Baffling London BTL economics

Cornucopia

I appreciate that the OP's figures don't look favourable, but that doesn't mean that all BTLs are the same.

In SE London, moving into NW Kent, and the same on the Essex side of the river, the figures are much more promising.

2 years ago medium-sized houses were worth c. £325k (4-bed townhouse+garage), and rents were £1400-1500pm.

A typical BTL proposition would be 30% deposit (so £97,500), and a BTL mortgage might have been 3.5% fixed for 3 years. That's £7962pa, whilst the rental income would be £18,000 (@£1500pm). There would be purchase fees, stamp duty and management fees to factor in, but the rough starting figures look very positive, producing perhaps £9000pa after rental expenses, or 9.23%.

Add to that c. 30% HPI in the area over the same period and it looks even better.

The great unknown is whether that historic performance will continue, and no one can know that for any investment.

chucknorris

Cornucopia wrote: »

I appreciate that the OP's figures don't look favourable, but that doesn't mean that all BTLs are the same.

In SE London, moving into NW Kent, and the same on the Essex side of the river, the figures are much more promising.

2 years ago medium-sized houses were worth c. £325k (4-bed townhouse+garage), and rents were £1400-1500pm.

A typical BTL proposition would be 30% deposit (so £97,500), and a BTL mortgage might have been 3.5% fixed for 3 years. That's £7962pa, whilst the rental income would be £18,000 (@£1500pm). There would be purchase fees, stamp duty and management fees to factor in, but the rough starting figures look very positive, producing perhaps £9000pa after fees and rental expenses, or 9.23%.

Add to that c. 30% HPI in the area over the same period and it looks even better.

The great unknown is whether that historic performance will continue, and no one can know that for any investment.

But a lot has changed since then:

1. They have gone up 30% (your figures)
2. Stamp duty is now 3% higher
3. Loss of the 10% wear and tear allowance
4. Mortgage interest as an expense capped at only 20% for HRT payers (being phased in)
5. New £5k (£10k for couples) tax free allowance on dividend income (shares probably being the main alternative to property)

cells

mwpt wrote: »

I can add that but it isn't strictly necessary to make a judgement about the returns on the BTL investment. Useful though nonetheless.

NPV gives a much better understanding than annual return because we humans cant look at an annual return percentage and compute its meaning in our heads. ok investment A is returning 4.4% and investment B is 4.8%. All you know about that is that B is bigger than A. With a NPV calc you know the exact value off A and B in todays cash terms so its much easier to compare A is worth £188,000 today and B is worth £214,000 today etc

Cornucopia

chucknorris wrote: »

But a lot has changed since then:

1. They have gone up 30% (your figures)
2. Stamp duty is now 3% higher
3. Loss of the 10% wear and tear allowance
4. Mortgage interest as an expense capped at only 20% for HRT payers (being phased in)
5. New £5k (£10k for couples) tax free allowance on dividend income (shares probably being the main alternative to property)

Rents are up too. Though not 30%. But then some of the price increase will be leveraged out.

I think to be honest that if you don't find those figures compelling, you're not really trying. Likewise, I find something attractive about bricks & mortar as an investment that I don't get from shares.

cells

chucknorris wrote: »

5. New £5k (£10k for couples) tax free allowance on dividend income (shares probably being the main alternative to property)

are shares not virtually tax free

a couple would need to max out their ISAs and pensions before needing to buy shares outside of a wrapper and how many people can do that?

This shares vs property debate really needs to end with a big geared London and rEngland residential property company. It would then be which shares to buy and avoid direct property investment.

cells

Cornucopia wrote: »

Rents are up too. Though not 30%. But then some of the price increase will be leveraged out.

I think to be honest that if you don't find those figures compelling, you're not really trying. Likewise, I find something attractive about bricks & mortar as an investment that I don't get from shares.

The tax changes change a lot.

Imagine buying a £500,000 Buy to let and selling it for £500,000 in 10 years time. That would be a terrible investment because you have about £40k lost in the stamp duty the solicitors and the sales costs. The post tax net rental in those 10 years has to cover that £40k which it might not do. You then have to account for the huge amount of time you spend on the investment rather than buying say shares in British Land and forgetting about them

Personally I dont think I would invest now if my time frame was less than 15 years. Definitely flipping is a no go buying and selling in two years time. People can profit from it still but its much more a gamble and you would well lose from it. In the above example if prices stayed the same then buying and selling in two years would see a ~£40k loss

mwpt

wotsthat wrote: »

I've run a reasonably similar retirement spreadsheet where, 20 years ago, I made assumptions about what 40 years from there would look like. As you can imagine life doesn't work in a straight line like a spreadsheet and all of the assumptions were wrong to a greater or lesser degree.

The advantage I have is 20 of those 40 years have passed and the spreadsheet has been updated accordingly and I now only need to make assumptions for 20 years hence. The same will happen with your spreadsheet - at the end of year one it can be updated with real numbers and future assumptions finessed.

I'm more interested in how you'd use the model to decide whether to buy a BTL. I see my retirement spreadsheet as a pension tracker as much as a forecasting tool.

Take the Bristol example for your brother - what is it that's going to make the difference between a yes and a no? I know if it was me I'd want to take a view on the long term but would be far more interested in the performance over the first 5 years or so.

So is Bristol a buy or not? Does it have to work over 30 years with inflation at 1.5% and HPI at 0%?

The short answer to the last question is that property in Bristol would be a no go for me if I were a BTL investor but not because I don't think property would increase over 30 years but because I'd want a performing business that could stand knocks (such as me losing job) over a shorter term without losing me a lot of money.

It is an incredibly simple spreadsheet. I constructed it for him because he asked me if BTL was a good investment in London or elsewhere.

I told him all of this, that it was only to give some sort of easier way to make a slightly more educated guess as to whether a particular BTL would be a good investment or not vs another property. I explained that he should factor in HPI, which is very unlikely to be zero, and that it is often the difference between a no / yes decision for a BTL imo.

But for me, because I am a cautious person I would prefer to see when the business can turn a profit on it's own fundamentals, rather than relying on my having to sell to another person who is willing to accept a negative monthly yield. Zero HPI helps to see that point on the spreadsheet.

If I was a BTL investor, I'd also have a separate sheet showing expected yield against my expected HPI value. For example, if I was investing in London, I'd look for the more value areas with larger current yields giving me positive cash flow each month, and in areas that I felt were ripe for capital growth. I would not buy the West London property mentioned in the original post because my spreadsheet tells me it will be costing me money each month and which I could not hold on to if I say, lost my job. That is too big a risk of losing it all for me, even if someone might feel that the potential rewards were good.

Also, I'd be tempted to model it in a more complex manner, using monte carlo simulations to get a distribution of expected outcomes and judge from there. Is the potential risk of total loss too high, for example.

Generali

cells wrote: »

are shares not virtually tax free

a couple would need to max out their ISAs and pensions before needing to buy shares outside of a wrapper and how many people can do that?

This shares vs property debate really needs to end with a big geared London and rEngland residential property company. It would then be which shares to buy and avoid direct property investment.

There are UK Residential REITS out there but I have yet to find a decent one.

Mill got a lot of publicity a year or two ago because they were crowdfunded. They raised a couple of million which is hopeless in terms of being a fund as you just don't have enough scale to pay costs from management fees. The minimum size of a workable fund is about $50-75 million I would estimate just to cover non-salary costs.

There is another, KCR, which I just found today as a result of a quick antrobus. It looks pretty hopeless: illiquid and for all I know just another AIM listing designed to move money from equity holders to directors (no idea if this is the case, just speculating).

If there was a decent residential REIT out there I'd be interested. There's that Legal and General fund but I think that only has seed money from insto investors, I don't think they're interested in us investing into it.

mwpt

I see someone has added a sheet showing a London BTL investment property for £500k. Thank you for doing that.

It shows how well the investment can do under reasonable estimates.

I suspect this was cells, because he favours the NPV approach. Cells, I'm not disagreeing that NPV is essential if you want to know the end result. But I am saying that looking at a percentage yield distribution is also necessary to understand the investment in terms of when you can sell, how long to hold, etc.

I'll add another sheet showing the same scenario you've put but with the yield column still present.

cells

Generali wrote: »

There are UK Residential REITS out there but I have yet to find a decent one.

Mill got a lot of publicity a year or two ago because they were crowdfunded. They raised a couple of million which is hopeless in terms of being a fund as you just don't have enough scale to pay costs from management fees. The minimum size of a workable fund is about $50-75 million I would estimate just to cover non-salary costs.

There is another, KCR, which I just found today as a result of a quick antrobus. It looks pretty hopeless: illiquid and for all I know just another AIM listing designed to move money from equity holders to directors (no idea if this is the case, just speculating).

If there was a decent residential REIT out there I'd be interested. There's that Legal and General fund but I think that only has seed money from insto investors, I don't think they're interested in us investing into it.

Yes not interested in small REITS for the reasons you say also I would want one targeted on London and one rEngland. Something on the scale of British Land.

It is long overdue. The FTSE should have a significant UK residential component.