Forthcoming increases in rents will ...

cells

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.

The last one I bought (this month) in Zone2 and is now rented

My base assumption is that it will make over a 30 year period £310k Pre Tax profit on the rental side (rent and maintenance inflation of 2.5% and that mortgage rates go from 2.8% to 4.5% over the next 10 years)

That sounds a lot of money but it is only a 3.85% return on capital invested. That is to say the same money put into a bank account paying 3.85% interest would give you the same result (with a lot less agro and virtually no time investment in the bank account vs lots of time invested in running the BTL). Also by comparison the stock market FTSE100 dividend yield is 4.3% according to google and you can buy shares in a more tax efficient way

Of course what will make or break this as a good or bad investment is what prices do over the next 20-30 years. If they stay flat its probably better to just stick to savings accounts or some other investment class.

0% HPI = 3.85% ROEI
1% HPI would take it to 4.9% ROEI
2% HPI would take it to 6.1% ROEI
3% HPI would take it to 7.2% ROEI
4% HPI would take it to 8.3% ROEI
5% HPI would take it to 9.4% ROEI

cells

westernpromise wrote: »

If any Chancellor raised a tax to a level so high that revenues collapsed as everybody avoided it, he would thereby make an abject fool of himself.

First, he's demonstrated his failure to understand the Laffer Curve, and secondly, he's clearly failed specifically in whatever his claimed goal was in raising that tax. If the aim was to outlaw an activity he should have just done so. If it was not but the tax is so high that the legitimate activity stops anyway, then he has patently screwed up.

A chancellor who brought almost all legitimate activity in the property market to a standstill would not cut a credible figure.

We are close to that point in London. It is now cheaper to extend than to sell and re-buy, and it is rational to hold onto all property you now own. Selling it and buying back in again later both crystallises a CGT liability and is again prohibitively costly. At some really, really rich prices, some people will be persuaded to sell, but there aren't many folk left who'll pay those prices. They just convert the loft instead.

yes indeed volumes will only go down also a property investment must now take a lot more account of the investors age. If you are 65 is it worth paying £30k stamp duty on the average London property when if you die 1-2 year later you are at least £30k down.

How the public will react is an unknown probably the least financially aware as a group must be residential property investors.

buglawton

westernpromise wrote: »

If any Chancellor raised a tax to a level so high that revenues collapsed as everybody avoided it, he would thereby make an abject fool of himself.

First, he's demonstrated his failure to understand the Laffer Curve, and secondly, he's clearly failed specifically in whatever his claimed goal was in raising that tax. If the aim was to outlaw an activity he should have just done so. If it was not but the tax is so high that the legitimate activity stops anyway, then he has patently screwed up.

A chancellor who brought almost all legitimate activity in the property market to a standstill would not cut a credible figure.

We are close to that point in London. It is now cheaper to extend than to sell and re-buy, and it is rational to hold onto all property you now own. Selling it and buying back in again later both crystallises a CGT liability and is again prohibitively costly. At some really, really rich prices, some people will be persuaded to sell, but there aren't many folk left who'll pay those prices. They just convert the loft instead.

In this instance UK stamp duty revenues were down £870m over 8 months if I read the Telegraph article right. Revenue down and economic activity in the property sector stalled at the same time. Nice one George!

The only silver lining is that with such an incompetent chancellor at the helm, interest rates will never rise

chucknorris

cells wrote: »

If I were 60 years old with the view of holding for 10 years I think the £2.5k stamp duty of yesteryear would have been acceptable but the £30k stamp duty for just 10 years is going to be a lot less attractive.

I really don't want to be a landlord too far into my 60's, I see that as the time to enjoy the last decade or two of good health and fitness, although that said, I've seen some reasonable times done by 80 year olds in the Dorking 10 mile road race (very inspiring and demonstrates that fitness doesn't necessarily disappear in your 80's).

westernpromise

buglawton wrote: »

In this instance UK stamp duty revenues were down £870m over 8 months if I read the Telegraph article right. Revenue down and economic activity in the property sector stalled at the same time. Nice one George!

The only silver lining is that with such an incompetent chancellor at the helm, interest rates will never rise

I don't know about "never" but I still think we are probably not even half way through the era of emergency low base rates. Pretty well all the news is deflationary so I'm not sure where upward pressure on rates will come from.

Brexit is the big imponderable - it could either tank property (as the City financial sector leaves London for Paris, so as to stay in the EU) or send it to the next level (as we escape all that inept regulation and make our own).

Generali

cells wrote: »

The last one I bought (this month) in Zone2 and is now rented

My base assumption is that it will make over a 30 year period £310k Pre Tax profit on the rental side (rent and maintenance inflation of 2.5% and that mortgage rates go from 2.8% to 4.5% over the next 10 years)

That sounds a lot of money but it is only a 3.85% return on capital invested. That is to say the same money put into a bank account paying 3.85% interest would give you the same result (with a lot less agro and virtually no time investment in the bank account vs lots of time invested in running the BTL). Also by comparison the stock market FTSE100 dividend yield is 4.3% according to google and you can buy shares in a more tax efficient way

Of course what will make or break this as a good or bad investment is what prices do over the next 20-30 years. If they stay flat its probably better to just stick to savings accounts or some other investment class.

0% HPI = 3.85% ROEI
1% HPI would take it to 4.9% ROEI
2% HPI would take it to 6.1% ROEI
3% HPI would take it to 7.2% ROEI
4% HPI would take it to 8.3% ROEI
5% HPI would take it to 9.4% ROEI

Four questions:

1. Are your assumptions about profits based on the net present value of the cashflows or do you simply add up the amount of profit you expect from each year?

2. What will the impact on your net profit be from the upcoming tax changes?

3. What stress testing (if any) have you done on your investment: what happens if you can't refinance at an advantageous rate or the tenant refuses to pay the rent for a few months or if base rates go to 5% (mortgage rates of 7%) or higher for example?

4. What happens if prices fall rather than rise?

Sorry if that's invasive it's just from the numbers I see, admittedly from just 2 examples, I don't understand how BTL adds up at present in London as a new investment. Golden Lane is horrible although Clapham is a bit better (your numbers look more like Clapham than Golden Lane in all honesty).

Yes, if you're just 'coupon clipping' on a place you've had for years and have little or no debt against a decent income stream then I can see why someone wouldn't want to trigger a CGT event and then what the heck else are you going to put your money into?

westernpromise

chucknorris wrote: »

I really don't want to be a landlord too far into my 60's, I see that as the time to enjoy the last decade or two of good health and fitness, although that said, I've seen some reasonable times done by 80 year olds in the Dorking 10 mile road race (very inspiring and demonstrates that fitness doesn't necessarily disappear in your 80's).

I wouldn't be bothered about being a landlord in my 60s because my property is managed for me and entails my reading one email a month. That's about all I ever have to do. I am convinced that full management by a decent estate agent pays for itself because the tenants are looked after properly. So they don't leave, unless their lives change and they need to. I've been a tenant and had I had a choice of the same property managed by the landlord versus managed by an agent for 6% more rent, I'd have gone for the latter every time.

chucknorris

westernpromise wrote: »

I wouldn't be bothered about being a landlord in my 60s because my property is managed for me and entails my reading one email a month. That's about all I ever have to do. I am convinced that full management by a decent estate agent pays for itself because the tenants are looked after properly. So they don't leave, unless their lives change and they need to. I've been a tenant and had I had a choice of the same property managed by the landlord versus managed by an agent for 6% more rent, I'd have gone for the latter every time.

I didn't mention the bigger challenge, and that is all that equity needs to be spent (we don't have children), and it isn't going to be easy to get through it all, if I wait too long (late 60's) it definitely won't happen.

My tenants usually stay for a long time, the last one left after being there 12 years, one gave us notice last week, they have only been there 4 years (that is on the short side for us).

westernpromise

Bluebirdman_of_Alcathays wrote: »

I live in Bristol, and I can attest that the 18% figure sounds about correct.

which is a very interesting data point, because we are routinely reminded that rents cannot possibly rise ever, because if they could, they'd already have done so.

I went to Brizzel a few years ago and thought it was lovely.

Generali

buglawton wrote: »

If it's 0.4% then that's an absolutely huge loss. Imagine the reaction if a 0.5% tax hike on incomes were proposed with our currently flat economic outlook!

No, he won't lose his job over one single fail, it will be the cumulative result of a series of knee-jerk policy changes. Please the media, fail balancing the tax books and generally mess up the property market in the process.

He's doing it to please some media-sensitive part of the Tory party, but he'll be the fall guy in the end.

It's not 0.4% of total taxes, nothing like.

Revenues for this tax year should comfortably exceed £650,000,000,000. This apparently scandalous £900,000,000 missing tax take is about 0.14% of taxation.

It seems to me that you have a bee in your bonnet because any serious analysis of what you're saying shows your point to be a bit silly.