BTL - Is it really worthwhile?

princeofpounds

I think it's good you are asking the questions. After a 22 year unprecedented boom in property prices obviously memories fade of the problems the business model can face. Most people seem to think it's a money machine, on the basis that past performance predicts the future... and we all know it doesn't work like that.

Actually buying and reting property is a pretty small part of the business. Primarily BTL is a financial business, which exists because mortgage finance is one of the very few ways your average punter can get access to cheap, high loan-to-equity leverage.

The reason people get rich on BTL is simply gearing of returns. A simple example illustrates this:

buy a house for 100k, with a 20k deposit. Hold for 3 good years. Assume rent roughly covers mortgage for now. Price is now 120k. Sell, repay your 80k mortgage and you have 40k left. Congratulations, you are a new Alan Sugar who has just doubled his money!

However, perhaps you hold for one bad year instead. Prices head down 10%. You struggle to make repayments. Decide to sell house. Pay off your 80k mortgage. You have lost half your money in one swoop.

All gearing does is allow you to pay an interest fee to amplify your returns, up or down. Obviously in a huge boom market the likes of which has never been seen before in the UK this is going to work well. From now on, it's not quite so clear.

BTL is simply a big bet on two factors; house prices and interest rates (and those are also intrinsically linked - one heads up, the other down in general). Don't kid yourself there is anything more to it.

The rental yield part, as you have just worked out, in general only allows the bet to keep ticking over.

And because rental yields are so low in many parts of the country then yes, it can make sense simply to not bother and leave your money in cash (or, more likely, some other instrument you find interesting).

Sometimes you can get more yield out of a property, but you have to work out if it is worth it for the volatility risk. You might get 4.5% rental yield rather than 3% deposit rates. But is that extra 1.5% worth it when you consider that a 1% change in house prices - something that can happen in a month alone - means a 5% change in your capital.

You might want to take that risk, if you want to take that bet on property prices, but it's up to you. At least you'll have your eyes open to the bet you are taking.

princeofpounds

Do you all think I should buy my own house first before a BTL property?

Normally yes. It's far more tax efficient as an investment, has less costs (no agent fees etc.).

You don't get a rental cheque in your bank account but you do get an equally valuable implied return by not having to pay rent to live somewhere else.

If you plan on living at home forever that may not be so attractive but that's up to you.

Alex92_2

Thanks for that, PrinceofPounds. It sounds like an awfully big bet/gamble for not much of a return when you exclude capital growth from the equation.

So other than my own home (when I buy that), what will be best to do with my money, other than pay off the mortgage? Read up on stocks and shares? Vanguard LifeStrategy? ISA's? What do you do? Feel free to PM if you want to keep matters between you and me.

I cant stress how much i appreciate all the help!

princeofpounds

It sounds like an awfully big bet/gamble for not much of a return when you exclude capital growth from the equation.

Yes it is a big bet, but I should point out that you can do very well if you get it right.

Personally I don't think we are in immediate danger of a housing crash until short-term interest rates start to go up. And we know that the bank of England thinks they are unlikely to do so until at least 2015 based on Carney's speech.

But personally I need far more than 18 months time horizon for a BTL investment!

So other than my own home (when I buy that), what will be best to do with my money, other than pay off the mortgage? Read up on stocks and shares? Vanguard LifeStrategy? ISA's? What do you do? Feel free to PM if you want to keep matters between you and me.

Frankly, investing in anything is hard when central banks have been pursuing zero-interest rate policies and QE. That bids up all sorts of assets, not just houses, so you risk overpaying for all sorts of things.

What would be key for me

- getting out of the Pound with a good proportion of my savings; if rates are kept unreasonably low in the UK then you will feel it through a weaker pounds as international capital has less demand for GBP-denominated assets.

- Being in liquid assets. As well as being flexible, i think they have been reflecting the dangers of higher interest rates more quickly than things like property following the US 'tapering' scare. So you have already seen part of the mark-down.