BTL's and renters

julieq

Ironbull, I manage risk for a living.

You don't. You blather and you worry. Risk management is about assessing impact and probability and assigning sets of mitigating actions. The very language you use shows you don't understand how that's done. Void periods? OK, they happen. What is the impact of a void period of N days? What is the probability? How do you guard against that? That is the language of risk management, not: "XXX may happen" or "are you guaranteeing that YYY will not happen" or "well, there'll be maintenance costs..." (how much, how often, how do you reduce them?).

Frankly even the idea that something is "risky" is meaningless. Risk is quantifiable, and anyone who knows about risk management understands that. "Risky" is just a vague term for "worrying" and most laypeople confuse risk with worry, and avoid things that worry them.

The opportunity cost of BTL is exactly equal to your deposit, say 25% which is all the capital you ever need to put in. From that you get stable and increasing rentals over time, giving something like 6.4% over the purchase price as an INITIAL step, growing over time. You are likely to get capital growth over time without volatility, and given the supply situation that is pretty much a one way bet. You also then have the option of using additional capital to generate higher returns by other investments if you want to, or you can reduce the mortgage. There are multiple upsides and very few downsides beyond temporary price depressions, and in 3/4 of the country prices are stable or rising, and where they're falling they're not falling much and that will be reversed over 3-5 years. In the meantime the cost of loans is extremely low, so it has been a tremendous opportunity (incidentally I recommended it in 2009 here to general derision, anyone taking my advice then would have seen 20% capital growth, high and growing rental returns, and low costs, however it would have been good just on the rental yields which is what my analysis was based on).

Thrugelmir

julieq wrote: »

The opportunity cost of BTL is exactly equal to your deposit, say 25% which is all the capital you ever need to put in. From that you get stable and increasing rentals over time, giving something like 6.4% over the purchase price as an INITIAL step, growing over time. You are likely to get capital growth over time without volatility, and given the supply situation that is pretty much a one way bet. You also then have the option of using additional capital to generate higher returns by other investments if you want to, or you can reduce the mortgage. There are multiple upsides and very few downsides beyond temporary price depressions, and in 3/4 of the country prices are stable or rising, and where they're falling they're not falling much and that will be reversed over 3-5 years. In the meantime the cost of loans is extremely low, so it has been a tremendous opportunity (incidentally I recommended it in 2009 here to general derision, anyone taking my advice then would have seen 20% capital growth, high and growing rental returns, and low costs, however it would have been good just on the rental yields which is what my analysis was based on).

That sounds just like a BTL mortgage advisor working for the (now demised) Bradford & Bingley in their heyday.

julieq

Incidentally I certainly wouldn't recommend day trading, but if you're going to do it, spread betting is the way to go because it gives you better liquidity. You can make money day trading but generally that's about an underlying ramp in a market, not skill, and most traders don't understand that. Any form of short term market trading is inherently high probability of loss and high impact, and to mitigate that takes considerable skill.

IveSeenTheLight

IronWolf wrote: »

void periods and problem tenants never happen do they?

In the 5 years I've had investment properties, I've had 16 void days over the two properties.
This is equates to 0.43% of days available for rent.

The rents have always been paid on time and I've never had a problem tenant.

Of course, I'd never say never but the impact has been minimal.

IronWolf wrote: »

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?

Certainly the project is for low base rates for some time, but of course the investor has the opportunity to fix when they choose.

I've seen mortgage products fixed for 5 years at less than 5%, so can provide a decent level of security if one is cautious over the future rates.

julieq

Thrugelmir wrote: »

That sounds just like a BTL mortgage advisor working for the (now demised) Bradford & Bingley in their heyday.

OK, and so

1) What has happened to anyone taking their advice in your opinion?
2) What has happened to the B&B mortgage book? Is there a high rate of default

Nice try Thrugelmir, but BTL wasn't a problem for the banks and has performed well throughout the crisis.

julieq

To take those specific risks

Void periods - low probability, medium impact, nitigate by reducing rents to keep tenants at renewal or spreading risk over multiple properties.
Interest rate rises to 5% - high probability, medium impact, mitigate by fixing
Interest rates to 10% - low probability, medium to high impact, accept risk

That's how you work. Learn risk management as a skill and honestly your life will improve because your financial decisions will be better. You can't anticipate all risks, but you can drastically improve your probability of success.

Also learn from history. Those who don't are doomed to repeat it. I've told you this before.

IronWolf

julieq wrote: »

Ironbull, I manage risk for a living.

You don't. You blather and you worry. Risk management is about assessing impact and probability and assigning sets of mitigating actions. The very language you use shows you don't understand how that's done. Void periods? OK, they happen. What is the impact of a void period of N days? What is the probability? How do you guard against that? That is the language of risk management, not: "XXX may happen" or "are you guaranteeing that YYY will not happen" or "well, there'll be maintenance costs..." (how much, how often, how do you reduce them?).

Frankly even the idea that something is "risky" is meaningless. Risk is quantifiable, and anyone who knows about risk management understands that. "Risky" is just a vague term for "worrying" and most laypeople confuse risk with worry, and avoid things that worry them.

Oh look at you trying to sound all clever. Listen love I too have the qualifications in stats and maths and could talk all day in sigma's and probability distributions. I know all about what actuaries do and how they do it. But you've made the same mistake that most academics make when looking at investments, you assume risk is quantifiable, or even knowable, most of the time it isn't and only by accepting that and looking at qualitative factors and scenario analysis can you manage your risk well.

Sure if you're an insurance company and writing thousands of policies with 50 years of past data, you can make some pretty sophisticated models which will give you a pretty good idea of what your probabilities of loss are.

But BTL is a different animal, you don't know the likelihood of encountering a professional tennant, or having a void period, or interest rates rising in the next 5 years. You have to ask 'could it happen', and if it could, 'what if'. If that spells disaster and bankrupcy then you shouldn't do it. Normal people don't invest on the scale needed to average out risks, they need to be risk averse.

julieq

Oh for heaven's sake, I manage risks amounting to many millions of pounds in my day job. You don't need a sophisticated model in most cases, you need a 4 point scale on each variable because as a rule you're assessing relative risks. Where a risk is high impact high probability you will do further quantification and some modelling, or you will walk away. ISTL has explained that the measured void period is tiny, and in fact that's all you need to know for that assessment because it's not worth going into in more detail. Risk management is completely pragmatic, and it's about understanding how to reduce the risk of failure by understanding the key problem areas. I explained that you can't anticipate all risks, but if you can reduce say the top 5 risks by working to reduce either the impact or the probability you enhance your chances of success on average. Then you spread investment across several different areas where you have increased your chances of success, some win, some lose, on average you come out better than someone just steaming in and punting at random.

Why do you think I always stress the importance of bounding figures to understand their relative importance? It's because that is the single most important thing you have to do to assess relative risk. It's meaningless to know that the rate of voids is increasing. You need to know the voids as a percentage of total rental days. For example.

Honestly, all this talk of stats and maths just underlines that you're blathering about something you don't really understand. And I'm certainly not an academic.

But you're right that normal people don't work in a way that can average out high risks, which is why high volatility is exactly the wrong sort of environment for normal people. The risks are high impact high probability = high risk of ruin. And that is precisely why BTL which is low risk of ruin is a decent alternative because it gives a very comparable average rate of return to a professionally run investment fund.

System

IronWolf wrote: »

Oh look at you trying to sound all clever. Listen love

:rotfl:Alright darlin'

IronWolf

Ah, so you don't really manage risk for a living, your a manager using basic risk tools. Hardly something to brag about but each to their own.

p.s. volatility is not the same as risk

Anyway, you seem to be going way off the point. My point was, BTL has risks associated with it, that aren't all low risk, in my opinion, as risk is subjective.

In management speak that means, there are some medium probability, medium/high impact (or amber if you like the coloured tables) risks associated with it