Buy to let - advice please

Jim_B_3

Fitzy29 wrote:

oh and by the way, historically property gives far greater returns than the same amount invested in shares....

The oldest consistent data on house prices is from Halifax. The lender's house price index shows that a property valued at £100,000 in 1983 would be worth £555,000 today. Although this may seem like a decent return, a similar investment in commercial property would have grown to £997,000, while investing in a FTSE All Share tracker fund with dividends reinvested would have returned £1.4m. This indicates that, historically, property does not do as well at stocks.

The difference, of course, is that with property you can keep borrowing more and more to fund the next gamble, and thus whilst the property is not doing as well as stocks, you can borrow cash to invest to make up the difference, whereas nobody will lend you cash to put in a FTSE All Share - indeed, that's (metaphorically) where they've put it whilst they're waiting for someone to lend it to! The downside, likewise, is that if the property goes pear-shaped you're left with enormous debts, and if the stocks go wobbly you can't go below zero.

Fitzy29

I thinks that's the difference, with property you can borrow extra on top of your investment...

Lets assume it's a perfect world and you have 15k to invest.

Option A, you put this into shares and after ten years the value has increased by 100% so you have 30k.....a 100% return on your 15k

Option B, you put this into property and the bank sticks in an 85% mortgage so you have a total investment of 100k and after ten years the value of the property increases by the same 100% to 200k.... a 667% return on your 15K.

To me property seems a better choice, but after reading all of the above I need a lot more experience in other investment fields....Nothing is ever as simple as a few text books eh...:rolleyes:

F_T_Buyer

fox123 wrote:

Hi, Thank you all for replies.... On face of it I agree that this is not a good investment. My model was based on buying a £140K 2 bed flat in South end area, Essex. The rental return for 2 bed flats are £600- £500 pm. Now consider this model for a moment:-
- 1 bed flat -£110k, re morgage main house £40k/ £430 pm variable repayment morgage over 10 years, typical rental return £550- £450, this sounds more viable- all agree ?
.

That's only a 4.9% to 6% gross yield. Still a pathetic return, must try harder.

I'd want at least an 8% gross yield minimum.

Question for everyone, what's the minimum gross yield you would except in todays market? Assuming average voids of 1month a year.

N.b. Gross yield being yearly rent as a percentage of purchase price.

F_T_Buyer

Fitzy29 wrote:

I thinks that's the difference, with property you can borrow extra on top of your investment...

Lets assume it's a perfect world and you have 15k to invest.

Option A, you put this into shares and after ten years the value has increased by 100% so you have 30k.....a 100% return on your 15k

Option B, you put this into property and the bank sticks in an 85% mortgage so you have a total investment of 100k and after ten years the value of the property increases by the same 100% to 200k.... a 667% return on your 15K.

To me property seems a better choice, but after reading all of the above I need a lot more experience in other investment fields....Nothing is ever as simple as a few text books eh...:rolleyes:

And if prices fall 15%, or costs suddenly rise 15% it wipes out all your equity, and you have nothing. But with debt they will chase you for the remainder and you could end up losing all your wealth you have created in life up to that point.

I'm absolutely amazed how people justify this gearing. If you are taking a risk, you want a greater return for that risk.

Fitzy29

F_T_Buyer wrote:

.

I'm absolutely amazed how people justify this gearing. If you are taking a risk, you want a greater return for that risk.

Like I've said it's a business, and not without risk. I guess it depends if you want a regular job all you life and end up with a pension worth, well who knows...

He who dares and all that, there are all sorts of opportunities in property, the above, as I said, was a perfect world calculation a simple illustration and very basic at that. Money can be made in all sorts of ways through property, buying below market value, renovation projects, buying overseas etc.

It's obviously not for people like you,

BobProperty

F_T_Buyer wrote:

....Question for everyone, what's the minimum gross yield you would except in todays market? Assuming average voids of 1month a year.

N.b. Gross yield being yearly rent as a percentage of purchase price.

You might remember my answer from previous threads, 15%. I'd go as low as 10-12% if the market was hot and I could see some easy improvements either to the rents or the capital value. That's not "today's market".

BobProperty

Fitzy29 wrote:

I thinks that's the difference, with property you can borrow extra on top of your investment...

Lets assume it's a perfect world and you have 15k to invest.

Option A, you put this into shares and after ten years the value has increased by 100% so you have 30k.....a 100% return on your 15k

Option B, you put this into property and the bank sticks in an 85% mortgage so you have a total investment of 100k and after ten years the value of the property increases by the same 100% to 200k.... a 667% return on your 15K.

To me property seems a better choice, but after reading all of the above I need a lot more experience in other investment fields....Nothing is ever as simple as a few text books eh...:rolleyes:

Option C, you put £100 a point spread bet on crude oil at about 5700 and sell at 7700 and make £200,000 tax free. Easy, no costs, no tax, don't know why everyone isn't doing it.
(I do actually )

F_T_Buyer

BobProperty wrote:

You might remember my answer from previous threads, 15%. I'd go as low as 10-12% if the market was hot and I could see some easy improvements either to the rents or the capital value. That's not "today's market".

I do accept that gearing can be good, and as you say you'd want far more return for the risks, i.e. a good yield and potential capital growth. None of which are present in todays market.

Fitzy29

F_T_Buyer wrote:

..or costs suddenly rise 15% it wipes out all your equity .

How does the costs rising by 15% wipe out 15k equity in a 100k property?

On the point of it decreasing by 15%, unlikely but fair point, however your rental income is unlikey to drop so you could sit the downturn out as historically prices of property do increase.... all a risk, but a good one really. Plenty of rich property gits about!

F_T_Buyer

Fitzy29 wrote:

How does the costs rising by 15% wipe out 15k equity in a 100k property?

On the point of it decreasing by 15%, unlikely but fair point, however your rental income is unlikey to drop so you could sit the downturn out as historically prices of property do increase.... all a risk, but a good one really. Plenty of rich property gits about!

Ok, I said that wrong. What I mean is costs could rise after income (such as voids etc) which add up to 15% equity, would wipe out that equity. If this continued you would be up a creek with no propeller...