Buy to Let now...or wait a year??

GDB2222

IveSeenTheLight wrote: »

I bought one of my BTL in Jan 2007 and it is profit making.

I think this may depend on how you define profit. Did it still make a profit if you allow for the capital depreciation since you bought it?

IveSeenTheLight

GDB2222 wrote: »

I think this may depend on how you define profit. Did it still make a profit if you allow for the capital depreciation since you bought it?

You assume capital depreciation, however in my area there has been very little of it.
Actually, since Jan 2007 on paper my property has increased by approx £25,000
If you look at http://www.hbosplc.com/economy/includes/25_07_08CountyHistoricData.xls you will see that between Dec 06 and Jun 08, average house prices in Aberdeen City increased 17.33%

Remeber though, that this is only a paper valuation and any house price appreciation or depreciation will only be realised at the point of selling.

At this time, I have no intention of selling the property for the next 25 years. It may drop on paper but over the next 25 years, I fully expect the capital valuation to be higher than now.

Dithering_Dad

IveSeenTheLight wrote: »

Dithering Dad:
I could divulge my BTL investment strategy in detail , however I don't think I follow the normal BTL.
E.g, rather than leave the mortgage high to benefit on allowances via tax, I am resolved to reduce that as fast as I can. It's not the most efficient way, but it is the safest risk way.

I've seen from some of your other posts, you query why BTL, when you can stick in a bank.
Just very simply, if you buy a property for 150k with a 30k deposit, then your investment is 30k.
If managed properly and you obtain a rental coverage throught the lifetime of the mortgage including running / maintenance costs, even without any change in the property price over 25 years, that property is now worth as an investment 150k
Puting the same 30k into a bank at 5% only gives you a 4% return after tax. Therefore after 25 years that 30k at 4% return is only 80k, therefore a 70k better return from property in this example than puting into a standard bank account.
In order to get a similar return you need a nett interest rate of approx 6.66% or 8.325% gross

The key is to ensure that enough rent is received to cover costs, which in my case, both my BTL's do and much more.
Possibly in the areas you are looking at this is not achievable and the figures don't add up. Its not the case everywhere though.

Thanks ISTL, I see the logic behind what you're saying but again I think it's a bit too convenient to just let 25 years of time pass and simply say that "the rent always covers the mortgage" because the mortgage rate will not go up to 9, 10, 12, 15% in the next 25 years, because you won't have any voids rental periods in that time, you won't have any tenants who refuse to pay rent and have to be ejected using the courts and a bailiff, the central heating boiler won't need to be replaced at least twice in 25 years, the carpets and decour won't need to be replaced/updated at least 4 times in that period....

Again its interesting that the savings account is only allowed to be 4%. The Halifax currently has a 10% savings account and even ISAs are obtainable (tax free) at 6%. Also no mention of how you raised the cash for your BTL deposit. If it was MEWed then you're now paying more on your home mortgage and this has to be factored into your sums.

Also interesting that we only mention tax in regard to savings and no mention of income tax on BTL profits. As time goes on and more of the BTL mortgage is paid off, a greater amount of the rent will be profit and will therefore be taxed at either 20 or 40% (dependant on your income), whereas the ISA remains tax free through it's entire life.

I think I'll have to agree to disagree with the BTLers here because we're going around in circles.

GDB2222

IveSeenTheLight wrote: »

You assume capital depreciation, however in my area there has been very little of it.
Actually, since Jan 2007 on paper my property has increased by approx £25,000
If you look at http://www.hbosplc.com/economy/includes/25_07_08CountyHistoricData.xls you will see that between Dec 06 and Jun 08, average house prices in Aberdeen City increased 17.33%

Remeber though, that this is only a paper valuation and any house price appreciation or depreciation will only be realised at the point of selling.

At this time, I have no intention of selling the property for the next 25 years. It may drop on paper but over the next 25 years, I fully expect the capital valuation to be higher than now.

Well, leaving aside the question of whether it's appreciation or depreciation, I don't think you should ignore it. If you ignore it, it can lead you into a fallacy where you effectively convert capital into taxable income. Ignoring it also leads you to ignore the effect of market timing.

Putting it another way, my share portfolio has given me a dividend income of 3% over the last year, but it has dropped 20% in value. I have no intention of selling it for another 25 years. So, you tell me, have I made a profit or a loss over the last year? My view is that I have made a loss, by the way.

IveSeenTheLight

Dithering_Dad wrote: »

Thanks ISTL, I see the logic behind what you're saying but again I think it's a bit too convenient to just let 25 years of time pass and simply say that "the rent always covers the mortgage" because the mortgage rate will not go up to 9, 10, 12, 15% in the next 25 years, because you won't have any voids rental periods in that time, you won't have any tenants who refuse to pay rent and have to be ejected using the courts and a bailiff, the central heating boiler won't need to be replaced at least twice in 25 years, the carpets and decour won't need to be replaced/updated at least 4 times in that period....

Again its interesting that the savings account is only allowed to be 4%. The Halifax currently has a 10% savings account and even ISAs are obtainable (tax free) at 6%. Also interesting that we only mention tax in regard to savings and no mention of income tax on BTL profits. Also no mention of how you raised the cash for your BTL deposit. If it was MEWed then you're now paying more on your home mortgage and this has to be factored into your sums.

I think I'll have to agree to disagree with the BTLers here because we're going around in circles.

I think most of the challanges you mentioned would be covered in my simple statement of "If managed properly and you obtain a rental coverage throught the lifetime of the mortgage including running / maintenance costs".

Now I know I used the standard bank net interest rate of 4% but I did also mention that equivalent bank interest rate for a property was 6.66% or 8.325% gross. If you can get higher than this then maybe this is a safer investment.

I didn't speculate on interest rates going 9%, 12%, 15% etc, but similarly I didn't speculate on the property capital value after the 25 years.
Incidently, I kept the standard 25 year period, but on plan, both my BTL's will be mortgage free in 8 1/2 years, therefore to achieve the same results in I would need a 22.35% net interest or nearly 28% gross. (I admit I am topping this up with additional saving so the figures are massaged here and not truly reflective)

You seem to have a good head screwed on in that you can consider all the issues, so you can calculate for yourself.

I am not doubting that the figures may not add up for your area, but it can and does in others.

IveSeenTheLight

GDB2222 wrote: »

Well, leaving aside the question of whether it's appreciation or depreciation, I don't think you should ignore it. If you ignore it, it can lead you into a fallacy where you effectively convert capital into taxable income. Ignoring it also leads you to ignore the effect of market timing.

Putting it another way, my share portfolio has given me a dividend income of 3% over the last year, but it has dropped 20% in value. I have no intention of selling it for another 25 years. So, you tell me, have I made a profit or a loss over the last year? My view is that I have made a loss, by the way.

Fair enough, this means you are viewing profitability against rental income and capital value. You obviously are happy to accept this loss (where in other businesses you couldn't) because you fully expect the capital value to recove and give you more profit in the long term (realising it at the time of selling)

I can agree that the capital valuation can affect the timing of selling, but for me this will be viewed much nearer the time in 25+ years time.

P.S. Presumably, you would see a profit in an appreciating climate even if your rental income was making a loss i.e. subsidising the mortgage. I've only ever bought when the figures are such that the tenants are covering the costs, not me.

carolt

IveSeenTheLight wrote: »

Just very simply, if you buy a property for 150k with a 30k deposit, then your investment is 30k.
If managed properly and you obtain a rental coverage throught the lifetime of the mortgage including running / maintenance costs, even without any change in the property price over 25 years, that property is now worth as an investment 150k
Puting the same 30k into a bank at 5% only gives you a 4% return after tax. Therefore after 25 years that 30k at 4% return is only 80k, therefore a 70k better return from property in this example than puting into a standard bank account.

But what if property prices fall? Then it isn't worth 150K at all.

Or what about the opportunity cost ie what if instead of buying your BTL, for argument's sake, at 150K, you waited until it's value had fallen to 100K. Think how much interest not to say capital you would have saved!

GDB2222

IveSeenTheLight wrote: »

P.S. Presumably, you would see a profit in an appreciating climate even if your rental income was making a loss i.e. subsidising the mortgage. I've only ever bought when the figures are such that the tenants are covering the costs, not me.

First point: yes. Second point: same here!

IveSeenTheLight

carolt wrote: »

But what if property prices fall? Then it isn't worth 150K at all.

Well if it falls, then it would be worth less, but then again, nowhere in history (even in Japan) has house prices been lower than they were 25 years previously

carolt wrote: »

Or what about the opportunity cost ie what if instead of buying your BTL, for argument's sake, at 150K, you waited until it's value had fallen to 100K. Think how much interest not to say capital you would have saved!

I agree with you here, if you think the house price you are interested in may go lower then probably it would be better to wait. But as I showed earlier, not all areas and properties have fallen. The property I bought in Jan 2007 has increased on paper by 17%. If I had waited it would cost me 17% more and I don't know if they will drop 17% to the level they were at in Jan 2007.
Sometimes waiting can see you miss out on an oppertunity.

shellbell63

A lot of the 'anti' BTL brigade seem to be tarring us all with the same brush. Believing that most of us have funded the deposit by 'borrowing' on own home or some other form of loan. That we've all jumped on the bandwagon, without a second thought. There are those who've been tempted into this - & I for one feel sorry for them. After all they are only trying to better themselves, as is the instinct of all of us.

The fact that we are here discussing it, seems to me that we are in the 'sensible' BTL landlords group. I for one, thought it thru', would never borrow to find the deposit. I have no intention of selling in the short term. And if the preverbial hit the fan, then I could pay off any mortgage. So defo no tenants on the street. Would only buy if all costs covered.

Here my take on it. We put 30k as deposit on house. If we'd put that into savings at say an average of 8%pa for 20 years, that would be worth - to us as higher rate tax payer - between 76 & 77000. In 20 years when we retire, if we use the interest on our 76 - 77k as an income, & assuming we still get 8%, but this is now tax free, we'd get £510pm.
Thats a lot less than our BTL is producing in rent now. With inflation, in 20 years I'd expect it to produce even more, but even if remained the same forever, we still get more back month on month from the BTL - even after contingency fund, insurance, replacement/renewals etc.
If, as with my inlaws, interest rates fell, we'd get much less interest per month, if money was in bank. However if BTL mortgage gone, interest rates will not affect our rental. Provided we've bought well & in a good area & keep property up together & nice, there will always be someone needing or wanting to rent - even if house prices were much more affordable than they are now.

Please don't shout me down in flames. I'm not a financial wiskid or expert. Just an ordinary punter, making a decision about their future - as we all do.