BTL's and renters

julieq

You can't even spell competent

You're grasping at straws anyway. Yields are good and predictible and you get a shot of capital growth which will tend to keep up with wage inflation at least. If you don't think it's a great investment don't do it, but it's certainly not a poor investment and considerably less volatile than stocks and shares. You're unlikely to beat the volatility in the short term, and it may wipe you out, and certainly you can't do it with borrowed money.

IronWolf

IveSeenTheLight wrote: »

You've answered your own point then.

the current forecast by most economists is that they don't expect rate rises for some time yet, least I've not seen any predictions for 7%.

But let's assume at some point they do rise to that levels.
what's likely to be the pressure on rents in the same time?

call me crazy, but I don't trust forecasts, especially by economists.

And even if it did take say 5 years and the landlord has built up enough equity that the rent covers the interest more comfortably, you then have opportunity cost of having capital tied up in the flat.

Not surprisingly, the returns on BTL are by far greatest during the early years, when it is highly leveraged and therefore at its most risky. After a few years the return on your capital drops off considerably.

It's never "free money" as everyone seems to suggest because you always have capital employed, at first the deposit and then it slowly increases as the equity does, resulting in plummenting ROCE but a less risky investment. The 2000's were a glorious time to invest in BTL due to tiny deposits and ever increasing house prices, but those days are over.

julieq

You don't need forecasts, although if you're a competent investor you'll be looking at them.

But more importantly you've made the classic mistake in considering rents as fixed when in fact rental increases year on year. So initial yield is not the same as the yield throughout the life of the arrangement.

Residential property against a supply shortage is just about the least risky investment there is. That's why banks will lend against it. It will tend to self correct because if rates go up, inflation is implied, and that includes housing costs including rental and purchase costs. It self hedges.

IronWolf

julieq wrote: »

You can't even spell competent

You're grasping at straws anyway. Yields are good and predictible and you get a shot of capital growth which will tend to keep up with wage inflation at least. If you don't think it's a great investment don't do it, but it's certainly not a poor investment and considerably less volatile than stocks and shares. You're unlikely to beat the volatility in the short term, and it may wipe you out, and certainly you can't do it with borrowed money.

Ah the spelling corrections, when all else fails.

Volatility is the intelligent investor’s best friend, if house prices fluctuated +/- 5% daily it would certainly benefit any BTLers would it not? You could pick up properties when they got so cheap that the rental yields were very high.

Also investing with borrowed money has never been easier with the birth of spreadbetting, you can certainly employ far more leverage than a house purchase and pay no tax on any gains. Of course, you can get ‘wiped out’ but the same can be said of a BTL purchase, for is not being in negative equity being ‘wiped out’? You’ll continue to get rent but that goes straight into the banks coffers.

IronWolf

julieq wrote: »

You don't need forecasts, although if you're a competent investor you'll be looking at them.

But more importantly you've made the classic mistake in considering rents as fixed when in fact rental increases year on year. So initial yield is not the same as the yield throughout the life of the arrangement.

Residential property against a supply shortage is just about the least risky investment there is. That's why banks will lend against it. It will tend to self correct because if rates go up, inflation is implied, and that includes housing costs including rental and purchase costs. It self hedges.

Nope I didn't make the classic mistake, rent increases no where near make up for the increase in capital employed and therefore plummetting ROCE. I've looked into the various scenarios, yields are never attractive to me after the first few years.

And you seem to be oblivious to the falling house prices everywhere in the country besides the South East and London? How are they the "least risky investment there is"?

IveSeenTheLight

IronWolf wrote: »

Capital growth over the long term is likely to be far lower than we've seen over the last 10 years, at best it might keep up with inflation which is what, 2-3% a year? Rental yield might be another what, 3-4% a year after reasonable expenses. Hardly breathtaking returns.

Let's look at your pessimistic figures.

If I put a £30k deposit on a £150k property and it then increases 3% each year over the next 5 years.
The value is then £168k, so my £30k investment has increased by £18k in the 5 years.

Of course there are other factors to consider, but the meagure 3% inflation linked HPI provides a far better return on the capital investment.

Now then to the rental yield.
The mortgage for said property would be £120k, which at 4.1% (available BTL product at the moment) would be £410 per month.
Now the rental market comes into play, but I know areas which would command £750 - £800 pcm rent on a £150k property.
This means the RY is 6.4%.

with deductions it would of course be lower, but then if you consider in relation to the deposited investment, it's much higher.

Here's an example I showed earlier: -

IveSeenTheLight wrote: »

I'm in the process of concluding on a BTL, so I've done the figures recently.

My RY is 6.49% of the purchase price.
The profit is 12.05% on my deposit after the mortgage interest is deducted.
The rent could reduce by 50% and still the costs would be covered.

julieq

You talk a good game but I doubt you can actually play one.

I've actually long recommended spreadbetting instead of day trading because it needs no capital to speak of and has low costs, but if you can beat yields on BTL as things are at present consistently then go and knock on the door of an investment bank because they'd love to have you on board.

Anyway, being in negative equity on a BTL isn't being wiped out, because you don't lose money until you crystallise a loss and you maintain your rental income. Being hit on a margin call on a spreadbet will wipe you out, because you are responsible for paying up within a short period of time, and if you are using stop losses to guard against big swings you don't get a time buffer to ride out storms. But in any case few BTL investors if any are using high LTVs and there's a considerable buffer. Even if there wasn't, because there is a supply shortfall and rising rents, there's nothing particular to cause negative equity over the mid term.

Anyway no-one is asking you to invest in BTL, and I don't - I might have done it but I needed liquid cash to educate my children at the point where I was considering it in early 2009. But really the idea that the opportunity cost is a big factor is nonsense. IF you are a skilled investor - I don't think you are frankly - and if you hit essentially lucky then you may well beat the returns over a period of time. As things are now, facing forwards, which is the only way to invest, it's a reasonable play. Which is why people do it.

julieq

IronWolf wrote: »

Nope I didn't make the classic mistake, rent increases no where near make up for the increase in capital employed and therefore plummetting ROCE. I've looked into the various scenarios, yields are never attractive to me after the first few years.

And you seem to be oblivious to the falling house prices everywhere in the country besides the South East and London? How are they the "least risky investment there is"?

Are you oblivious to the fact that you can choose where you buy a property to rent out, and the chances are a competent investor would choose to buy one where the yields are best?

To summarise your argument, if you're a financial numpty in housing investment, but at the same time better than most investment banks in terms of managing stocks and share investments, and if you construct a forward situation where interest rates are high but prices of houses decrease, then stocks and shares are a better investment than BTL because of the opportunity cost.

It is, as they say, an argument. Just not a very convincing one.

Anyway keep on doing what you do. I'm sure it'll work out fine. I wouldn't personally invest in precious metals, but some people do and they seem to make money doing it. Competent investment is about spreading risk and finding a balance to produce a reasonable return, not about looking for a single winning lottery ticket. As is any form of professional gambling.

julieq

Oh, and by the way, nothing obliges you to use capital to pay off a loan directly. If you can beat the loan rates with an investment, you'd keep the money you'd use for repayments, invest it, and you have zero opportunity cost. Obviously you would be seeing increasing yields on the rental income.

Or combinations thereof.

I really don't think you've thought this through, have you?

IronWolf

julieq you seem to have a poor comprehension of risk, as do most housing “bulls”. Saying you have ‘long recommended spreadbetting over day trading due to low capital requirements’ then in the next breath admit to the much larger risks from margin calls and high leverage.

Same applies to BTL although you don’t seem to accept it as being risky, because of course, void periods and problem tenants never happen do they? House prices always go up, and interest rates are guaranteed to be 0.5% for the next 5 years, and will never go above 10% in the future?

Opportunity cost is a very real cost in this market, because whether you like it or not, house prices in most of the country are declining, or flat. That means its costing you money compared to numerous risk free interest rates available, and even more low risk bonds available. To disregard it is frankly moronic, as is perpetuating the myth the BTL is “low risk”. It was in 2000, it isn’t now.