Baffling London BTL economics

chucknorris

Generali wrote: »

Rents can only rise significantly if significant numbers of LLs exit the market.

Increased costs to LLs might even reduce rents in the short term as LLs want to decrease voids. Remember, 1 month without rent reduces returns by 8% but doesn't reduce costs significantly: better to cut the rent by 5% and see a 1 week void rather than a 1 month void.

In the long run increased costs for LLs will almost certainly increase rents though.

I don't think rents will rise significantly, I think they are already alarmingly high, so it won't take much more to create a problem. We are currently marketing a flat, and when looking at the competition, I noticed that some flats are now being marketed as 3 bedrooms, but without a lounge! So 2 beds are being advertised as 3 beds, like this one:

http://www.zoopla.co.uk/to-rent/details/15080347

So maybe that is another potential outcome, properties will be more densely occupied.

cells

chucknorris wrote: »

I don't think that you really tried either, so this morning I have looked at one of my properties in detail, as if I was buying it today as an investment property:

£500k 3 bed flat in Battersea.
Rental income £21,600 (£1,800/month)

I applied the following costs/criteria:

- 70% mortgage at 4.25% (I ignored gimmicky initial discount products)
- £3k repairs/maintenance/misc costs/decoration sinking fund
- 10% letting agents fees
- based on mortage tax relief capped at 20%

Actual investment of £186,000 consisting of:

£150k deposit
£30k stamp duty
£3k fees (solicitor, mortgage arrangement, valuation etc)
£3k furniture

The first year annual return (for a 40% tax payer) is a £2k net loss, that does not include any opportunity cost on the £186k invested. Of course I have based this on the mortgage tax relief being capped at 20% which will not actually be fully implemented until 2020, but that unfortunately is the future.

In your example there is an annual loss for the first 11 years on the rental side

Even with 2% annual HPI on a NPV it only just beats paying down debt by year 30

So it would be a bad purchase

However if prices increase by 3% a year then by year 9 it becomes a better investment than cash and by year 30 it has a NPV in excess of paying down deby by £100,000

Generali

cells wrote: »

In your example there is an annual loss for the first 11 years on the rental side

Even with 2% annual HPI on a NPV it only just beats paying down debt by year 30

So it would be a bad purchase

However if prices increase by 3% a year then by year 9 it becomes a better investment than cash and by year 30 it has a NPV in excess of paying down deby by £100,000

What level of HPI would it take to match long term equity returns (including dividends) of 7%?

chucknorris

cells wrote: »

In your example there is an annual loss for the first 11 years on the rental side

Even with 2% annual HPI on a NPV it only just beats paying down debt by year 30

So it would be a bad purchase

However if prices increase by 3% a year then by year 9 it becomes a better investment than cash and by year 30 it has a NPV in excess of paying down deby by £100,000

The flat isn't particularly expensive for the area, in fact, it is actually cheap(ish). I think the problem is that a lot of potential investment properties are going to look like a 'bad purchase', that is exactly the point that I am making.

I think 3% per annum, in London, where prices are already high, is a very big 'if' though. Don't get me wrong, I hope that it happens, I just wouldn't want to have to rely upon it.

cells

chucknorris wrote: »

I don't think rents will rise significantly, I think they are already alarmingly high, so it won't take much more to create a problem. We are currently marketing a flat, and when looking at the competition, I noticed that some flats are now being marketed as 3 bedrooms, but without a lounge! So 2 beds are being advertised as 3 beds, like this one:

http://www.zoopla.co.uk/to-rent/details/15080347

So maybe that is another result, properties will be more densely occupied.

Rents are expensive in inner London but inner London is/has become the area of young sharers. So while a £2,000 per month 3 bed flat is expensive for a family when it is occupied by 4 workers sharing the flat and bills its a lot more affordable. With bills that £2000 is ~£2300 and shared amongst 4 people its less than £600 per month

which is not all that bad.
By comparison the cheaper areas of the country HMO rooms tend to go for ~£400 and those are places you can buy a larger house for £130k

London sharers are thus paying some £200 per month more than their equivalents in places like Birmingham which the higher wages of London should cover

chucknorris

cells wrote: »

Rents are expensive in inner London but inner London is/has become the area of young sharers. So while a £2,000 per month 3 bed flat is expensive for a family when it is occupied by 4 workers sharing the flat and bills its a lot more affordable. With bills that £2000 is ~£2300 and shared amongst 4 people its less than £600 per month

which is not all that bad.
By comparison the cheaper areas of the country HMO rooms tend to go for ~£400 and those are places you can buy a larger house for £130k

London sharers are thus paying some £200 per month more than their equivalents in places like Birmingham which the higher wages of London should cover

Young professional sharers have been my target market since I started 25 years ago, although we do actually have a family in one of our proprieties at the moment (but that is unusual).

cells

Generali wrote: »

What level of HPI would it take to match long term equity returns (including dividends) of 7%?

do shares really offer a long term return of 7% and is it real or nominal?

Im not saying they dont, I just dont know and if its something silly like 'over the last 100 years shares returned...' then its not valid

What about the last 20 years for uk equities?


anyway using chuck flat as the example if house pirces increase by 5% nominal a year by year 9 it beats a 7% return elsewhere.

Interestingly by year 21 it peaks and then it falls off again so that by year 30 they are neck and neck. At first I thought that was a mistake in the formulas somewhere but on checking Its because the 7% shares return is considered tax free (in an isa) whereas the property is taxed and taxed quite heavily.

chucknorris

cells wrote: »

do shares really offer a long term return of 7% and is it real or nominal?

He is including capital growth, but so were you too.

cells

cells wrote: »

Rents are expensive in inner London but inner London is/has become the area of young sharers. So while a £2,000 per month 3 bed flat is expensive for a family when it is occupied by 4 workers sharing the flat and bills its a lot more affordable. With bills that £2000 is ~£2300 and shared amongst 4 people its less than £600 per month

which is not all that bad.
By comparison the cheaper areas of the country HMO rooms tend to go for ~£400 and those are places you can buy a larger house for £130k

London sharers are thus paying some £200 per month more than their equivalents in places like Birmingham which the higher wages of London should cover

I should have added that some (maybe a lot) of that £200 per month premium to live in inner London is offset by transport costs. Many of my inner London tenants either walk or cycle to work. Even in the cases they use a bus or tube pass its cheaper to buy a zone 1-2 pass than a zone 1-4 pass and certainly cheaper than owning and paying for a car

So the sharers in Birmingham might be £400 per month for the house and bills and £200 per month for the car while the sharers in London are £600 for the house and bills and close to £0 for the legs/bicycle

Generali

cells wrote: »

I should have added that some (maybe a lot) of that £200 per month premium to live in inner London is offset by transport costs. Many of my inner London tenants either walk or cycle to work. Even in the cases they use a bus or tube pass its cheaper to buy a zone 1-2 pass than a zone 1-4 pass and certainly cheaper than owning and paying for a car

So the sharers in Birmingham might be £400 per month for the house and bills and £200 per month for the car while the sharers in London are £600 for the house and bills and close to £0 for the legs/bicycle

In cash terms a mortgage on a 1.5 bed flat in Bromley with season ticket and 1 small car cost me far more than rent on a 1 bed flat in the City of London with no season ticket or car.