FSA Warns of Dangers of BTL

silvercar

yield measured against current value is important as it indicates how marketable the property would be as an investment.

IveSeenTheLight

A LL who bought 40 years ago may have paid only say £2k.

If they take in £800 per month, are you guys believing the rental yield is 480%.
If you believe that they would never sell.

If that property had a current value of £250k, then the rental yield is only 3.84% and then they could find it is better to sell and re-invest where they can get more than the rental yield percentage

This is why you work out on a current valuation and not the purchase price

You would use the purchase price if you were considering buying a property for BTL, not after you have bought it.

HelpWhereIcan

chucky wrote: »

it depends how you calculate your yield.

you can calculate it from:

price paid for property vs income
outstanding loan vs rental income
estimated property value vs rental income

all 3 are useful and different ways to calculate yield and are important to see what your yield actually is.

I would only use 3 for the reasons iveseenthelight states. As s/he says it can be useful in the decision making process for when/if to sell a property - especially when taking into account the risk it offers compared to other asset classes as dunstonh points out.

BTL is risky because of the gearing and the fact that your eggs are in one basket (a single property) which is pretty illiquid.

However, I don't think the traditional yield calculations provide the full picture when looking at a property that is mortgaged (as most are).

I use return on capital employed - in other words the return I am getting on the money I have spent.

Recent Example:

Property Value: £125000

Price Paid : £88000

Mortgage amount: £66000 (now £158.95 pm)

Rental Income : £450 pm (£5400)


The capital employed is £22000 deposit, approx £2000 purchase costs plus about £3000 refurb costs: total is about £27000

Property is self managed so return allowing for 1 mth per year void (ARLA Average) is £ 4950

Less Mortgage: 1907.40
Less Insurance: 380

Costs: £2287.40

profit = 4675 - 1907.40 = 2662.60

The property stands at £27000 capital employed so 2662.60/27000 * 100 = 9.86% (11.52% if you assume no voids)

If that £27000 was in a deposit account it would not be earning anywhere near that.

Drops in interest rates means that the mortgage costs less now so the ROCE goes up. Rises in rates may make the ROCE fall to the point that the risk outweighs the reward and the yield calculation based on value means that it is worth selling to reinvest the whole in a better performing/lower risk asset class.

That obviously ignores the negative risk of gearing which means that you can lose more than you put in, but based on the property being bought at well below RICS valuation and that it is one in an area of rental demand it is a risk minimised as much as possible.

The need to keep reviewing these things and making further decisions based on the overall picture is the reason BTL is harder work than most have given it credit for and why it should only be part of an investment strategy not the whole.

RomansProperties

chucky wrote: »

that's a decent loss!

i carry a small loss on one of my BTL's - about £50 a month.
i would not be comfortable with 800 euro

I used to make a lose on 2 of my properties until the rates dropped and they were on tracker mortgages.
People are forgetting when deals end and you go onto Base rate trackers of LIBOR trackers then the buytolet might actually make more sense

KKevin_2

Its has worked in Reverse for me

I bought an ex-council flat this time last year for £80k, i put down a 15% deposit which left me with a mortgage of £68k which was on a tracker interest only mortgage.

As i got a tenant in straight away i was getting £400 per month and my interest only mortgage was £300, due to the interest rates falling, my mortgage is now just over £100 which is therefore giving me a profit of £300 a month which isnt bad for a £12k investment.

RomansProperties

???? Street
6.49 Fixed £220,000£122,40056£7,944£1,420£25,636£16,27211.65
This is how I work out my returns.

RomansProperties

Property Address

Fixed Rate

Value

Mortgage

LTV

Repayments (PA)

Expenses

Income

Profit/Loss

Return

???? Street

6.49

£220,000

£122,400

56

£7,944

£1,420

£25,636

£16,272

11.65

Sorry forgot the headings

Kev09

I was buying BTL's simply on the basis that if I took an interest only mortgage, I could get 1.5 x the rent to cover the mortgage as I plan to hold them for a very very long time i.e. pretty much never sell them! this seemed to work for me however it meant that the most expensive flat I bought was 80k, and for that I had to go a hunting around different parts of the country (Scotland). One of my mortgages tracks base rate with no lower ceiling it is about £60 per month, and I get £375 for the flat. Happy days! on the downside I stopped by flats before the boom peaked and bought a whole load of shares mostly in financials and mining stocks! fool!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

right now am investing in nothing! too scared!

Cleaver

IveSeenTheLight wrote: »

Do you own property or rent?

I think 'live with parents' may have a been a sensible third choice to offer him.

Cleaver

RomansProperties wrote: »

???? Street
6.49 Fixed £220,000£122,40056£7,944£1,420£25,636£16,27211.65
This is how I work out my returns.

Glad I'm not your accountant. I don't speak binary.