Capital Gains tax: buy-to-let investors must tear up retirement plans

Thrugelmir

IveSeenTheLight wrote: »

The Majority. I very much doubt that.
Could you back that up?

OK a very simplistic view based on averages. Lets say that you borrow a £100k over 25 years at a fixed 5%.

To repay £100k in 300 months requires an average capital repayment of £333 per month.

Capital is repaid out of after tax income. So if our borrower is a basic rate taxpayer. They'll need to generate a pre-tax average monthly return of £416 (or £4,992 per annum). Rounded that's a net pre tax return of 5%.

Interest on £100,000 over 25 years at 5% is £75k.

Again on a simple average that's £250 per month (or £3k per annum).

So now our investor has to generate an 8% return on his £100k just to cover the mortgage interest and repay the capital.

I think that its obvious where I am heading. As the 8% gross yield is without any overhead costs, void periods, bad debts etc.

If the investor doesn't generate these returns to repay the capital, then of course interest charges increase. Which although tax offsetable diminishes the return.

Much of recent property investment is based on the property value increasing , not a plan to build equity which can be realised when the property is sold. As any capital equity (purchase price) in the house is of course free of tax.

I did the example on a simple average. Whereas what would actually happen is that the "rent" would start low. (Which attracts people into the game as investors). But have to be progressively increased every year as the ratio split of capital and interest changed. Many people fall to realise that after 15 years paying a repayment mortgage that they still owe 60% of the original capital.

I'm not in anyway anti property investment. Just that people need to understand what they are doing and have a plan. As you would for any business. As thats what BTL ultimately is.

chucky

why do you have to repay the capital?
it's tax inefficient to repay the capital after a certain LTV.
paying back capital increases your tax liability.

how about if you worked your BTL model on a lower LTV instead of your selective example - what yield would you need to generate then :think:

i can show you examples that generate 15% and 20%

Thrugelmir

chucky wrote: »

why do you have to repay the capital?
it's tax inefficient to repay the capital after a certain LTV.
paying back capital increases your tax liability.

how about if you worked your BTL model on a lower LTV instead of your selective example - what yield would you need to generate then :think:

i can show you examples that generate 15% and 20%

It all depends on your final goals and objectives.

The simple example wasn't based on LTV but the gross yield required to generate cash to repay a loan.

Be interested to see your examples. :T

chucky

Thrugelmir wrote: »

It all depends on your final goals and objectives.

The simple example wasn't based on LTV but the gross yield required to generate cash to repay a loan.

Be interested to see your examples. :T

your interpretation of yield isn't correct IMO.

yield is the return on the money invested - therefore the money invested is the deposit amount placed on the property.

here's a real life example for you.

property price paid £375k - loan amount £275k = £100k investment.

rental £400 per week = £20,800 per year income
gross yield = £100k divided by £20.8k = 20.8% gross yield.

mortgage interest amount at 2% = £5,400 a year
£5,400 - £20,800 (Rental Income) = £15,400 return/ = 15.4% net yield minus repairs, costs, etc

i think out of that 15.4% yield you can make some good capital repayments if you like.

Thrugelmir

chucky wrote: »

your interpretation of yield isn't correct IMO.

yield is the return on the money invested - therefore the money invested is the deposit amount placed on the property.

here's a real life example for you.

property price paid £375k - loan amount £275k = £100k investment.

rental £400 per week = £20,800 per year income
gross yield = £100k divided by £20.8k = 20.8% gross yield.

mortgage interest amount at 2% = £5,400 a year
£5,400 - £20,800 (Rental Income) = £15,400 return/ = 15.4% net yield minus repairs, costs, etc

i think out of that 15.4% yield you can make some good capital repayments if you like.

Blowing your own trumpet is all very well. Thats the throw of the dice in life. I fail to see how that helps the average punter who isn't so astute as you.

Give me an example of how an investor can achieve those returns in the current market?

chucknorris

chucky wrote: »

your interpretation of yield isn't correct IMO.

yield is the return on the money invested - therefore the money invested is the deposit amount placed on the property.

here's a real life example for you.

property price paid £375k - loan amount £275k = £100k investment.

rental £400 per week = £20,800 per year income
gross yield = £100k divided by £20.8k = 20.8% gross yield.

mortgage interest amount at 2% = £5,400 a year
£5,400 - £20,800 (Rental Income) = £15,400 return/ = 15.4% net yield minus repairs, costs, etc

i think out of that 15.4% yield you can make some good capital repayments if you like.

Yes the all important yield is that expressed on what has been invested, the gross yield I only ever used as a simple comparison between properties to see which one looked better value before narrowing down to my taget property then doing a proper appriasal.

chucky

Thrugelmir wrote: »

Blowing your own trumpet is all very well. Thats the throw of the dice in life. I fail to see how that helps the average punter who isn't so astute as you.

not at all - you asked. i guess i must apologise for using real life numbers instead of playing fantasy numbers and MSE assumptions.

unlike many on here - i like to deal in facts not assumptions.

Thrugelmir wrote: »

Give me an example of how an investor can achieve those returns in the current market?

it's quite simple - have a good LTV, a good loan rate and buy a rentable property at an investors price.

if you sit back moaning that it's not possible you will never get anywhere in life unless you work for it :money:

chucknorris

Thrugelmir wrote: »

Blowing your own trumpet is all very well. Thats the throw of the dice in life. I fail to see how that helps the average punter who isn't so astute as you.

Give me an example of how an investor can achieve those returns in the current market?

I really don't know how many more times I have to say this but once again I will point it out. The year one yield will never look that good, (all together now) 'it's a long term investment' the yield will improve over the years because although rents will grow with inflation mortgage rates will merely fluctuate. Before someone points out that rents have fallen or stagnated over the last 2 years, that is unusual (look at the last 10-20 years).

Taking chucky's example further additionally when looking at capital growth it should be looked at in terms of the money invested. For example if you buy at £375k with a £275k mortgage you have invested say £120k with deposit, furnture etc, fees and maybe a bit of work. So if the property eventually in say 10 years goes up to £500,000 that represents a 100% (not 33%) gross capital growth on the money invested.

Dirk_Rambo

Harry_Powell wrote: »

Just when you believe that carolt cannot get any more pathetic....

What's wrong carolt, 'that time of the month' again where you log onto MSE and try to create an argument because your old man has given you a backhander again, or even worse simply ignores you.

Oh well, let's all settle down to a few days of carolt arguing with everyone while she works all that pent up frustration out of her system. I do so wish she would get a divorce or buy a vibrator or some other damned thing to save us all from her moods.

wow, thats one nasty post. you should be ashamed.

Thrugelmir

chucky wrote: »

if you sit back moaning that it's not possible you will never get anywhere in life unless you work for it :money:

You are truly so funny. :rotfl:

it's quite simple - have a good LTV, a good loan rate and buy a rentable property at an investors price.

Amazing what effect hindsight has on ones ego.

I hardly call managing a BTL property hard work either.