Martin Lewis stands up for renters on breakfast TV

FTBFun

Percy1983 wrote: »

Ok here is another very basic sum for you.

I buy a house at £100k by the time the mortgage is paid it will have cost me £150k.

I rent it out very cheaply so rent doesn't even cover the interest and over the term get a stranger to pay £30k of the interest.

So a house which should have cost me £150k has cost me £120k.

I see a £30k saving... and a house at the end.

By all means I very much doubt example as extreme as the above would ever be the case, but even in worse case there is a saving.

Well no, as you haven't been paying the mortgage off so would have to sell the property to do so.

Rotor

I know percy, it's worse than you think. I have heard that a wealthy man has borrowed money from a bank and used it to build a factory to build widgets.

No lie ; the cheeky b stard is using profits from selling us consumers (thats you and me folks) these widgets to pay off the interest on the loan!

He will soon own this factory outright that WE are paying for .







Now where does martin keep his sarcasm emoticons?

ukcarper

Percy1983 wrote: »

Yes I agree in a badly thought out BTL venture you could get more money by investing elsewhere.

But a lessor profit is still a profit. I still fail to see how BTL can make a loss without a massive amount of mismanagement.

If you think about there a lots of things that could go wrong over a 25 year period compared to sticking money in bank the extra couple of % compensates for those risks.

I’m not a BTL landlord and never will be but I see as just another investment it’s more risky than sticking your money bank but the returns can be higher.

chewmylegoff

Percy1983 wrote: »

Thats is my point, even if you run it at way below market rates you still end up with ahouse at the end of it for less than it should have cost you.

Like I say you would have to have extremely low rents for it to not even cover the interest.

Did you forget that my extreme example is in replay to your comment about what if your rent income doesn't clear the interest.

As you can see the answer is you still get a subsidised house at the end of it.

By all means the example leads more to a free happy meal, but its still a free lunch.

Your logic is so completely flawed.

Either you are comparing this to:

(i) buying a house and living in it, in which case you need to factor in the rent you have to pay whilst you aren't able to live in your house for 25 years; or

(ii) another investment, in which case you have to factor in the lost opportunity cost, including the income that you would have earned if you were not funding a loss making investment.

perhaps the easiest way for you to understand why what you are saying isn't true, is to look at it from the tenant's point of view. they have received subsidised housing, having to pay only £30k to use a house for 25 years that would have cost them £150k to buy. in that time they can not only have the enjoyment of the house, but also of the £120k that they would have paid.

the tenant is the one who has enjoyed the free lunch in your example, not the landlord - surely you can appreciate that they can't both be eating for free?

Thrugelmir

Rotor wrote: »

He will soon own this factory outright that WE are paying for .

I would always opt to invest in more machinery to increase output than be lumbered with a redundant factory unit in the future.

ukcarper

Rotor wrote: »

I know percy, it's worse than you think. I have heard that a wealthy man has borrowed money from a bank and used it to build a factory to build widgets.

No lie ; the cheeky b stard is using profits from selling us consumers (thats you and me folks) these widgets to pay off the interest on the loan!

He will soon own this factory outright that WE are paying for .







Now where does martin keep his sarcasm emoticons?

I’ve heard it worse than that some bloke borrowed the money from a bank to block up a river and flooded the whole area and is now charging us for the water that we need to survive.

princeofpounds

I still fail to see how BTL can make a loss without a massive amount of mismanagement.

Then you lack imagination and financial knowledge.

A simple example. I pay a 20% deposit on a 100k house. I let that house out for 6% achieved net operating yield (not a bad number).

My mortgage cost is 4% interest-only, fixed for 5 years (again, quite realistic and with a safety margin of a fixed rate).

5 years later, and the 'profit margin' of my 6% rental yield over my 4% mortgage cost has roughly increased my equity to a handsome 30% (we will assume for now that you keep the extra funds in a bank so the mortgage outstanding remains at 80k).

Now comes time to remortgage. *BAM!* some nasty economic event causes the pound to devalue. Perhaps Ed Balls gets back into power and wants to up government spending.

Interest rates soar as a consequence (I won't go into the mechanics unless you want me to) and reach the heady heights of 7%, which, frankly, is only the average of the last few decades or so. To remortgage now costs roughly 9% (similar spread over base rates).

The rental market will not pay any more for your property. Maybe a little more, for inflation, so let's assume you are running at a 2% deficit now on those mortgage payments rather than 3%.

But you can't afford to subsidise this, because it's almost one-third of a rent on a new place! And besides, you are already maxed out sending little Johnny to private school.

But you think things will get better, so you take out some personal loans, beg from family to tide you over, put little Johnny in the local sink estate comprehensive and subsidise the mortgage. 3 years of that and your equity is reduced to 24%. Then perhaps you can't make a payment, and you need to liquidate or face foreclosure.

You sell. But with mortgages so expensive, people can't afford to pay what they once could for houses. In fact, houseprices are down 30%. This may sound ridiculous, but it's not. The early 90s crash was more than this. I can also explain at length the inverse relationship between house prices and long-term expected interest rates, but it will take up too much space for now.

So you sell for 70k, and have 4k of returned profits remaining. You pay off most of your mortgage of 80k. You are left with a princely debt of 6k, when you once stood with a deposit of 20k (Which over those 8 years would be something like 25k stuck in a bank account)

Your economic profit (which take into account the opportunity cost of what you could have done with your money, a concept you have to educate yourself on) is -31k.

You are now a BTL bankrupt.

Now, I am not saying this is a likely scenario. In fact, I think it is not likely as long as the policy of trying to support debtors by artificially low interest rates is pursued. But it is well within the realms of possibility.

Percy1983

FTBFun wrote: »

Perhaps you should consider heading in then?

Sounds great but my morals prevent me taking on such a thing.

the_flying_pig wrote: »

i dunno what the heck you're getting at here.

in this example you've paid out £120k to get something that you could at the end sell for £100k & that provides you personally with no benefits [such as shelter] in the intervening time.

as moneymaking schemes go it's decidedly sub-prime.

Very true, good job the example works on £100 month rent.

Thrugelmir wrote: »

Probably why BTL has become so popular. Why build a real business when you can borrow money, buy a property and sit back while watching the profits grow. All too easy.

That is the big problem.

Rotor wrote: »

I know percy, it's worse than you think. I have heard that a wealthy man has borrowed money from a bank and used it to build a factory to build widgets.

No lie ; the cheeky b stard is using profits from selling us consumers (thats you and me folks) these widgets to pay off the interest on the loan!

He will soon own this factory outright that WE are paying for .







Now where does martin keep his sarcasm emoticons?

The big difference here is we can all live without widgets, where as we all need somewhere to live.

A._Badger

Percy1983 wrote: »

The big difference here is we can all live without widgets, where as we all need somewhere to live.

No, we need jobs too. People make widgets.

ukcarper

A._Badger wrote: »

No, we need jobs too. People make widgets.

What about the water