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

shellbell63

Oh & by the way - we haven't bought for a couple of years either, as the figures haven't stacked up.
Only now beginning to consider again.

Dithering_Dad

Max_Headroom wrote: »

Easy.


In your example you paid too much for the house.

You'd need to buy at a figure whereby the rental income covers a repayment mortgage. That way the house value becomes basically irrelevent in that once it is paid for, you get rental income regardless of value (although I suppose value could affect rental income, in that if prices dropped to £20,000 say, just to make the point, you're not going to get much rent as people would buy instead unless very cheap rent. Not very likely though!)

In addition, there will be (eventually) capital appreciation which, if nothing else, will erode your mortgage value, and of course rental increases in time.

It is a viable business, but like any business the numbers need to add up. They stopped adding up a few years ago but people kept piling in (foolishly) looking at historical capital appreciation for future profits.

Or to put it another way, you could buy a sandwich shop, look at costs and income and decide whether it's a viable business, but if the shop is £10 million pounds it won't be.

It's all about the numbers.

Cheers Max. I understand that the less you pay for the house, then the lower the mortgage is and so the higher the rental yield will be, but there is only so far you can push the house price down. Plus cheaper hosuing surely results in lower rent?

I also never see any real-world calculations that show the real costs over say 20 years of the investment. No one ever seems to factor all the costs of BTL (i.e. legal fees, stamp duty, mortgage arrangment fees during the house purchase, the mortgage arrangement fees, rental agency fees, dead rental periods, insurance costs, service costs, etc. during the lifetime of the BTL. Plus the legal costs of getting a bad tenant out of your property must be enormous (I know this is probably a rare occurance, but it does happen). Plus the cost of your time in dealing with the BTL and your tenants, decorating and maintaining the property, filling in Inland Revenue self assessment forms each year.

All of that opposed to simply putting your money into ISAs and sitting back for 20 years. It doesn't seem worth it.

GDB2222

Dithering_Dad wrote: »

Cheers Max. I understand that the less you pay for the house, then the lower the mortgage is and so the higher the rental yield will be, but there is only so far you can push the house price down. Plus cheaper hosuing surely results in lower rent?

I also never see any real-world calculations that show the real costs over say 20 years of the investment. No one ever seems to factor all the costs of BTL (i.e. legal fees, stamp duty, mortgage arrangment fees during the house purchase, the mortgage arrangement fees, rental agency fees, dead rental periods, insurance costs, service costs, etc. during the lifetime of the BTL. Plus the legal costs of getting a bad tenant out of your property must be enormous (I know this is probably a rare occurance, but it does happen). Plus the cost of your time in dealing with the BTL and your tenants, decorating and maintaining the property, filling in Inland Revenue self assessment forms each year.

All of that opposed to simply putting your money into ISAs and sitting back for 20 years. It doesn't seem worth it.

I think that BTL is all about timing your purchases properly. I didn't think there was anything worth buying for BTL in the London area for the last 8 years, or so. For it to make any real sense from an income point of view, you need a gross rental yield significantly greater than 10%, and that has not been available during that period. I like income-producing investments, rather than growth investments, because growth seems to be much more volatile.

On a rental yield of say 12%, it breaks down roughly as follows:
1% for voids
1% for maintenance
1% to agent
2% to me for dealing with all the flak
7% for cost of finance (be that my capital or mortgage finance, including a rather small risk premium)

That 12% is very high compared to the costs of owner-occupation, so I don't know if it will ever become worth buying for BTL again.

mewbie_2

chucky wrote: »

the obvious upside on BTL is the capital appreciation but short to medium term this is unrealistic - rental yields will very rarely make you money. the objective is not to make a profit anyway so you pay no tax on the rental income...

Right. I don't know why I am bothering but sometimes something makes you think "for the love of Pete". Wind back ten years, before the madness. Old time professional landlords always bought for rental yield, with a side order of capital appreciation (in line with normal house price rises) that helped the long term inflation proofing of their asset. Nothing has magically changed that formula - people always think it is different this time - no, it's not.

In the last ten years a succession of ever more misguided people have piled into pwoperty as though it was a get rich quick scheme. It was briefly, it ain't no more.

Now it is going to slump big time. Once it hits bottom - maybe four / five years - it might be worth a look for those who still cling to the idea. And if you really want to spend the rest of your lives running round after ungrateful tenants, and worrying about voids, repairs, and interest rate rises then you are welcome. Who knows, you might make a success of it, and be able to live the 'dream', or more realistically, like Rigsby from Rising Damp.

Most BTLs are taking a massive gamble on a geared investment. Would you borrow to invest in shares, or commodities, or art? Probably not. But it's as safe as houses innit? Er.. no it's not.

I don't hate BTLers. I just thought they were mad. But hey, each boom has it's proponents and I am just glad I managed to stay on the sidelines and resist the temptation to mortgage my future on a dream.

Like DitheringDad, I would love to see a link to a property, or proof of price paid, and some figures on rental income versus costs, etc. But I couldn't be convinced at the height of the madness, so I think it is unlikely now.

HammersFan

DD, The long-term view of BTL relies on some sensible gearing as well as getting some income month to month. I think you are off-target with your description of BTL as a mug's game (I think that's pretty inflamatory language by the way) - you ignore the effect of gearing over the long-term (think 40k in a BTL as deposit, break even month-to-month for 10 years - I will eat my hat if the average property price is not at least 80k higher in ten years).

Of course it's a case of having a balanced mix of different investments. Ithink the OP's strategy seems very sound - a paid off mortgage and a few BTLs for early retirement, terrific.

The very unpleasant tone of the whole debate paints many of the posters on here in a very poor light.

StevieJ

Would it not make sense to invest in some sort of property fund that buys and rents/manages houses, that way you would not have all the rubbish to deal with?

Dithering_Dad

HammersFan wrote: »

I think you are off-target with your description of BTL as a mug's game (I think that's pretty inflamatory language by the way)

I think I'm on target but I see what you mean about the inflamatory language. It was just a phrase, I didn't intend it as an indictment of the current BTLers who may have bought their properties prior to the boom. Apologies anyway for the implication.

StevieJ wrote: »

Would it not make sense to invest in some sort of property fund that buys and rents/manages houses, that way you would not have all the rubbish to deal with?

Exactly, and the fund would be invested in wide range of commercial properties throughout the country that would give you the gains from market appreciation and also the steady income from commercial rents, which are far longer (25 years?) than domestic. The other advantage is that if you save up a 'deposit' of 30k, only 10k need go into the property fund, with 10k in government bonds and 10k in equities. Diversification.

It's been an interesting debate, but I've decided that BTL just does not justify the returns (for me anyway). Forgive me for saying this if I'm wrong but it seems to me that a lot of people invest in 'bricks and mortar' simply because they understand it - after all they will have gone through the whole process when they bought their home. This doesn't necessarily mean it's a good investment.

mewbie_2

Dithering_Dad wrote: »

The other advantage is that if you save up a 'deposit' of 30k, only 10k need go into the property fund, with 10k in government bonds and 10k in equities. Diversification.

One of the key factors in the ability and eagerness of so many getting into BTL in the madness years has been that they didn't need to save up. It was all too easy to mew 20k out of your home, use that as a deposit, fluff up your income a bit to get a large mortgage, top up the rent for a few months / years and then sell at a fat profit. The beauty and the risk of gearing.

At least my currently failing investments, think shares for example, will not financially cripple me. But if I had borrowed heavily to fund those investments rather than saving (such an old fashioned concept), then I could be looking at an impossible to clear debt mountain.

Maybe I didn't have the cahones for it, or put another way, I am not now in danger of losing them.

StevieJ

mewbie wrote: »

One of the key factors in the ability and eagerness of so many getting into BTL in the madness years has been that they didn't need to save up. It was all too easy to mew 20k out of your home, use that as a deposit, fluff up your income a bit to get a large mortgage, top up the rent for a few months / years and then sell at a fat profit. The beauty and the risk of gearing.

At least my currently failing investments, think shares for example, will not financially cripple me. But if I had borrowed heavily to fund those investments rather than saving (such an old fashioned concept), then I could be looking at an impossible to clear debt mountain.

Maybe I didn't have the cahones for it, or put another way, I am not now in danger of losing them.

Fair comment, I forgot about the gearing.

Dithering_Dad

mewbie wrote: »

One of the key factors in the ability and eagerness of so many getting into BTL in the madness years has been that they didn't need to save up. It was all too easy to mew 20k out of your home, use that as a deposit, fluff up your income a bit to get a large mortgage, top up the rent for a few months / years and then sell at a fat profit. The beauty and the risk of gearing.

At least my currently failing investments, think shares for example, will not financially cripple me. But if I had borrowed heavily to fund those investments rather than saving (such an old fashioned concept), then I could be looking at an impossible to clear debt mountain.

Maybe I didn't have the cahones for it, or put another way, I am not now in danger of losing them.

I did think about MEWing when I typed 'saved up a deposit', but thought it'd open a new can of worms. I would also like to see our 'real world figures' with the added cost of an increased mortgage on the BTL/MEWers own home. Effectively the BTL will be on a 100% mortgage, which blows the rental yeilds out of the water.