expenses) / purchase price * 100

rental income = rent - voids

cost of debt servicing = (interest charged - 20% tax credit) + mortgage fees.

mortgage fees = cost of remortgaging / remortgage period in years

maintenance = cost of yearly services + replacement costs

replacement costs = cost of item / lifespan of item in years, summed for each item (boiler, roof, door, fence, etc.)

other expenses = agent fees, lawyer, stamp duty, etc. 

?

Edited by Captain Kirk
Thought of more

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1 hour ago, Captain Kirk said:

Isn't it something like

% yearly gross yield  = (rental income - cost of debt servicing - insurance - maintenance - other expenses) / purchase price * 100

rental income = rent - voids

cost of debt servicing = (interest charged - 20% tax credit) + mortgage fees.

mortgage fees = cost of remortgaging / remortgage period in years

maintenance = cost of yearly services + replacement costs

replacement costs = cost of item / lifespan of item in years, summed for each item (boiler, roof, door, fence, etc.)

other expenses = agent fees, lawyer, stamp duty, etc. 

?

Nope.

Bung the rents up innit.

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14 minutes ago, Si1 said:

Nope.

Bung the rents up innit.

That's where I keep going wrong. I need to ditch the pen, paper, spreadsheets and morals, and just believe in the bubble.

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1 hour ago, Captain Kirk said:

That's where I keep going wrong. I need to ditch the pen, paper, spreadsheets and morals, and just believe in the bubble.

 

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  • 298 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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