Chasing the BTL Dream

Thrugelmir

mewbie wrote: »

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.

Ah the James Bond Aston Martin Money Box..... a collectors item.

chucknorris

Thrugelmir wrote: »

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:

I'm afraid I can never get past the feeling that if I invest in 'funds' I am paying for guys that work in the city to drive round in porches, so I never indulge in funds, I prefer to be 'hands on'. I know someone (probably an IFA) will say that historically these funds perform better but I'm afraid I am far too cynical for my own good. I'm afraid I'm the sort of guy that always suspects he is getting unnessary work done during an MOT at the garage etc. (it's just the way I am).

Although that said it does look as if your investment is doing quite well.

HammersFan

Thrugelmir wrote: »

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.

Option 3 has the attraction that one property has been paid for by tenants. The other is very likey to be worth much more than was paid for it.

Why sit on an IO mortgage? Well building up the funds to clear the mortgage is better than paying it off because it keeps the funds liquid.

Going forward the BTL market is likely to be more like 50% LTV (which will probably mean closer to 140+% rental cover). That suits me since, as you rightly point out, it reduces risk. With a Tory gov looking increasingly like I would be very suprised if they tightened BTL.

I can see your points and how they apply to the reckless approach to BTL that was around at the peak, but sensible leveraging is possible (in fact its often the only way nowadays).

JonnyBravo

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.

Absolutely. Agree with everything you've said.

Do you not think there would be a an increase in rental over the 25 yr period?

IveSeenTheLight

Thrugelmir wrote: »

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.

I see this differently to you then.

You only have one amount of £21,750 in this example.
You choose either to: -

a) Invest in a 5% ISA scheme and earn £73,500 after 25 years
or
b) Invest in a property valued at £85k, where upon even without rent profit / increases or HPI, you still own a property worth £85k

It's not a lost oppertunity as you do not have the funds to invest in both.

To try and put it your way, work out the "lost oppertunity" for what your ISA investment would have if it didn't have a property that was valued at £85k 25 years earlier

IveSeenTheLight

Thrugelmir wrote: »

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.

And what your eluding to is one of the reasons why BTL investors would re-mortgage to keep the interest higher and withdraw the money for investment elsewhere

silvercar

a) Invest in a 5% ISA scheme and earn £73,500 after 25 years
or
b) Invest in a property valued at £85k, where upon even without rent profit / increases or HPI, you still own a property worth £85k

Your assuming that after 25 years the property is still worth 85k. Very unlikely, even if house prices follow inflation you would get more than 85k.

Kenny4315

Mewbie you can buy my flats, 3 in one freehold, for £650k there a nice little earner, with good tenants, but don't waste too much time houses are going UP UP UP !!

Actually to you lets call it £750k !!!!

Kenny4315

I reckon in 25 yrs time an £85k property will be around the £340k mark if not slightly higher. Working on the basis of doubling every 12 1/2 years or so.

IveSeenTheLight

silvercar wrote: »

Your assuming that after 25 years the property is still worth 85k. Very unlikely, even if house prices follow inflation you would get more than 85k.

Totally agree, however if you followed the thread you would see that we did not include any HPI or rent profit. It was to get away from the assumption that you need HPI for it to be worthwhile (which clearly it does not need such)

Even without these things it provided an 18% better return than puting the deposit into a 5% ISA for the term