Forthcoming increases in rents will ...

Generali

chucknorris wrote: »

It is going to be interesting what happens, but a couple of things did come to my attention from your post:

1. £400/week rent link was from 2008, rents have increased quite a bit sine then, I think £500 to £550 is about the market price now.

2. The article is focusing on it being (possibly) lucrative for existing landlords, rather than new new entrants, I agree that property looks far from good for new entrants. But maybe not too bad for incorporated landlords.

Cells produced some figures not too long ago on the percentages of properties bought in London for investment (sorry I can't be bothered to search for it), but it was a significant percentage. If landlords stop buying, as you say something will have to give, I don't think they will stop buying altogether, but their numbers will reduce as they will tend to invest higher deposits and be incorporated. The 3% stamp duty is a barrier, but there are noises about incorporated landlords not having to pay (details yet to be published).

Absolutely right, apologies for that. It did sound low. In fact it sounded like rents hadn't really changed since I left the UK in....2008!

I was hoping to find something to let in Golden Lane as it is a nice estate with lots of similar flats and not too chi-chi.

At £500/wk the yield is 3.9% assuming 100% occupancy and no costs. Assume 48 week occupancy which is apparently a decent rule of thumb and yield drops to 3.5% before costs.

Add to that a service charge of £3,500 a year just for basic cleaning etc costs and an accumulated deficit (apparently) of £50,000 a flat (link).:eek:

Perhaps I'll try another area to test on. Maybe Golden Lane is atypical. I certainly wouldn't BTL there!!!

chucknorris

Generali wrote: »

Absolutely right, apologies for that. It did sound low. In fact it sounded like rents hadn't really changed since I left the UK in....2008!

I was hoping to find something to let in Golden Lane as it is a nice estate with lots of similar flats and not too chi-chi.

At £500/wk the yield is 3.9% assuming 100% occupancy and no costs. Assume 48 week occupancy which is apparently a decent rule of thumb and yield drops to 3.5% before costs.

Add to that a service charge of £3,500 a year just for basic cleaning etc costs and an accumulated deficit (apparently) of £50,000 a flat (link).:eek:

Perhaps I'll try another area to test on. Maybe Golden Lane is atypical. I certainly wouldn't BTL there!!!

I forgot about how high service charges can be, despite the fact that I have 4 leasehold flats. I bought a share of the freehold for one, that one only costs about £600, the other 3 are ran by a co-op management, and they are about £1,200 each. So quite good value, even so, these will be sold first as I appreciate freehold properties much more, and there is always the risk of a major works bill.

By the way I've never had a rental void in 25 years, apart from instigated voids to do work (new kitchens/bathrooms etc.). That was a nice surprise though, because when I started off, I had allowed for one month a year in my spreadsheet, so quite a bonus.

Generali

Moving on to Clapham (trying to stick to areas I know).

This place was sold a couple of months ago:

http://www.rightmove.co.uk/house-prices/detailMatching.html?prop=2644004&sale=2184259&country=england

for £890,000 and it looks to me very much like this place:

http://www.rightmove.co.uk/property-to-rent/property-54488453.html

which is in the same street and up for rent at £595/wk.

The trouble with housing of course is that is isn't fungible so we can't say for sure that the two places are of equal value but I reckon it is close enough for these purposes.

Gross yield then = 595 x 52 / 890,000
= 3.5%

Using the 48 week year we get 3.2%.

So a 50% mortgage needs an interest rate of 6.4% for the LL not to be able to cover the interest costs.

Of course, a LL spending £890,000 on a house is likely to be a top rate taxpayer so let's put the numbers through the Torygraph's BTL Tax Calculator:

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11966662/Buy-to-let-calculator-how-will-new-tax-reduce-your-profit.html

Assume tax deductable costs of £3,000 a year (10% of rent of £600/wk for 50 weeks a year).

Assume a c. 50% mortgage of £450,000 at 2.5% so £11,250 interest costs.

Assume earnings of £100,000/yr (seems low but okayish: the house costs 9 x that!). Assume savings interest of £1,000/yr. Assume no dividend income.

Current rules:
Rental income £30,000
Mortgage interest £11,250
Profit before tax £15,750
% interest relief 100%
Interest now taxable £0
Taxable profit £15,750
Tax chargeable £9,450
Less 20% tax credit £0
Tax due £9,450
Net profit after tax £6,300

Rental income £30,000
Mortgage interest £11,250
Profit before tax £15,750
% interest relief 0%
Interest now taxable £11,250
Taxable profit £27,000
Tax chargeable £15,000
Less 20% tax credit -£2,250
Tax due £12,750
Net profit after tax £3,000

Coincidentally the after tax profit is the same as the assumed costs.

This is how the numbers work with record low interest rates.

chucknorris

Generali wrote: »

Moving on to Clapham (trying to stick to areas I know).

This place was sold a couple of months ago:

http://www.rightmove.co.uk/house-prices/detailMatching.html?prop=2644004&sale=2184259&country=england

for £890,000 and it looks to me very much like this place:

http://www.rightmove.co.uk/property-to-rent/property-54488453.html

which is in the same street and up for rent at £595/wk.

The trouble with housing of course is that is isn't fungible so we can't say for sure that the two places are of equal value but I reckon it is close enough for these purposes.

Gross yield then = 595 x 52 / 890,000
= 3.5%

Using the 48 week year we get 3.2%.

So a 50% mortgage needs an interest rate of 6.4% for the LL not to be able to cover the interest costs.

Of course, a LL spending £890,000 on a house is likely to be a top rate taxpayer so let's put the numbers through the Torygraph's BTL Tax Calculator:

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11966662/Buy-to-let-calculator-how-will-new-tax-reduce-your-profit.html

Assume tax deductable costs of £3,000 a year (10% of rent of £600/wk for 50 weeks a year).

Assume a c. 50% mortgage of £450,000 at 2.5% so £11,250 interest costs.

Assume earnings of £100,000/yr (seems low but okayish: the house costs 9 x that!). Assume savings interest of £1,000/yr. Assume no dividend income.

Current rules:
Rental income £30,000
Mortgage interest £11,250
Profit before tax £15,750
% interest relief 100%
Interest now taxable £0
Taxable profit £15,750
Tax chargeable £9,450
Less 20% tax credit £0
Tax due £9,450
Net profit after tax £6,300

Rental income £30,000
Mortgage interest £11,250
Profit before tax £15,750
% interest relief 0%
Interest now taxable £11,250
Taxable profit £27,000
Tax chargeable £15,000
Less 20% tax credit -£2,250
Tax due £12,750
Net profit after tax £3,000

Coincidentally the after tax profit is the same as the assumed costs.

This is how the numbers work with record low interest rates.

it is the ROI that is the shocker! Only £3k for almost £500k invested, it just doesn't work for me, shares would be a better investment.

Also the loss of the 10% wear and tear allowance is significant too (I don't think you took that into account), that was a significant bonus, as the costs were nowhere near 10%. I wouldn't have invested in that property even with the old rules, nice to see high rents though, I have 4 flats in Battersea that are a good standard (but not quite as good as the property above). At the moment my rents are too low, they are:

2 bed £1,400
2 bed £1,367
3 bed £1,800
3 bed £1,867 (just received notice on this one, we are going to put it up to over £2,000/month.

chucknorris wrote: »

the day after the budget changes were announced I looked at the first couple of properties that I bought, and re-ran the figures applying the new post budget tax rules. When I first bought I was only covering costs and showing a very small profit, but I was content with that, because I was investing for the long term. But with the new tax rules, there is no way that I would (or could) have taken on those initial losses, in not only the first year, but quite a few more subsequent years before breaking even. It definitely is a 'game changer' for new entrants (and highly geared current landlords), it will also be interesting to see what happens to rents.

Generali

chucknorris wrote: »

it is the ROI that is the shocker! Only £3k for almost £500k invested, it just doesn't work for me, shares would be a better investment.

Also the loss of the 10% wear and tear allowance is significant too (I don't think you took that into account), that was a significant bonus, as the costs were nowhere near 10%. I wouldn't have invested in that property even with the old rules, nice to see high rents though, I have 4 flats in Battersea that are a good standard (but not quite as good as the property above). At the moment my rents are too low, they are:

2 bed £1,400
2 bed £1,367
3 bed £1,800
3 bed £1,867 (just received notice on this one, we are going to put it up to over £2,000/month.

Even more than £500,000 once you account for SDLT I would think.

The return can only come from capital gains. That's all when and good if prices continue to rise but you've got to wonder how much more than £900,000 prices can get. Even quite small percentage gains are vast amounts of money from here. Another 10% on prices and we're talking a million for a 2 bed terrace in Sarf London.

7% a year for a decade from there is 2 million, 7% a year for a decade on from that is 4 million squids. So you'd need to earn a million a year in 15 years time to buy a 2 bed terrace in Clapham.

It doesn't seem likely somehow. Possible of course but I don't think that you could present it as the most likely outcome.

We live in interesting times. Love it

chucknorris

Generali wrote: »

Even more than £500,000 once you account for SDLT I would think.

The return can only come from capital gains. That's all when and good if prices continue to rise but you've got to wonder how much more than £900,000 prices can get. Even quite small percentage gains are vast amounts of money from here. Another 10% on prices and we're talking a million for a 2 bed terrace in Sarf London.

7% a year for a decade from there is 2 million, 7% a year for a decade on from that is 4 million squids. So you'd need to earn a million a year in 15 years time to buy a 2 bed terrace in Clapham.

It doesn't seem likely somehow. Possible of course but I don't think that you could present it as the most likely outcome.

We live in interesting times. Love it

I just can't see much in the way of (real term) capital gains in London, certainly not 7% PA (although I know you were jesting). I'm happy with current values and I'll be content with inflation only rises between now and when I sell, I'm not sure when my first sale will be exactly. We received notice from a tenant last weekend, but that is for a property that I want to retain. I have two flats that I have earmarked for early selling, if the notice had come from one of those I would have thought seriously about selling, rather than re-letting. Another trigger would be the base rate going over 2%.

EDIT: It will be great news for everyone with money in shares when I sell, because it is almost certain that the ftse will have gone back up, depriving me of the opportunity of investing at this current low level.

Generali

chucknorris wrote: »

I just can't see much in the way of (real term) capital gains in London, certainly not 7% PA (although I know you were jesting). I'm happy with current values and I'll be content with inflation only rises between now and when I sell, I'm not sure when my first sale will be exactly. We received notice from a tenant last weekend, but that is for a property that I want to retain. I have two flats that I have earmarked for early selling, if the notice had come from one of those I would have thought seriously about selling, rather than re-letting. Another trigger would be the base rate going over 2%.

EDIT: It will be great news for everyone with money in shares when I sell, because it is almost certain that the ftse will have gone back up, depriving me of the opportunity of investing at this current low level.

There are plenty of people in Aus that will tell you that 7% pa nominal returns are to be expected. They are best ignored .

I do wonder where capital gains can come from in London residential property. Wood Green excepted of course.

padington

Generali wrote: »

I just don't see how BTL can work as an investment to new entrants unless you can find a way to get around the SDLT changes.

To buy this relatively modest, ex-council flat (albeit very centrally located):

http://www.rightmove.co.uk/property-for-sale/property-54620213.html

will cost £675,000. That's £44,000 in SDLT! I reckon you could let it for £400 a week if you get no voids:

http://goldenlaneestate.com/content/details.htm

So it's going to take 110 weeks' rent just to pay off your stamp duty bill.

That's a yield of below 3% BTW. That might look attractive with a BTL mortgage available for 2% plus change. Even with a working assumption that a BTL owner is pretty risk averse and so putting down a big deposit (IIRC 50% is pretty standard) base rates only need to go up to 4% for the LL to struggle to cover a 50% LTV mortgage using the rent alone (working on the assumption that mortgage rates are typically base rate + 2%).

Something's gotta give. Either rents are going to go up substantially (say 50% real rise over the next few years) or house prices are going to have to come down or the entire London market is just going to grind to a halt because nobody will sell but nobody can afford to buy.

Surely the number of plutocrats wanting a 2 bed, ex-council place must be limited.

Rents went up in Brighton and Bristol last year by 18%. That's pretty substantial.

mwpt

padington wrote: »

Rents went up in Brighton and Bristol last year by 18%. That's pretty substantial.

18%?!

I have heard through the grapevine that Bristol is buzzing in the last few years but that seems incredible. Source?

EDIT: Found it, on a guardian article. So, what forced up these rent rises?

Was it a decrease in the OO population, putting more pressure on rental stock?
Was it an increase in OO occupation, leaving fewer rental properties, putting more pressure on the rental stock?
Was it more BTL entrants to the market, leaving OOs priced out and forced to rent, pressure on rental stock?
Was it the announcement of the upcoming tax changes, prompting landlords to raise rents?
Was it fewer BTL entrants to the market, leaving fewer rental properties, pressure on rental stock?

All of these I've seen as reasons cited for increased rents.

padington

mwpt wrote: »

18%?!

I have heard through the grapevine that Bristol is buzzing in the last few years but that seems incredible. Source?

EDIT: Found it, on a guardian article. So, what forced up these rent rises?

Was it a decrease in the OO population, putting more pressure on rental stock?
Was it an increase in OO occupation, leaving fewer rental properties, putting more pressure on the rental stock?
Was it more BTL entrants to the market, leaving OOs priced out and forced to rent, pressure on rental stock?
Was it the announcement of the upcoming tax changes, prompting landlords to raise rents?
Was it fewer BTL entrants to the market, leaving fewer rental properties, pressure on rental stock?

All of these I've seen as reasons cited for increased rents.

http://www.theguardian.com/money/2016/jan/12/brighton-and-bristol-hit-hardest-as-rents-raised-by-an-average-of-18-in-2015

I've mentioned before but the air bnb rents in brighton have also gone banana's. It was voted one of the top ten locations in the world to have a weekend in recently. Generally on top of its game. The Japanese won their rugby game their and swam in the sea on a nice day and the Japanese tourists marked it down as a must see location. Also generally cricket locations seem to be doing very well. No where has done as well as the Oval area over the years and Hove enjoys a respectable cricket club. Also the i360 seems to be beginning its magnetic effect early. Whilst the ripple effect from London seems to be kicking in. Tech companies have also been calling it the 'silicon beach'. Whilst a survey of young UK professionals recently put Hove in the top five most wanted area's to live ( it might have even be number one, I can't remember ).

Certain places just get knighted as being cool every now and again and things tend to go ballistic, seem brighton is doing that right now, I guess a lot of people are choosing to rent first for a year to see how it goes.

Bristol was just too cheap in the first place given how nice it is generally in my opinion, bit too far from London though for me.