Rents rising again....

Thrugelmir

IveSeenTheLight wrote: »

The typical rent for this type of property is £760 pcm, which covers the £475 pcm mortgage interest (also at 5% for ease of calculation) and provides a profitable return of £285 pcm (7% return on investment) which also covers capital repayment, maintenance etc.

Gross mortgage is £667 in year 1 on a repayment basis. So £192 of capital on average every month.

Your profitable investment return of £285 is taxable. At a 20% tax rate that nets to £228.

So after funding capital repayments that leaves £36 per month to fund maintenance and refurbishment. Not enough to provide a sinking fund even.

HAMISH_MCTAVISH

The_J wrote: »

I've no doubt that somewhere it would be possible to get the tenant to pay off a repayment mortgage but it's very unlikely.

Over 25 years it's just about inevitable, almost everywhere in the country.

Assuming a £1000 per month initial rent, and rent only rising roughly in line with the long term inflation average at 3% annually, the monthly rental payment at the end of 25 years is £2,032.79

Total rent received over 25 years = £445,011.

Assuming a £250,000 house with a 25% deposit and a 5% interest rate, total payments (including deposit) are £391,331.

It's safe to say your tenant has bought you the house.

And then some.

The_J

You've not calculated the shortfall in the initial years and the compound interest, the cost of repairs, void months etc. etc.

And 3% yoy from here is hard to see given the likely wage freezes.

HAMISH_MCTAVISH

The_J wrote: »

You've not calculated the shortfall in the initial years

It's of no relevance to total profit and loss.

You pay in £391,331.

You get paid £445,011.

You may pay more of that 391K in the early years, and less in the later years, but that's still all you pay.

Just as you may receive less of the 445K in the early years and more in the late years.

But again that makes no difference to total profit and loss.

the compound interest

,

Eh?

What compound interest?

The discussion is whether or not a rent for 25 years will cover the full repayment cost of a mortgage for a landlord for 25 years.

And it certainly will, just about anywhere in the UK.

the cost of repairs, void months etc. etc.

You have £54,000 left over after mortgage payments.... That should cover it.

And don't forget you own a house at the end, based on just 3% annual HPI, that's worth over £500,000.

3% yoy from here is hard to see given the likely wage freezes.

Nice try.

We're talking a 25 year average, not just the next few years.

And we have now all but guaranteed the next couple of decades will average higher than historically normal HPI and rent inflation thanks to creating the worst shortage of housing in history.

The_J

HAMISH_MCTAVISH wrote: »

It's of no relevance to total profit and loss.

You pay in £391,331.

You get paid £445,011.

You may pay more of that 391K in the early years, and less in the later years, but that's still all you pay.

Just as you may receive less of the 445K in the early years and more in the late years.

But again that makes no difference to total profit and loss.

If you fail at basic maths we cannot continue this.

If the tenant is paying £1000 to start with, and you need £1500. Where is the £500 p/m difference coming from? You'd have to borrow it (or pay from your salary which is the same thing) and if we assume 5% interest (this is really low, average BTL APR is 5.5%, average loan APR is 9% at the moment and base rate is 0.5%) this would add up for the 15 years until you break even on the rent (compound interest on that, if you let it build up adding the difference each month, would be 75k). The compound interest on the excess from year 16 is about 7k.

This is pretty simple to see if you compare it to interest only (which is what most people do and would ensure there is no shortfall in rent and mortgage payment). 25 years IO @ 5% = £312600 + the £250k lump sum = £562600 after 25 years. Which is quite a bit less than £440k received in rent.

I'm not trying to argue against BTLs. I think they are a good investment especially because of the asset price growth but it is a lie to claim that landlords are stealing property off tenants.

HAMISH_MCTAVISH

The_J wrote: »

If you fail at basic maths we cannot continue this.

Tempting as it is to unload both barrels at you, I'll give you the benefit of the doubt here and just talk really slowly in the hope that you'll finally understand.

If the tenant is paying £1000 to start with, and you need £1500. Where is the £500 p/m difference coming from? You'd have to borrow it (or pay from your salary which is the same thing)

This is a cash flow issue. Not a profitability issue.

If you initially pay more towards the mortgage from your income than you receive in rent, that doesn't change the total amount that you pay towards the mortgage.

Borrowing to cover a shortfall would be stupid, and should preclude you from taking on a BTL to begin with.

You pay 391K total in deposit, mortgage interest, and capital repayments.

You get 445K back in rent.

The timing of those payments doesn't change the totals.

25 years IO @ 5% = £312600 + the £250k lump sum = £562600 after 25 years. Which is quite a bit less than £440k received in rent.

Ah sorry, but if you fail at basic maths we cannot continue this.

The total cost on a repayment mortgage at 5% with a 25% deposit is 391K, including the deposit, all mortgage interest and the capital repayment.

Why would you want to pay 562K when you could pay 391K?

I'm not trying to argue against BTLs. I think they are a good investment especially because of the asset price growth

They'd be a good investment even without asset price growth.

but it is a lie to claim that landlords are stealing property off tenants.

I've never claimed landlords are stealing property off tenants.

The_J

I didn't read that, I had to stop at borrowing to cover a shortfall. If you didn't have to fill that gap from your income you could save it. Let say at 5% (if we're going to go low on BTLs, may as well go upper end on savings over 25 years).

This is GCSE level stuff but I should probably tell you I have a first class honours degree in mathematics from one of the top universities in the world.

Your last point (because I can read it from here), I know you didn't say that. My post was in response to someone who said that a tenant would pay for a repayment mortgage. I said this isn't true.

DpchMd

The_J wrote: »

I didn't read that, I had to stop at borrowing to cover a shortfall. If you didn't have to fill that gap from your income you could save it. Let say at 5% (if we're going to go low on BTLs, may as well go upper end on savings over 25 years).

This is GCSE level stuff but I should probably tell you I have a first class honours degree in mathematics from one of the top universities in the world.

Your last point (because I can read it from here), I know you didn't say that. My post was in response to someone who said that a tenant would pay for a repayment mortgage. I said this isn't true.

For someone so well educated, so well qualified and so successful in business, it's incredible just how much you get wrong.

HAMISH_MCTAVISH

The_J wrote: »

I didn't read that,

Shame about that.

If you had you may have learned something and so probably wouldn't have embarrassed yourself with the rest of that post.

This is GCSE level stuff but I should probably tell you I have a first class honours degree in mathematics from one of the top universities in the world.

Oh dear....

And was it there that you learned it was a good idea to spend £562,000 via a poor choice of payment options such a 100% mortgage on interest only when you could spend £391,000 instead with a simple repayment mortgage?

If you didn't have to fill that gap from your income you could save it..

Yes, fair enough.

But of course it's not 25 years, as the gap between £1000 per month and £1500 ends somewhere around year 15, and the 500 per month steadily decreases all the way through as rent increases. And the net after tax return would be more like 3.5%.

Can't be arsed working it out... (perhaps you could put that first class honours degree to work), but I'd be prepared to bet you're looking at not much more than 20K or so in lost interest.

So again, still well within the reality that rent will pay for a repayment mortgage for a BTL over 25 years.

HAMISH_MCTAVISH

DpchMd wrote: »

For someone so well educated, so well qualified and so successful in business, it's incredible just how much you get wrong.

Getting it wrong is not the issue, everyone makes mistakes.

Getting a relatively simple financial calculation wrong, and then bragging about your "first class honours degree in maths from a top university" is a bit more worrying.

And from a supposed "financial advisor" is more worrying still. :cool: