Is BTL now the best retirement investment?

HAMISH_MCTAVISH

robmatic wrote: »

Come on now, I think what you meant was that the current best buy is 3.79% with a hefty 40% deposit and a hefty 3% arrangement fee (unless you mean that BM Solutions product which is remortgage only).

Nah, I looked at the table and picked the cheapest one at 75% LTV. Didn't bother looking at fees.

Regardless, the above example is worked at 6%. Sure you could find a decent mortgage at that price with low fees.

[Deleted User]

julieq wrote: »

How is something you have just agreed to be profitable a risk?

Risk of ruin is very high with shares, and there is no such thing as luck. Risk management works on probabilities, impact assessment, and mitigating factors that can be applied.

It's perfectly possible to make serious money gambling if you understand that. William Hill does.

I am a landlord and see BTL as a good, low risk investment however when I read your post I felt embarrassed by association.

1. Usually in investments, the higher the risk the higher the profit. Nobody would take the higher risk options otherwise. A balanced portfolio will include various products at various levels of risk. How much risk people take is a personal matter but age is usually a factor for obvious reasons.

2. There is such a thing as luck. Overall playing the percentages will pay off but on each event there is luck involved.

3. William Hill make money on over-rounds, they do not gamble.

EDIT: To illustrate point 2 if you got odds of 100 to 1 on rolling a six on a fair die it would be a value bet as the probability is 1 in 6. Whether you actually get a six when you roll it is down to luck.

robmatic

HAMISH_MCTAVISH wrote: »

Nah, I looked at the table and picked the cheapest one at 75% LTV. Didn't bother looking at fees.

Regardless, the above example is worked at 6%. Sure you could find a decent mortgage at that price with low fees.

How do your workings look with the national average yield that you mentioned?

HAMISH_MCTAVISH

robmatic wrote: »

How do your workings look with the national average yield that you mentioned?

Same house, same assumptions, yield of 5%, 25 years....

Total Rent after 10% voids = £146,140

Total cost inc deposit and mortgage interest/repayment = £144,472

Total asset value £177,971.

Make up your own assumptions for other costs. But effectively that's what your investment will cost you. You get the house for free, all it costs you is maintenance, redecorating, fees, etc.

And of course, returns soar even further when you take it out to 40 years.

Emy1501

Most BTL's are taken out interest only unless times have changed. Where I am in the South East and I suspect this is probably the average for the SE you would be lucky to get 3-5% yield at the moment looking at an average mortgage rate. As long as your cash rich and do your homework properly then there is money to be made in BTL like any investment.

Whether its the best long term investment is anyones guess but in the SE you are going to need at least 50K to put down and probably about 5K in reserve for any problems so not something available to the average person.

Also who knows the effect of prices etc when people start to sell inverstments to fund retirement which will probably start to happen within the next 10 years.

lisyloo

Seems to me there is quite a lot of time/work involved in this.

Firstly you have to go out and buy a property. Not an easy task in itself and obviously you'll need to do your research to get a good area and good yield.
There's the normal buying process stuff - offer, mortgage, exchange, completion, insurance etc.
You cannot sub-contract this out, you have to do it yourself.
Once you've done that you then have to do any necessary decoration, furnish the property, get the boiler checked and PAT testing.
Sounds like decoration is "minor" even if it's the whole flat and therefore down to us to do ourselves in our spare time.

I'm not says it's not good for people that have the time.
What I'm saying is that there are not insignificant amounts of work to be done, which not everyone has the time for.
I certainly don't have the time for this at this point in my life (invalid parents).

That doesn't of course make it a bad investment, just that I think these significant amounts of time have been skipped over which it shouldn't be when it's a showstopper for some people.

But I think Cleaver is right.
If you're planning for your retirement then that's a massive step in the right direction.

good luck to those who have the foresight to take control whatever you're invested in.

Procrastinator333

HAMISH_MCTAVISH wrote: »

Glad you agree.

But I was curious, so I did it anyway from the two flats I posted earlier, and using a 6% mortgage rate to keep you happy.

Purchase Price = £85000

Interest = 6.0%
Deposit = 25%
Term of Loan = 25 years
Monthly Rent = £575
Rent Rate Increase = 3%
Expected House Price Inflation = 3%

Mortgage Info
Deposit: £21,250.00
Mortgage amount after deposit: £63,750.00
Monthly Payment: £410.74 (Capital and Interest)

Total spent on mortgage payments = £123,222.64 .
This includes Capital & Interest.

£59,472.64 in total interest over the 25 years.

Using a 3% average house inflation rate over 25 years, the house will increase in value to £177,971.12.

Rental Info
£575.00 for the first year.

An average of 3% yearly increase.

You'd collect £259,068.92, before voids, over 25 years.

Assume voids of one month in 10 to make it easy to calculate, and that's a deduction of £25,906, so an actual return of £233,154.

Results:
Flat cost you £144,472 to buy including deposit, capital and interest.

You took £233,154 in rent.

Profit so far £88,682. PLUS you now own a house worth £177,971

You can be as pessimistic as you like, Graham, but I'd struggle to spend 88 grand on landlords insurance, furniture, maintenance, and decorations for a 1 bed flat in 25 years.

So 25% of £85k = £21.25. A HR taxpayer in a salary sacrifice scheme would get £40.3k in to their pension pot. So that is a 89.7% return in 1 day. Not bad.

After that, as you have factored inflation in to your example, assume they achieve 8% Per year. After 25 years they will have £276k. A BR taxpayer would have £207k.

It is also important to consider the point at which the income will come in. You have neglected the impact of tax and CGT. Rental income will be subject to income tax. Yes so may a pension in the end, so may balance out, but many will be HR taxpayers in working life and BR taxpayers in retirement. So it is quite possible to be paying HR tax on your rental income compared to BR tax on your pension. Then there is also also CGT which while you may get some reliefs, will likely result in a fairly hefty bill.

BTL is more attractive to BR taxpayers as there is not such a jump on day 1 from tax relief and the impact of that can be seen above. However a BR taxpayer is exactly the sort of person who is unlikely to be able to cope with a bad tennant. 6 months of no rent and a £5k clean up bill could easily wipe out someone with the income of a BR tax payer.

Imo, is it a good idea to have 2 or 3 BTL properties as your pension - No. That old adage of past performance is not a guide to future performance is as true for property as anything else. For someone to put all of their pension eggs in to the single basket of BTL is simply madness in my opinion. The numbers don't support it being that great an investment compared to the opportunities within a pension wrapper and it is much more hassle and risk.

But I do think BTL is perhaps a useful tool for the HR tax payer who wants additional diversification. It probably becomes particularly attractive for anyone who thinks they are going to get close to their lifetime allowance in their pension pot.

But in reality, the only reason BTL is in the same ball park as a pension is because it is geared. Gearing can be risky. Especially for those without the finances to support that gearing should things go wrong.

Procrastinator333

Oh, and the best retirement investment by an absolute mile is matched contributions from your employer. Not available to all and not available in umlimited amounts. But any matched contribution is just miles ahead of anything else. It should be top of the list for all. Not taking matched contributions when available is simply madness.

A BR taxpayer in a matching sal sac scheme gets £10.69 in to their pot for £4. A HR taxpayer gets £10.69 for £3. That is 267% growth in 1 day for the BR taxpayer and 356% growth in 1 day for the HR taxpayer.

HAMISH_MCTAVISH

Procrastinator333 wrote: »

After that, as you have factored inflation in to your example, assume they achieve 8% Per year. After 25 years they will have £276k. A BR taxpayer would have £207k..

Minus fees and the vagaries of the market....

In reality most pensions are performing nowhere near this well.... It's a bit of a national scandal IMO, but it's sadly the case.

After fees, the return from your example would be more like half what you estimate.

It's a fact. Greedy pension companies are siphoning off great swathes of pension money in the form of sky-high management charges. While legal, the practice employed by UK pension funds has been exposed as being among the worst in Europe with Britons frequently paying up to four times the amount paid by their neighbours in Holland and Denmark.

On the face of it, the charges levied by these firms appear meagre – typically 1.5 per cent of a pension fund's value. But number-crunching reveals the truly devastating effect such charges have over time. An influential report published by the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA) last week showed that over the life of a pension – 25 years – an individual saving into a scheme which charges 1.5 per cent in annual management charges will see a staggering 38 per cent of their income gobbled up by fees.

Put into context, this equates to a 60 per cent increase in yearly retirement income for someone who saves £1,000 per year until they are 65 and who receives an average return of 6 per cent. Before fees, their yearly retirement income would have been £16,080, up from a mere £9,900 if a 1.5 per cent charge is applied.

http://www.independent.co.uk/money/pensions/revealed-the-scandal-of-how-pension-providers-rake-in-the-money-2157940.html

Which puts the BTL markedly ahead again I'm afraid.

chucknorris

lisyloo wrote: »

Seems to me there is quite a lot of time/work involved in this.

Firstly you have to go out and buy a property. Not an easy task in itself and obviously you'll need to do your research to get a good area and good yield.
There's the normal buying process stuff - offer, mortgage, exchange, completion, insurance etc.
You cannot sub-contract this out, you have to do it yourself.
Once you've done that you then have to do any necessary decoration, furnish the property, get the boiler checked and PAT testing.
Sounds like decoration is "minor" even if it's the whole flat and therefore down to us to do ourselves in our spare time.

I'm not says it's not good for people that have the time.
What I'm saying is that there are not insignificant amounts of work to be done, which not everyone has the time for.
I certainly don't have the time for this at this point in my life (invalid parents).

That doesn't of course make it a bad investment, just that I think these significant amounts of time have been skipped over which it shouldn't be when it's a showstopper for some people.

But I think Cleaver is right.
If you're planning for your retirement then that's a massive step in the right direction.

good luck to those who have the foresight to take control whatever you're invested in.

Yes that's correct, because it's not just an investment it's also running a business, that's why it is more profitable, but it can come with a significant amount of hassle and also a varying degree of time and effort required depending on how much you delegate (at a cost).

Just because it's more profitable does not mean that it is better value, some might prefer lower returns with less of a 'hands on' investment. It's not for everyone.