This blog is devoted to those of you who want to maximise your money. And it follows on from last week’s blog about me wondering whether to sell up and re-organise the way I run my life.
Those of you who have followed my writings for years will know some of this.
And some of you asked about the band I fronted way back in the eighties. If anyone’s interested here is a clip from a tv appearance we did which includes a video of our first release:
Somewhere I should have some material from our longest tv appearance, which was at prime time. Once upon a time there was a tv program called Sixty Minutes. We were featured throughout the whole program as we performed silly sketches from our Mocker Olympics, which took place at the old sports track where Westfield shopping centre now is.
OK, back to the plot.
Let’s start with the easy bit; how to value a house.
If you want to buy a house and live in it, that’s fine. But if you want to use that house to leverage your income, then you have to be smart.
It’s interesting to ask an estate agent what your house is worth, but that wont help you. You need to leverage your own funds against a narrative. Let me explain.
The average person buys a house, sells it when they want to move, and then buys another. That’s fine. But if you want to make your house do more work you need to start thinking. And what is my favourite phrase here? DO THE MATHS! Such a simple phrase. Such a simple concept.
Almost nobody does of course. I have said that I am looking to move. The first thing I did, just for a laugh, was to ask an estate agent to come and value my house. Two came, both were ladies, but for all I know the men would be the same. The agents each asked me the same question: “What figure were you looking for?” In other words they wanted to know how much money I wanted to sell the house for. For the record I refrained from laughing.
A more useful way of valuing a house is to measure the square meterage, and multiply it by the local sale average per square metre. In my case this gives me a value of €616,000. That’s the local average. I have four bedrooms, that’s above average. My garden is one hectare or 2.25 acres. I have a cottage in the grounds and a rather nice gazebo, and of course I have a swimming pool. Let’s say a conservative sale price might be at least €750,000. But if I count in the other cottage, that changes to €950,000.
The real way to value the house, however, is to relate to its commercial worth. There are a few rules here.
A base way of working that out is to assume you were using the property to make money. That would mean renting it out. Valuation would be roughly ten times annual income. So what’s the going rate for similar rentals?
I could use the holiday rental rate, or the long term rate. Holiday lets are more expensive, but they are more work, and a true business would have to factor the cost of change-overs plus replacement costs, cleaning, and all sorts of sundry wear and tear costs. You dont get that with long term rentals, just average maintenance costs. Long term rent for my place would be about €1,500 pcm. That works out to €18,000 a year.
Take off 10% for repairs, that brings us back to €16,500 a year. I ought to add in the rates, but let’s keep things simple for the time being.
Now multiply that last number by ten to get the commercial valuation of your house as a business: €165,000.
That does not sit happily with the assumed valuation of the house as a sale item. In fact the figures are so far apart we can safely say that house prices here in the Algarve are way, way into bubble territory. That doesn’t mean they are at a top, but I prefer to act before the drop begins. One takeaway from the above is that a would-be purchaser should be looking to rent rather than buy.
Based upon the above figures I really ought to sell.
I now need to look at the market drivers. Local buyers are non-existent at these prices. With the current situation in Germany, with their industrial base collapsing, German citizens are looking to leave. Where will they go? Maybe to the Algarve. The same is true of the Brits and Scandinavians, so there is probably a backlog of buyers round the corner. Perhaps I should hang on.
Once again, Let’s do the maths.
For sake of argument, let’s say I simply move across to Spain. Here’s how things work out.
First assumption is that I stay here in the Algarve and wait for a maybe better sale price. What’s my financial position?
I’m going to assume I’m comfortable living on €2,000 a month. You can substitute your own figure. This is just me explaining a method.
The alternative is that I sell. I can invest money and get back several different amounts. I have two investment deals on my table at the moment. One will return me 17% p.a. Another will give me 12%. I could also invest in local property outside the Algarve. That would mean buying a ruin for €30,000, and doing it up at a cost of €40,000, and selling for €140,000. Doing one transaction a year would give me an annual income of €70,000 minus 28% tax (€19,600).
Let’s call that the equivalent of €1,000 a week in income.
Now suppose I rent a place in Southern Spain for €1,000 a month. I could in fact do better than that. I would have a home, but I would now also have an income of €5,000 a month.
(4,000 + 2,000 - 1,000.) And I still have a rather large capital sum keen to make me more money.
On the other hand, let’s be really pessimistic. Let’s assume I only get 10% on all my capital, and I’ll assume the lower sale price (€750,000). I would still be getting €6,000+ a month.
So what on earth am I doing living in this ridiculously expensive house? A sane person would sell up, rent, and giggle all the way to the bank. After all, if I reduce the matter to maths, living in this house is costing me €6,000 a month. What! I must be potty!
Think about it! There is a little maxim that I learned. I was extrapolating from that rather good American phrase: You dont own stuff; stuff owns you. Why do I need to own things? What I really need is to be able to use things. If I follow that lead I get to conserve my capital and put it out to work for me while I live according to currently the hip business principle: sale as a service. That’s probably what you do when you use software, and online services, so why not apply the same principle to where you live?
Think about it. And do the maths!
And if you want a follow-up to my previous article on Spain, go here for the next instalment. It’s about English ladies abroad and their obsession with charity shops, and what they get up to with the local cats:
https://www.property.org.uk/unique/blogs/Algarve/English%20Ladoes%20Abroad.shtml
How to Make Money From Your Home