Forthcoming increases in rents will ...

mwpt

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

Cells, can you mention how you raised the capital for this? I guess it's around £170k (referring to investment capital)? Do you follow the high leverage constant remortgage model to expand?

cells

Generali wrote: »

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?

1: I did the simple annual profit. What discount rate do you suggest for the NPV? Its quite a bit of guesswork. Anyway at 3% discount rate the NPV of the cash flow is aprox this much more than the equity invested

0% HPI = 25%
1% HPI = 80%
2% HPI = 140%
3% HPI = 230%

So even with no 0% HPI the NPV of the cashflow is highre than the equity invested. However bear in mind this is not a passive investment for instance it took not far off 100 hours of mostly physical labour to get the place into a good lettable condition plus ongoing time commitments in excess of a more passive FTSE tracker or the like. And again the discount rate is all important in NPV estimates so it really is a bit of guesswork

2. Those are with the new tax rules but with the existing stamp duty. With the stamp duty changing the rental side is the same but the returns after being sold will be a bit less as there is more capital employed

3: I penciled in a 1.25% increase in mortgage costs in two years when I refinance another 0.25% increase two years after that. Another 0.25% two years after that then from year 10 onward I have it as 4.5% finance cost. Overall I see a 1.75% increase in mortgage rates from here long term. The base rate may increase more than that but I dont think mortgages will because a good slab of banks finance costs are not the BOE rate but savers who have their money in 0% current/savings accounts

Refinance risk. Its a 25 year mortgage so worst case is going onto SVR @ 5% which is not much more than the 4.5% I assumed long term rate I will end up paying. Also I have reasonable cash buffer to see me through bad tenants or unexpected repairs/costs


4: I will cry like a big baby then convince myself its only temporary so as to not go insane

buglawton

Generali wrote: »

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.

Quote:
Originally Posted by Generali
That's about 0.4% of income tax and NI receipts. You honestly believe Mr Osbourne is going to lose his job over that?
It sounds like wishful thinking.

To which my reply was: 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!

Put it in the context of the reply I posted to your own figure.
Who has got a bee in their bonnet?

padington

westernpromise wrote: »

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.

Ive been following Brighton ( or specifically Hove rents) and 12 months ago £725 was a reasonable price to pay for a one bed flat. Now it's more like £850.

Airbnb weekend rentals have been rising just as steep also.

That's a rent rise of are 18% and a capital appreciation by over 8% in year.

It's a self fulfilling prophecy in a way too because it creates a club of well connected professionals who then become more attracted to the area because the schools become better etc etc.

padington

Simon Jenkins arguing that rents will spiral ...

http://www.standard.co.uk/comment/comment/simon-jenkins-panic-over-a-property-crash-will-just-leave-london-poor-and-ugly-a3165241.html

buglawton

Good article with some accurate jabs at Osbornes current myopic thinking.

Simon also seems to think that the upcoming tax changes are going to reduce supply of rented accommodation and raise rents as a result.

Pity that the Mayor of London can't set local property tax (and occupancy) policy instead of the cloud-cuckoo chancellor.

Crashy_Time

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).

Stuff like this will be more and more common as people just can`t sell family homes. Landlords with these types of properties always negotiate/keep rent low IME for good long term tenants.


http://www.rightmove.co.uk/property-to-rent/property-37493466.html?showcase=true

mwpt

buglawton wrote: »

Good article with some accurate jabs at Osbornes current myopic thinking.

No, it's the article that is myopic. Here are some examples.

I bought my first studio flat in the Seventies and it cost four times my starter salary. The 85 per cent mortgage cost 17 per cent. It consumed 40 per cent of my income and was crippling. That same job today also buys a studio flat at the same multiple. But the mortgage is four per cent, which consumes a mere 15 per cent of income.

He then goes on to talk about buying in Camden, as if that was the poorest of the poor. Like none of the other even poorer boroughs existed back then. Then he talks about multiples. Stats don't lie Simon, average multiples are what, 10 or 11 times average earnings today, the highest they've ever been. I'm sure his anecdote is great for trying to prove his point though.

And another:

The Council of Mortgage Lenders’ index has London’s average mortgage interest in 1990 consuming 30 per cent of average income. That is 10 per cent today. Yes, the deposit is bigger and payment may take longer, but no one can say London property is less affordable to buy.

I think we can Simon. I would rather have bought at low multiples and high rates than the other way round. When you have high rates and low multiples, you can make massive dents into the mortgage and pay it off far more quickly than you can when the price is enormous but interest rates are low.

So let's examine his claim. I'm going to make up some figures but the maths is the same regardless of the figures I pick for salary.

He claims mortgage was 40% of income (not sure if he means net or gross but I'll just ignore tax for this purpose). If I make up a figure of £6k pa salary, his income is £500 pm, of which 40% is £200. At 17% repayments, 25 year mortgage that implies he borrowed £14k with deposit of 15% = total house cost of £16500. Which is less than three times his salary. Not the more than four times he claims. And as his salary rose, even small amounts, it made a massive difference in his ability to pay down that mortgage very quickly because his salary was a high proportion of the total debt. A 3% rise in salary was a big chunk extra of his total housing cost.

So what does that look like today at rates of 2%? We keep everything else the same (salary, etc). The same flat would cost £56500, you'd need a much larger deposit (£8k) which would take you far longer to save, and your ability to pay off large chunks quickly would be very much diminished. And, the property would now be 9.4 times earnings. About what the stats tell us now. And a 3% rise in salary, is a small chunk of the total housing cost.

Simon is a jerk.

chucknorris

Crashy_Time wrote: »

Stuff like this will be more and more common as people just can`t sell family homes. Landlords with these types of properties always negotiate/keep rent low IME for good long term tenants.


http://www.rightmove.co.uk/property-to-rent/property-37493466.html?showcase=true

My properties aren't like that, they are let to young professional sharers, not families, the reason that I rent below the market rent is to have a choice of tenant, so I can avoid idiots. Life is too short to put up with certain types, that I could do without.

Crashy_Time

chucknorris wrote: »

My properties aren't like that, they are let to young professional sharers, not families, the reason that I rent below the market rent is to have a choice of tenant, so I can avoid idiots. Life is too short to put up with certain types, that I could do without.

Nobody mentioned your properties?