The words ‘price’ and ‘cost’ seem interchangeable, but actually they can be two very different things. For example when you buy something online, the price may be £100, but when you add postage, the overall cost comes to £105.
The most important of these two words is cost. Cost indicates how many pounds have left your pocket at the end of the day. The price can be a good guide in some circumstances but not in others. For example when you see things for sale for a penny on selling sites, then when you click through the postage is £10 and they are just using a sneaky sales tactic.
When you are buying houses you need to look at both the price and the cost. Obviously you want to get as good of a price as possible, but you also need to ask yourself what is the cost is?
For example, you are looking at two identical properties, one is freehold, the second is leasehold with a ground rent of £1,000 per year. Here the price you are willing to pay for the second property should in theory be at least say £20,000 less than the first. In reality this probably wouldn’t happen however for a few reasons, firstly because we are focused on comparing property prices, and secondly because too often the fact that the property carries a hefty ground rent is only revealed once the prospective buyer is well down the line.
Another example that is very relevant following pensions freedom, is looking at the tax paid when taking money out of your pension pot in order to purchase an investment property. For example if you were to withdraw a gross pension pot worth of £140,000 which the taxable part is subject to higher rates due to your employment income, then you would be paying around £21,000 extra tax which you may not have paid, had you waited until you retired and withdrawn gradually over a number of years. The extra tax paid needs to be added on to the purchase price of the property and all other fees and taxes to determine the overall cost. This will probably show it to work out as a very poor business move overall.
The price two people may pay for something may be the same, but the cost to those people could be very different.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner
24th October 2016