Chasing the BTL Dream

Conrad

mewbie wrote: »

Anyway I'll keep looking - it's the way to get rich obviously
.

My rich clients tend to just buy property,let a tenant pay the mortgage and hey presto in 20 years time they end up even richer. Certainly a lot richer than the which magazine reading supa saver ladybird account types.

Problem with pessimists is they think too much.

Conrad

mewbie wrote: »

Corporate bonds currently yield anything up to 9%, tax free and no lightbulb changing.

You trust other people to package up and manage you future then?
You forget many LL's have been down the packaged investment route in the past and found it wanting

Thrugelmir

caroline2960 wrote: »

<However the service charges come to 200 a quarter. 800 a year. So now I'm 500 quid behind >

But at the end of the mortgage period, 25 years or whatever, you will have a house with no mortgage which has cost you approx 500 quid a year, not a lot for a nice little pension fund when the time comes.

C

But there's been no allowance for repaying the capital balance on the mortgage , which would be paid out of after tax profit.

The capital balance of £63,750 would require a pre tax profit of £79,688.
Or in simple terms a monthly profit of £266 over the 25 term of the mortgage.

So a BTL investment potentially requires an ever increasing annual rental stream to fund the capital element of the mortgage. ( Thats why rental yields need to a lot higher at the outset of the investment than 5%).

If income tax rates this will also increase the required profit.

The figures above are for a 20% rate taxpayer. For 40% even worse.

chucky

Thrugelmir wrote: »

But there's been no allowance for repaying the capital balance on the mortgage , which would be paid out of after tax profit.

The capital balance of £63,750 would require a pre tax profit of £79,688.
Or in simple terms a monthly profit of £266 over the 25 term of the mortgage.

So a BTL investment potentially requires an ever increasing annual rental stream to fund the capital element of the mortgage. ( Thats why rental yields need to a lot higher at the outset of the investment than 5%).

If income tax rates this will also increase the required profit.

The figures above are for a 20% rate taxpayer. For 40% even worse.

have you included the 10% Wear & Tear allowance?
that will be 10% of your rental income that can be used to repay capital...

if you do repay capital - the interest on the debt that you service decreases allowing for further capital repayments and even lower interest on debt and more rental income that is available to repy debt and so on and so on....

Thrugelmir

chucky wrote: »

if you do repay capital - the interest on the debt that you service decreases allowing for further capital repayments and even lower interest on debt and more rental income that is available to repy debt and so on and so on....

Totally agree. At 5% the yield is too low though. I doubt many people bother to calculate what after tax profit they need to achieve over a 25 year time frame to repay capital.

At a flat 6% interest rate over a 25 year period. The mortgage will cost £124,800 to repay. £63750 capital and £61,050 interest.

Interest is offsetable. So the Gross rental income required is £124,800 plus £15,938 tax = £140,738. The deposit of £21,750 would grow to around £73,500 if invested at a compound rate of 5% in say an ISA. So the pure cost of acquiring the property is £214k (rounded).

So on a 300 month rental term. The property would need to be let at average £713 per month.

At a base point of £420 per month. By year 25 the rental income would need to be £1006 per month or increase at a compound rate of just over 3.75% per annum.

This is all on the basis of no voids, changes in interest rates or changes in taxation rules. Not enough margin of comfort in my view.

chucky

Thrugelmir wrote: »

Totally agree. At 5% the yield is too low though. I doubt many people bother to calculate what after tax profit they need to achieve over a 25 year time frame to repay capital.

At a flat 6% interest rate over a 25 year period. The mortgage will cost £124,800 to repay. £63750 capital and £61,050 interest.

Interest is offsetable. So the Gross rental income required is £124,800 plus £15,938 tax = £140,738. The deposit of £21,750 would grow to around £73,500 if invested at a compound rate of 5% in say an ISA. So the pure cost of acquiring the property is £214k (rounded).

So on a 300 month rental term. The property would need to be let at average £713 per month.

At a base point of £420 per month. By year 25 the rental income would need to be £1006 per month or increase at a compound rate of just over 3.75% per annum.

This is all on the basis of no voids, changes in interest rates or changes in taxation rules. Not enough margin of comfort in my view.

initial buying price, rental income and finance are the important things to consider - unless these are correct it's not going to work.

you know what you're looking at but unfortunately the OP doesn't.
he's assuming that any property is suitable for BTL - they're not, you have to be careful and know what you're looking at.

he's not being serious anyway - the thread is desperate hunt for Thanks

mewbie wrote: »

Anyways. I spied an 85k flat which could probably rent out for about 450 a month. Allow for voids 10 x 450 = 4500. 85k x 5% borrowings = 4200. So a nice profit on my 85,000 pounds of 300 hundred pounds a year. Not bad I thought.

However the service charges come to 200 a quarter. 800 a year. So now I'm 500 quid behind.

Plus I can't borrow the money anyway because apparently I need a deposit and get this - the fascists want the rent to cover the mortgage payments by 125% or something ridiculous.

IveSeenTheLight

Thrugelmir wrote: »

So a BTL investment potentially requires an ever increasing annual rental stream to fund the capital element of the mortgage.

You've said this a couple of time and I do not understand your point.

As the years progress, the interest required on the capital is reduced and more capital is re-paid, therefore why do you need an increasing annual rental stream?

Of course as rents are generally increased over time, this only goes toward repaying the capital quicker and reducing the amortization period.

IveSeenTheLight

Thrugelmir wrote: »

Totally agree. At 5% the yield is too low though. I doubt many people bother to calculate what after tax profit they need to achieve over a 25 year time frame to repay capital.

At a flat 6% interest rate over a 25 year period. The mortgage will cost £124,800 to repay. £63750 capital and £61,050 interest.

Interest is offsetable. So the Gross rental income required is £124,800 plus £15,938 tax = £140,738. The deposit of £21,750 would grow to around £73,500 if invested at a compound rate of 5% in say an ISA. So the pure cost of acquiring the property is £214k (rounded).

So on a 300 month rental term. The property would need to be let at average £713 per month.

At a base point of £420 per month. By year 25 the rental income would need to be £1006 per month or increase at a compound rate of just over 3.75% per annum.

This is all on the basis of no voids, changes in interest rates or changes in taxation rules. Not enough margin of comfort in my view.

Why do you add on the theoretical £73,500 to the cost of the property?
You've shown that the cost of the property is £140k (capital, interest and tax).
The £73.5k is merely a comparison of what the inital deposit would net compounded at 5% over the 25 years, it is not an actual cost.
Effectively you are need to compare this £73.5k against what the property will be worth in 25 years time

Thrugelmir

IveSeenTheLight wrote: »

You've said this a couple of time and I do not understand your point.

As the years progress, the interest required on the capital is reduced and more capital is re-paid, therefore why do you need an increasing annual rental stream?

Of course as rents are generally increased over time, this only goes toward repaying the capital quicker and reducing the amortization period.

A repayment mortgage is flat over its term, ie equal amount. On the assumption that interest rates don't change.

However the % split of capital and interest does.

So for example on a £100k loan at 6% over 25 years. The repayments are £644.30p per month.

In year 1 . Interest totals £5,951 and Capital Repaid £1,780
In year 15. Interest totals £3,617 and Capital Repaid £4,114
In year 25. Interest totals £245 and Capital Repaid £7,486

Only interest is offset against rental income. the capital element has to be repaid out of after tax income.

So what I am saying. Is that as the capital element repaid increases so the underlying rental income has to as well. The increase in rental income has to also factor in the prevailing rate of income tax.

In the example above. In year 25. The property would need to generate a pre tax profit of £9,357 to cover the capital repayment (at 20% tax). As opposed to £2,225 in year 1.

mewbie_2

Harry_Powell wrote: »

Please find me one, just one, that I can invest in today and receive anything close to 9%. Pretty please .

Well, er, you may have missed the boat - lol.

Seriously there are plenty of high yield bonds out there - dyor.