BTL in perspective

cgnao

I have been renting a flat for about a year. My landlord paid it £114,950 a couple of months before I moved in (checked on NetHousePrices). In the current market a similar flat could easily be bought for under £110,000 (asking prices for many similar flats for sale in this area are 110-115k), so if he sold now he would incur a capital loss.

The rent I pay (£500) barely covers his mortgage payments. He has recently tried to increase the rent but backed off after I threatened to move out. There are many similar vacant flats in my area that I could rent for about the same price.

Let's examine how my landlord's "investment" has done in the past 12 months:

Rental income 6,000
Service charges (1,050)
Maintenance (plumbing) 280

Income after expenses 4,670
Tax (40%) (1,868)

Income after tax 2,802

Mortgage interest (5,000)
(£100,000 @ 5%)

Total profit (loss) (2,198)

So the silly idiot is losing more than 2k a year. And this does not include his buying/selling costs and capital loss.

Even if he didn't have a mortgage to pay, the yield before tax would be 4,670/114,950 = 4.06%. Why bother when there's plenty of instant access savings accounts paying in excess of 5%?

While the idiot landlord subsidises me, I wait for house prices to revert to the long term average of 3.5 times salary.

Who said that renting is dead money?

garysletters

Whilst I agree that being a landlord is not the cash-cow most people seem to think, I have to bring to your attention a major error in your calculations.

The tax charge you have guessed for your landlord will actually be probably nothing. You are taxed AFTER all expenses are taken off i.e. you should deduct mortgage interest and other expenses BEFORE you work out any tax liability. How do you know all these figures for how much he is paying on the mortgage anyway???

however, you have also oversimplified things and not added costs like advertising to find you, BTL insurance, safety certs, legal costs, other maintenace costs and agents fees if he uses them. (There will be others too.)

You are right that a yield of 4% is rubbish. however, this property has a yield of over 5% (still low)

Maybe his reason for buying wasn't to make money from you, but for long term growth??? Or for himself to move into later????

dougk_2

You say many properties are at an asking price between 110 an 115k.
It's possible he could get more or less than this amount. There is a big element of chance and luck in the housing market. As a longer term investment he could do well.
What will the flat be worth in 10 years time? No-one knows. How much will the rent be in 10 years time? No-one knows. In both cases I would imagine it will be higher than now.
as garysletters said - how do you know about his mortgage? If he's on a BTL mortgage its unlikely to be as much as 100k as this is above many BTL lenders LTV ratio allowed. He could have bought the property with cash and hence the £5,000 expenditure on a mortgage may not be there.

I would say at present its not a good short term investment, but we don't know the full facts.