Baffling London BTL economics

westernpromise

Herzlos wrote: »

What if he's not taken out a mortgage?

It's not much better. His riskless 5 year return would have been £21k a year net of tax. His rental income is going to be £22k gross so £13k net. So he's £8k a year down in a locale where prices have started to weaken from SDLT.

The amount of upside in what is a labour-intensive place for your money just doesn't seem worth it.

mwpt

Generali wrote: »

You're forgetting the power of leverage.

Assuming he invested £325,000 plus the £38,750 in SDLT and let's say £1,250 in fees he's put up £365,000. If he's lost £50,000 straight away by overpaying and the £40,000 that he's paid in transaction costs, he's lost 25% near as dammit of his investment straight off the bat.

He's taking a bet on prices rising. If they continue to rise at 10% a year then he's laughing of course.

My brother (who lives and works in another country) has recently been asking me about BTL in the UK. I put together a spreadsheet to show him what I thought cashflows look like for BTL in Bristol. Note that I am not a BTL landlord and the knowledge is scraped together from reading here and there.

I added this West London property as another worked example. The spreadsheet is here:

https://docs.google.com/spreadsheets/d/1AdOZwwXg9EQnfA0YfwNMoAe5jewBRwNGlPLIndspbCQ/edit?usp=sharing

Feel free to add a new sheet and modify or tell me what I've missed / needs changing.

EDIT: I use 0.0001% HPI to simulate zero capital growth, because I want to see if the investment performs in it's own right, without requiring to sell to the greater fool.

wotsthat

westernpromise wrote: »

Let’s say he’s got a lifetime BTL tracker at BoE plus 2.75% (a deal that requires a 30% deposit). He thus has a £663k mortgage that costs £22k a year. He could have been getting say 3.5% via a 5-year bond on his own £325k (the remainder of the buy price, the SDLT, and a few grand of purchase costs). So that would be £11k of gross income, say £7k net with no risk to the capital. That’s what his BTL investment has to beat.

So he lets the place out at £29k a year, pays 40% tax on that income and gets 20% back. That’s a £6k tax hit which leaves £23k. Out of this he pays £22k in mortgage interest. That’s before he’s spent anything on letting fees (probably £3k), service charges (another £3k a year), a very modest £1k say on repairs. So he’s £5k a year negative outright, £12k negative versus the 5-year bond, and he’s overpaid another £50k. Over the next 5 years he’s thus going to need a capital gain of about £150k before CGT just to break even. That’s a steady 3.5%. To make significant gains he needs 5% or more compound but the question then arises as to what return is enough relative to the risk he’s taking and the liquidity issues of having to find £12k a year to fund his bet.

Maybe he's not given it as much thought as you? I'm always surprised by how little Excel is used as a tool (or even pencil and paper) when making even quite big life decisions.

He's either done the same calculations as you but expects prices and/ or rents to rise more than you or he's done no calculations and still expects prices and rents to rise more than you.

i.e. with or without the maths it's a punt on house prices and he's feeling bullish.

chucknorris

wotsthat wrote: »

Maybe he's not given it as much thought as you? I'm always surprised by how little Excel is used as a tool (or even pencil and paper) when making even quite big life decisions.

He's either done the same calculations as you but expects prices and/ or rents to rise more than you or he's done no calculations and still expects prices and rents to rise more than you.

i.e. with or without the maths it's a punt on house prices and he's feeling bullish.

I've said this already, if I was starting out today, I wouldn't invest in property, I would of course buy my own home, but I wouldn't buy investment property.

wotsthat

mwpt wrote: »

EDIT: I use 0.0001% HPI to simulate zero capital growth, because I want to see if the investment performs in it's own right, without requiring to sell to the greater fool.

I can see why you'd do that but the rental yield increases each year as the rent goes up whilst the asset value is static.

This means you might not need to sell to the greater fools out there but you do need to rent to them.

mwpt

wotsthat wrote: »

I can see why you'd do that but the rental yield increases each year as the rent goes up whilst the asset value is static.

This means you might not need to sell to the greater fools out there but you do need to rent to them.

Yes, but I have a variable to reflect rent increases (set at 1.5% in that spreadsheet). It's reflected in the overall figures.

If you set HPI higher you can obviously see why investing in property is attractive, if it continues to go up. It just strikes me as the definition of a pyramid scheme, an investment that doesn't yield as an actual business but does well if you can convince someone that he will be able to sell for higher to someone who can sell for higher to someone....

(I realise that there are properties out there with real yields)

Generali

mwpt wrote: »

Yes, but I have a variable to reflect rent increases (set at 1.5% in that spreadsheet). It's reflected in the overall figures.

If you set HPI higher you can obviously see why investing in property is attractive, if it continues to go up. It just strikes me as the definition of a pyramid scheme, an investment that doesn't yield as an actual business but does well if you can convince someone that he will be able to sell for higher to someone who can sell for higher to someone....

(I realise that there are properties out there with real yields)

Asset values do tend to rise over time: long term house prices in the UK have tended to rise in line with nominal GDP and there's no reason I can see for that to cease.

I think that you could make a decent case for house prices in London being above long term averages and riding for a fall but I don't think that it's reasonable to describe expecting an asset that has risen in value pretty reliably for decades as a Ponzi scheme.

mwpt

Generali wrote: »

Asset values do tend to rise over time: long term house prices in the UK have tended to rise in line with nominal GDP and there's no reason I can see for that to cease.

I think that you could make a decent case for house prices in London being above long term averages and riding for a fall but I don't think that it's reasonable to describe expecting an asset that has risen in value pretty reliably for decades as a Ponzi scheme.

I agree, the future often looks like the past. Sometimes it does't though, so it's nice to have a tool which shows me if my investment will stand on it's own.

wotsthat

mwpt wrote: »

Yes, but I have a variable to reflect rent increases (set at 1.5% in that spreadsheet). It's reflected in the overall figures.

If you set HPI higher you can obviously see why investing in property is attractive, if it continues to go up. It just strikes me as the definition of a pyramid scheme, an investment that doesn't yield as an actual business but does well if you can convince someone that he will be able to sell for higher to someone who can sell for higher to someone....

(I realise that there are properties out there with real yields)

You've assumed prices will fall by 1.5% in real terms every year for the next 30 years. That doesn't strike me as particularly realistic either.

As per Generali's signature most plans don't survive the first punch in the mouth. What I'm really trying to say is that all of your assumptions are wrong (some for better and some for worse) but the model will improve over time as the future becomes the past.

Obviously, I think it's important to model over a long period but it seems unrealistic to make a decision today based on a 30 year forecast. Maybe buying decisions should be more closely related to what 5 year fixes are available or the cash flow over the first few years?

the_flying_pig

who knows.


maybe it's a cash buyer looking for a virtually risk-free 2-and-a-bit% net return that's also a good inflation hedge.


hugely unspectacular returns but, y'know, arguably defensible as a no-risk, no-effort investment in the current climate...