Chasing the BTL Dream

Thrugelmir

IveSeenTheLight wrote: »

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

I would call it "lost opportunity". The deposit money could be invested in other number of investments. (Including I should add a pension which would have uplifted the capital by 20% or 40% at the outset).

So the true cost of the investment is actually far higher.

chucknorris

mewbie wrote: »

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

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

Well as I said earlier to be tax free they have to have at least 5 years left to maturity, so that excludes quite a lot of bonds on offer. Where are you looking? Here is a link to the corporate bond table at self trade, as you can see most bonds pay well under 9%:

http://fixedincomeinvestor.selftrade.co.uk/x/mem_selftrade/bondtable.html?groupid=4


Could you post a link to the website you have please

geoffky

i could buy ten flats tomorrow...but what is the point? i have enough money to last my lifetime and leave the children a big wedge..so why do people take the risk,, as it is a risk.. its like a obsession for more...

HammersFan

Thrugelmir wrote: »

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.

I think you are over-complicating it a bit. My view is that there are a few strategies.

1. Generate 125% or more of the mortgage interest through rent. Use surplus to maintain or improve the property and any that's left stick in savings. At the end of the term, just take the equity growth. Of course there might not be any, but over say, 15+ years, very unlikely.

2. Pay back the mortgage using any surplus on a repayment loan. In my view a bit riskier as it ties up captial and is not tax efficent, but gives peace of mind that at end of the term the house is paid for and can generate an income (plus being an asset).

Both stragies 1 and 2 involve investing a deposit. Probably about 35% or more to make it workable. Therefore, you'd have to subtract the interest you could have gotten on that elsewhere from any overall profit.

But unless I am missing something, in both cases there is a decent chance of doing alright out of the deal.

3. Combine 1 and 2 by having one interest only BTL (lower monthly costs) and using the surplus to pay down a second BTL which is on a repayment mortgage. Obviously more complicated than this, but it could work quite well. Advocates of this argue that there is no need for property prices to rise for this to work.

Another way is to take any profit and use it to pay down your residential mortgage.

In my experience the first year or two of BTL is tight but it soon settles down.

mewbie_2

chucknorris wrote: »

Well as I said earlier to be tax free they have to have at least 5 years left to maturity, so that excludes quite a lot of bonds on offer. Where are you looking? Here is a link to the corporate bond table at self trade, as you can see most bonds pay well under 9%:

http://fixedincomeinvestor.selftrade.co.uk/x/mem_selftrade/bondtable.html?groupid=4


Could you post a link to the website you have please

Here you go mate - 9% ish - tax free.

Thrugelmir

chucknorris wrote: »

Well as I said earlier to be tax free they have to have at least 5 years left to maturity, so that excludes quite a lot of bonds on offer. Where are you looking? Here is a link to the corporate bond table at self trade, as you can see most bonds pay well under 9%:

http://fixedincomeinvestor.selftrade.co.uk/x/mem_selftrade/bondtable.html?groupid=4


Could you post a link to the website you have please

Thats because the quoted yields are if held to maturity. As prices for a lot of the bonds are priced over par you would incur a capital loss on redemption.

Some investment funds allow you to choose between income and capital (units or shares).

Thrugelmir

HammersFan wrote: »

I think you are over-complicating it a bit. My view is that there are a few strategies.

1. Generate 125% or more of the mortgage interest through rent. Use surplus to maintain or improve the property and any that's left stick in savings. At the end of the term, just take the equity growth. Of course there might not be any, but over say, 15+ years, very unlikely.

2. Pay back the mortgage using any surplus on a repayment loan. In my view a bit riskier as it ties up captial and is not tax efficent, but gives peace of mind that at end of the term the house is paid for and can generate an income (plus being an asset).

Both stragies 1 and 2 involve investing a deposit. Probably about 35% or more to make it workable. Therefore, you'd have to subtract the interest you could have gotten on that elsewhere from any overall profit.

But unless I am missing something, in both cases there is a decent chance of doing alright out of the deal.

3. Combine 1 and 2 by having one interest only BTL (lower monthly costs) and using the surplus to pay down a second BTL which is on a repayment mortgage. Obviously more complicated than this, but it could work quite well. Advocates of this argue that there is no need for property prices to rise for this to work.

Another way is to take any profit and use it to pay down your residential mortgage.

In my experience the first year or two of BTL is tight but it soon settles down.

I'm hardly overcomplicating matters. Its the basic rule of leveraging BTL that the amateurs are overlooking. Tax what tax? The rent covers the mortgage. Classic quotes.

You seem to be working on some very generous assumptions as well. 35% deposits , 125% rental coverage of mortgage interest. Not sure this a true reflection of the majority of the BTL market.

In general terms, with my business hat on. My main comment has to be that clearing debt reduces exposure to changes in interest rates. Why sit on an interest only mortgage for 25 years. Reduce risk.

After 15 years you still owe 66% of the capital on a repayment mortgage. So unsure why option 3 has many attractions. As you are still highly exposed to changes in market conditions.

Personally I would currently hedging my bets as future changes to taxation although indirect in nature to BTL. Will diminish the attractions as a long term investment.

chucknorris

Thrugelmir wrote: »

Thats because the quoted yields are if held to maturity. As prices for a lot of the bonds are priced over par you would incur a capital loss on redemption.

Some investment funds allow you to choose between income and capital (units or shares).

But that's because they have been bid up, unless you have a time machine you can't go back in time and buy them at the original issue price. Are you saying you have to ignore the redemption loss? If so it's hardly a true 9% annual return is it?

Thrugelmir

chucknorris wrote: »

But that's because they have been bid up, unless you have a time machine you can't go back in time and buy them at the original issue price. Are you saying you have to ignore the redemption loss? If so it's hardly a true 9% annual return is it?

I currently invest in a high yield corporate bond / fund. The income shares yield 7.84%. My running average yield is 9.84% since I started buying last December. For this I forgo any capital gain. So pleasantly happy.

Though I must add that the attraction is fading. Time to find something new. Cash perhaps? As the markets are due a set back and therefore a fall. :rolleyes:

mewbie_2

Thrugelmir wrote: »

Yield stuff

I kid you not, but one of my bond things has risen 44% this year. If only I had put more than one and thruppence into it.