Financial Transaction Tax - Does it make property more attractive to investors?

wotsthat

I think, as suggested above, BTL's are getting into the market without that much analysis. To a large extent they are getting lucky because deposit and mortgage requirements are conspiring to push people into rental. Also most forecasts show that housing supply will remain behind demand for many years which puts an upwards pressure on prices.

I did some sums recently when I was looking at a holiday home and looking at real sold prices and advertised rents. £155,000 buying cost and £650/ month rent. I 'phoned the letting agent out of interest and the rental didn't include the service charge of £70/ month which was expected to be paid by the owner.

Without HPI better returns can probably be achieved elsewhere with less stress. However, it's easy to understand, someone else buys you a house, and there's nothing wrong with getting rich slowly either.

shortchanged_2

wotsthat wrote: »

However, it's easy to understand, someone else buys you a house, and there's nothing wrong with getting rich slowly either.

But my point is if you buy a house now on an IO mortgage is someone else actually buying you a house particularly if HPI is not that great. If the rent isn't all that great is any capital actually getting paid off?

I'm not convinced that people that are going into the BTL market at the moment are actually making great yields, particularly now there seems to be an upwards trend in mortgage rates.

RenovationMan

shortchanged wrote: »

But my point is if you buy a house now on an IO mortgage is someone else actually buying you a house particularly if HPI is not that great. If the rent isn't all that great is any capital actually getting paid off?

I'm not convinced that people that are going into the BTL market at the moment are actually making great yields, particularly now there seems to be an upwards trend in mortgage rates.

Why not put aside your whole soapbox about interest only mortgages and lack of HPI, because all you are doing is creating a flawed wealth development model and then deriding the flaws you gave it.

Instead, imagine the financial model I have been discussing since the very beginning, the one where I even apologised if I was being ambiguous about if I wasn't being clear enough). The financial model is the following:

You put a 25% deposit on a residential house and rent it out. You use the income from the BTL to pay down the mortgage. You do not spend any of this income because you are investing for your retirement. Once the house is paid off and you retire, the monthly rental income is used to pay yourself a monthly income in retirement. You do not sell the property, ever, because you are using the monthly rental income as retirement income. When you die, the house(s) go to your spouse free of IHT and she continues to receive the full retirement income (unlike an annuity whereat best your spouse would receive a much reduced income and at worse receive nothing at all). When your spouse dies your kids get the house(s) subject to IHT, which is more than they would get from an annuity (i.e. zero with the lump sum lost forever).

So to recap:
1. You get an IO mortgage so that when you have void periods your outgoings are low. When you have tenants you make overpayments from profits to pay off the mortgage by the time you retire.
2. You never sell the house so HPI is unimportant.

shortchanged_2

What I am saying Renoman is that I don't believe the current yields (if you buy now) are actually large enough to be able to return enough profit to pay off the mortgage.

RenovationMan

shortchanged wrote: »

What I am saying Renoman is that I don't believe the current yields (if you buy now) are actually large enough to be able to return enough profit to pay off the mortgage.

Show me how you calculated your yield figures to arrive at this conclusion. I asked the same of miserlymartin but he seems to have missed my post.

I'm not saying you're wrong, I just want someone to show me the calcs so that I can base my judgement on solid financial grounds rather than people's intuition or gut feelings.

shortchanged_2

RenovationMan wrote: »

Show me how you calculated your yield figures to arrive at this conclusion. I asked the same of miserlymartin but he seems to have missed my post.

I'm not saying you're wrong, I just want someone to show me the calcs so that I can base my judgement on solid financial grounds rather than people's intuition or gut feelings.

OK I'll give it a go.

£135,000 property. 25% deposit £35,000.

£100,000 mortgage. At 5% over 25 years IO, monthly payments are £416 a month


Now to acheive a gross yield of around 5.8 % you would need to be charging around £600 a month rent on this property.

So you are left around £180 a month to allow for periods of vacancy, repairs, insurances etc.

I'm no expert on BTL's so I'm not sure what sort of tax relief is available but I don't think those figures are particularly appealing, also bearing in mind interest rates probably will go up.

Generali

shortchanged wrote: »

OK I'll give it a go.

£135,000 property. 75% deposit £35,000.

£100,000 mortgage. At 5% over 25 years IO, monthly payments are £416 a month


Now to acheive a gross yield of around 5.8 % you would need to be charging around £600 a month rent on this property.

So you are left around £180 a month to allow for periods of vacancy, repairs, insurances etc.

I'm no expert on BTL's so I'm not sure what sort of tax relief is available but I don't think those figures are particularly appealing, also bearing in mind interest rates probably will go up.

The thing you're missing is inflation.

The debt you have is not increasing with inflation, the value of the house and the rent probably are.

If you assume 2% pa inflation (i.e. low historically) then after 25 years you have a debt of £100,000 still, a house value of £216,000 and a rent of £966. Now you have a gross 'fantasy profit' of £550 a month.

As you say, that doesn't include voids, interest rates rising (likely) repairs, taxes etc. It does show the power of inflation.

Now if you invest your money in another productive asset (e.g. shares, a business, farmland) then you will get a similar effect from inflation so it's not to say that this will be the best investment ever. As a plan BTL is not necessarily a bad one though unless something goes wrong. That's the big problem though, you don't have diversification and your losses can far exceed your investment.

RenovationMan

shortchanged wrote: »

OK I'll give it a go.

£135,000 property. 75% deposit £35,000.

£100,000 mortgage. At 5% over 25 years IO, monthly payments are £416 a month


Now to acheive a gross yield of around 5.8 % you would need to be charging around £600 a month rent on this property.

So you are left around £180 a month to allow for periods of vacancy, repairs, insurances etc.

I'm no expert on BTL's so I'm not sure what sort of tax relief is available but I don't think those figures are particularly appealing, also bearing in mind interest rates probably will go up.

25% deposit on a £135k property is £33750, requiring a £101,250 mortgage.

As gen has said, the purchase price of the house is fixed, but the rental you can charge can go up with inflation.

Also, as you pay down the mortgage the mortgage costs on the IO mortgage change, which you also forgot to add to your calculations.

So on your calculation, the income will increase with inflation and the costs will go down with mortgage overpayments.

shortchanged_2

Generali wrote: »

The thing you're missing is inflation.

The debt you have is not increasing with inflation, the value of the house and the rent probably are.

If you assume 2% pa inflation (i.e. low historically) then after 25 years you have a debt of £100,000 still, a house value of £216,000 and a rent of £966. Now you have a gross 'fantasy profit' of £550 a month.

As you say, that doesn't include voids, interest rates rising (likely) repairs, taxes etc. It does show the power of inflation.

Now if you invest your money in another productive asset (e.g. shares, a business, farmland) then you will get a similar effect from inflation so it's not to say that this will be the best investment ever. As a plan BTL is not necessarily a bad one though unless something goes wrong. That's the big problem though, you don't have diversification and your losses can far exceed your investment.

I see what you are saying Generali but inflation will also affect such costs as repairs, insurances etc.

shortchanged_2

RenovationMan wrote: »

25% deposit on a £135k property is £33750, requiring a £101,250 mortgage.

As gen has said, the purchase price of the house is fixed, but the rental you can charge can go up with inflation.

Also, as you pay down the mortgage the mortgage costs on the IO mortgage change, which you also forgot to add to your calculations.

So on your calculation, the income will increase with inflation and the costs will go down with mortgage overpayments.

Renoman but this is the point I am trying to make, is how do you pay down the IO mortgage if the the rent you get barely covers the mortgage and the other overheads.