Baffling London BTL economics

cells

mwpt wrote: »

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.

Well for me I need NPV my mind cant compute exactly what the difference is between a 5% return over 30 years vs a 5.3% return over 30 years or a 4.7% return over 30 years. They seem pretty much the same thing but a NPV calc shows exactly what the difference is and it can be significant

If you want to improve the sheets put in a cell which allows you to put in the year of sale. So I would be interested in the NPV of investing in a 30 year gilt rate vs Property. put in the year of sale into a cell eg 10 and you will get a different NPV for the property than putting in 20 years. The interesting bit will be that the longer you hold the property the higher the NPV and better the investment will be as you average fixed costs over a number of years.

Also knock off 2% for voids on the rent side
And maybe knock off £10k on the property NPV to have it redecorated before sale

chucknorris

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.

They are tax efficient for me, but not tax free.

chucknorris

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.

Well we already have 8 London investment properties, so I am definitely not trying to buy any more, in fact I'm not too far away from selling (mine, not my wife's properties, she wants to hang on a bit longer).

I used to feel that way too (preferring property to shares), but I am now seeing the advantages of shares, but I am approaching retirement, maybe that has got something to do with it. Plus I've been a landlord with multiple properties for over 25 years, and I think I am a bit tired of it now.

westernpromise

Beyond the value of property as a pension there is, for me, the wider question of how to preserve family capital that is held as property across generations. Does anyone have any thoughts about how to do this?

I have around £3 million of family capital either extant or likely to be inbound via inheritance over the next decade or so. There is only so much one can do about protecting this from IHT as matters stand - I am not about to start managing elderly parents out of their house, for example - but looking beyond that I’m wondering if there are any structures I should be looking at.

For example, a colleague has bought five houses this year through a company that is capitalized with his own cash. The sellers were other landlords. The houses have been bought via mortgages, but 100% secured on the company’s cash (and are therefore cheap). The mortgage is deductible against rental income, which is high because these are 4-bedroom houses in Northampton that have been turned into 6-bedroom serviced HMOs. Typical gross yield is 25 to 30%. The net proceeds come out as dividends. He and his wife are directors of the business, and businesses can, of course, be inherited free of IHT. Companies outlive people, so this structure can as currently configured last indefinitely, without ever crystallising a CGT liability.

Simply owning and letting out one property is starting to feel a bit naïve.

wotsthat

cells wrote: »

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.

With a reit, if I'm understanding correctly, you'd avoid direct property investment but none of the costs associated with property investing?

I can see the advantages such as shared risk across a bigger portfolio and an improvement in liquidity but transaction costs for the company would remain stupidly expensive.

cells

there must be some rules as to what type of business qualifies.

you can also keep profits in the company you dont have to take them out and pay a dividend tax on top.

out of interest what types/rates/LTV of mortgage was he able to get inside the company.

chucknorris

westernpromise wrote: »

Beyond the value of property as a pension there is, for me, the wider question of how to preserve family capital that is held as property across generations. Does anyone have any thoughts about how to do this?

I have around £3 million of family capital either extant or likely to be inbound via inheritance over the next decade or so. There is only so much one can do about protecting this from IHT as matters stand - I am not about to start managing elderly parents out of their house, for example - but looking beyond that I’m wondering if there are any structures I should be looking at.

For example, a colleague has bought five houses this year through a company that is capitalized with his own cash. The sellers were other landlords. The houses have been bought via mortgages, but 100% secured on the company’s cash (and are therefore cheap). The mortgage is deductible against rental income, which is high because these are 4-bedroom houses in Northampton that have been turned into 6-bedroom serviced HMOs. Typical gross yield is 25 to 30%. The net proceeds come out as dividends. He and his wife are directors of the business, and businesses can, of course, be inherited free of IHT. Companies outlive people, so this structure can as currently configured last indefinitely, without ever crystallising a CGT liability.

Simply owning and letting out one property is starting to feel a bit naïve.

I can see how that would change things, it certainly would for us, but we don't have children. Hence the need to sell at some point.

Generali

cells wrote: »

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.

You can get a pretty good indirect proxy by holding residential builders.

At the moment nobody in London seems that bothered by rental yield anyway. You also have the plus that equity value can't be less than zero in a REIT or shares in builders but it can with a BTL investment.

cells

wotsthat wrote: »

With a reit, if I'm understanding correctly, you'd avoid direct property investment but none of the costs associated with property investing?

I can see the advantages such as shared risk across a bigger portfolio and an improvement in liquidity but transaction costs for the company would remain stupidly expensive.

the company transactions (stamp duty etc) would be expensive but the actual purchase of shares would not be.

So imagine there is a BTL investor who wants to buy a flat for £500k and he is buying off another investor who is selling. There will be £30-35k in transaction costs.

Imagine the same £500k in the REIT shares. One person wants to sell £500k in shares and another buy £500k in shares. The transaction costs are the 0.5% shares stamp tax or about £2.5k in transaction costs

So instead of paying £30-£35k transaction costs to buy a £500k BTL you pay £2.5k transaction costs to 'buy' an exposure to a £500k BTL within the REIT


Also inside an ISA/Pension there would be no further capital gains tax or income/dividend taxes

EDIT: I suspect the shares would trade at a premium to book value to avoid the transaction fees. So in the example above of buying a £500k property the shares might trade at between £500-£530k and that would be the cost to go out and buy a BTL. Or at least that would be the case in normal times.

mwpt

Generali wrote: »

You can get a pretty good indirect proxy by holding residential builders.

Take your bet against the shorts.