Is BTL now the best retirement investment?

Thrugelmir

HAMISH_MCTAVISH wrote: »

So once again, I'll throw this question out to the bears.

Name me one other investment where you can invest 20K, and get around 100K back in real terms in 25 years, plus an inflation adjusted 5% plus yield for life?

BTL became a fad after the property boom........

Figures courtesy of the Rowntree Foundation.

New gross lending cases
1999 44,400
2000 48,400
2001 72,200
2002 130,000
2003 187,600
2004 226,000
2005 223,100
2006 319,200
2007 346,000
2008 222,700

So there's no 25 year track record to fall back on for BTL. The jury's out on how many people will actually eventually make a profit.

robmatic

HAMISH_MCTAVISH wrote: »

Those are gross yields, but they're more than enough to pay a repayment mortgage even after tax, voids and maintenance.

So, for example, on the 80K flat, you're getting a yield of 8.1%, or £525 a month.

This is obviously a very area dependent business then, because here in Edinburgh that's about double the typical yield.

HAMISH_MCTAVISH wrote: »

The breakdown would then be as follows.

£20,000 deposit. (25% to get a decent rate)

See, I thought the attraction of BTL was that after 25 years someone else has bought you a house. With a 25% cash outlay at the start of the 25 year period you've practically bought the bloomin' thing at outset yourself!

HAMISH_MCTAVISH wrote: »

£60,000 mortgage and we'll assume 5% average over 20 years.

Monthly repayment mortgage £355, interest-only component £250.

5% average? Are we assuming that they're just not going to go up... at all?

HAMISH_MCTAVISH wrote: »

Allowing for one month void and £500 maintenance per year on average....

I think 1 month void per year seems reasonable as an assumption, but whose time is involved here for marketing and maintenance? Or PAT tests and gas safety checks? And you should probably factor in furnishing at outset and decorating every 2 years.

HAMISH_MCTAVISH wrote: »

Income -

11 x £525 = £5775 per year

Outgoings -

12 x £355 = £4260 per year

Maintenance = £500 per year

Tax on income = approx £500 (depends on rate, status, individual or ltd company, etc)

Total = £5260 per year.


Net profit after expenses, and before taking into account the fact that someone else is buying you a house = £415 the first year, and of course that will increase as rents increase with inflation.



Lets say two people start out with £20,000.

Person A invests in a flat in the example above.

Person B invests in something else.

I'd struggle to think of anything else that will give you returns of £80,000 or so in real terms from a 20K stake with no further investment.

If you achieved a real return of 6% p.a. with equities then you could return 4 times your stake at the end of a 25 year period.

lisyloo

Indeed. Nothing is risk free. But this is less risky than most.

I disagree.
One single BTL like one single share is hugely risky.
I'm not saying it's common, but one bad tenant and you could lose a lot.

Regardless, I'd suggest you're probably too risk averse for BTL.

At 2011 prices I accept that.
I'd be willing to get in if prices crashed though.
It isn't jsut about the income side in my view, it also about the capital gain/loss.

julieq

lisyloo wrote: »

I disagree.
One single BTL like one single share is hugely risky.
I'm not saying it's common, but one bad tenant and you could lose a lot.

You're unlikely to lose the lot, and shares are far more liquid than housing prices. One bad tenant and you may lose a few months rent, if a share goes south you lose your stash completely. But the big issue with BTL is as you say, it takes a great deal of your capital. On the other hand since you can get people to lend it to you it's potentially not a bad punt to nothing.

Graham_Devon

Gas safety checks alone are approx £50+ VAT.

If, as Hamish bases everything else on the assumption nothing will change, that requirement lasts for 25 years, that's £1,500 alone out of the £12,500 maintanance budget. Or, 10% of the total budget per year....on ONE single check.

Even carpeting / flooring a one bedroom flat, every say 5 years, is going to cost a good £800 every 5 years. Carpet, underlay, fitting. Theres £4k gone. Oops. Just 7k left.....and what....you mean kitchens and bathrooms don't actually last 25 years?!?!....they might need replacing too?! And the boiler.....it' needs servicing....god damn, you are kidding...

Plus the £150 landlord insurance which has now appeared. Is this coming out of maintanance too....or another pot that's not been included in the sums? If it's another pot, damn, were down to just £260 a year to play with.

1 interest rate rise. Free house....puff....up it goes in smoke. And this is on an all singing all dancing extra special finest Aberdeen property, where everything is just so much better than the rest of the country.

Sorry Hamish. This one was a corker. I do understand what you are stating about HPI. All people are saying is it's not a given, and it's not a free house. It can cost you more than you receive in rent per month to pay off the mortgage. After that...that's when it becomes really profitable. But to state it's all roses and free houses.....even from you....thats something else.

HAMISH_MCTAVISH

lisyloo wrote: »

I'm not saying it's common, but one bad tenant and you could lose a lot.

Yes.

But not enough to materially change the return over 25 years.

At 2011 prices I accept that.
I'd be willing to get in if prices crashed though.

In real or nominal terms?

Because I reckon there's no prospect of nominal falls, on a national average, of enough to make a significant difference to the outcome.

And whilst it's likely we'll see further falls in real terms, I'm also not seeing how waiting for them to arrive makes any difference, other than costing time and returns.

It isn't jsut about the income side in my view, it also about the capital gain/loss.

Capital gains are inevitable over any reasonable length of time.

But I reckon if you can get a deal to stack up based on zero capital growth, such as the example above, it's a no brainer. Capital gains are the gravy, they shouldn't be a pre-requisite for it to make financial sense.

julieq

Oh come off it Graham. £50 out of a year's rent and you say that's a serious expense? You having a laugh?

Ultimately what happens is that rents go up to cover costs. At the point at which yield stops being sufficient to make it a worthwhile investment, people stop investing or rents go up. Remember supply and demand? Gets you every time.

BTL would have died had we not had a price correction and a bank crash, because at that point it relied on capital growth and rental was less than mortgage costs. As we are looking forward that's not going to be the case again for years. At this point it's a decent self sustaining investment opportunity (as it was a couple of years ago when I pointed the same thing out to general derision from the bears). That may not always be true, but you have to keep moving.

Graham_Devon

julieq wrote: »

Oh come off it Graham. £50 out of a year's rent and you say that's a serious expense? You having a laugh?

No, never said that either.

Firstly it's out of Hamish's maintanance fund.

Secondly, at 10% of the total fund, for just one check, yes, it's a rather large chunk and therefore expense, out of a tiny £500 per year fund....considering what else has to come out.

Thirdly, were on a knife edge as it is, with just £260 profit. Nearly half that of a parasite account.

Hamish would make an excellent endowment policy or PPI salesman. "It WILL work, you WILL be covered, there ISN'T an issue". Look what happened there.

robmatic

HAMISH_MCTAVISH wrote: »

So once again, I'll throw this question out to the bears.

Name me one other investment where you can invest 20K, and get around 100K back in real terms in 25 years, plus an inflation adjusted 5% plus yield for life?

Equities. Boom! Next?

lisyloo

Thanks for your input Hamish. I appreciate having my views challenged,
I'm afraid it does not appeal, not even remotely, not even with a free house at the end.
I'll probably opt for the 40% pension tax relief which pretty much doubles my money straight away and no hassle.