I specialise in low value properties.  I typically buy a property for around £30,000.  This requires a £5,000 initial investment from me which includes the deposit, legal fees etc.  Every time I get hold of £5,000 I’m itching to buy a property.
 

Now consider this.  I’m walking past a car showroom and I see my favourite car, a Mercedes 300SL for £20,000.  it’s a bargain, I’ve got £20,000 in the bank and its in my favourite colour – BLACK!  Should I buy it?  If I did buy it for cash it wont cost me £20,000.  It will cost me what I will lose in the future as a result of the purchase.  To see the calculation of what I would lose then click here.
 
For those who wish to take my word on it then is £22,200!  That’s an annual salary for someone!  If the £20,000 that I had in the bank was as a result of a remortgage then the figures are even worse.  £20,000 borrowed at 5% makes you a further £1,000 worse off.  And if you don’t redeem the debt after 1 year then it will cost you £1,000 year after year after year.  If you let it run till the end of your mortgage term you may end up paying more interest than the price of the car!  Very bad for your wealth.

I’ll be honest with you however.  I do own a Mercedes 300SL worth £20,000!  But you’ll be damn sure I didn’t pay for it for cash.  I bought the car on HP at 17.3% APR.  It costs me £462 per month which is paid for out of my £600 pcm profits generated from the property purchases made.

The principle is – preserve your cash!  Wherever you can get sensible credit (less than 20% APR) then take it.  As long as you are willing to invest the money you have you can always service the credit you get with the profits you generate. 

Ajay.

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Posted on: 26th February 2008 @ 14:34:00