In the land of the blind.....

Ch0pp1e

Can anyone help?

I have been thinking about purchasing a buy-to let property, but cannot get my head round the opportunity cost.

On the one hand if you have £85,000 in the bank paying 4.6 % net, you would be essentially earning £3910/pa in interest.

On the other hand if you have a property that is £250,000 putting down £85,000 as a deposit you are looking at just breaking even through rental income and estate agent fees.

How do i measure what the cost is of investing in the new property vs. what interest is being accrued in the bank? Is it just the difference between an interest only mortgage and a repayment mortgage subtracted from the net earnings of the savings?

Firstly - Does the above make sense?
Secondly - would someone be kind enough to help?
Thirdly - What am i missing?

Thanks,

Leon

beingjdc

Ch0pp1e wrote: »

How do i measure what the cost is of investing in the new property vs. what interest is being accrued in the bank? Is it just the difference between an interest only mortgage and a repayment mortgage subtracted from the net earnings of the savings?

I don't think I/O or Repayment makes much difference here. It's pretty much just the net interest that your money could earn elsewhere.

Thirdly - What am i missing?

Primarily that for new BTLers at the moment, 10% of profit comes from the tenants, and 90% comes from rising prices. The decision you have to make is whether you expect prices to continue going up enough to offset the opportunity cost.

cells

Ch0pp1e wrote: »

Can anyone help?

I have been thinking about purchasing a buy-to let property, but cannot get my head round the opportunity cost.

On the one hand if you have £85,000 in the bank paying 4.6 % net, you would be essentially earning £3910/pa in interest.

On the other hand if you have a property that is £250,000 putting down £85,000 as a deposit you are looking at just breaking even through rental income and estate agent fees.

How do i measure what the cost is of investing in the new property vs. what interest is being accrued in the bank? Is it just the difference between an interest only mortgage and a repayment mortgage subtracted from the net earnings of the savings?

Firstly - Does the above make sense?
Secondly - would someone be kind enough to help?
Thirdly - What am i missing?

Thanks,

Leon

[FONT=&quot]
if you have 85k cash,

first put it into a better savings account, you can get 6.25% pretty easily. after tax that is 5%.

so the interest of 5% on 85k is £4250



now, if the BTL doesn’t make a profit of AT LEST £4250 PA it is not worth it, as you make that much with the money in a safe bank.


You could potentially buy a BTL house and decide to make zero profit on the rent, and hope the profit comes in from capital gains.

but you need to get at lest the stamp tax, buying fees, selling fees from the capital gains before you break even.

also don’t forget the capital gains is taxed at 40%



to be honest, right now, getting a BTL is a fool game[/FONT]

JoeK_3

You have not missed anything.

You have simply identified that buy to let at the moment is dangerous in the wrong hands. How could anyone consider investing £250,000 for a measly return.

The present buy to let market is for experienced people only, unless you want to get your fingers burned.

Well done for thinking outside the box, as most people dive in first and then think after.

JoeK