Baffling London BTL economics

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.

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.

Generali

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.

Given that Sainsburys Bank will give you 1.55% then you can more than double your loss before capital gains with a 'risk-free' opportunity cost.

Having said that it would only take a 1% rise in prices give or take to pay you that five grand back.

chucknorris

Generali wrote: »

Given that Sainsburys Bank will give you 1.55% then you can more than double your loss before capital gains with a 'risk-free' opportunity cost.

Having said that it would only take a 1% rise in prices give or take to pay you that five grand back.

I can't help thinking that property prices in London (where BTL is more prevalent) will dip or at least stagnate, and rents will rise. Rents rising would present the Gov with a problem, would they ignore it, or intervene?

economic

chucknorris wrote: »

I can't help thinking that property prices in London (where BTL is more prevalent) will dip or at least stagnate, and rents will rise. Rents rising would present the Gov with a problem, would they ignore it, or intervene?

why do you say dip will be more prevalent in more btl locations?

mwpt

chucknorris wrote: »

I can't help thinking that property prices in London (where BTL is more prevalent) will dip or at least stagnate, and rents will rise. Rents rising would present the Gov with a problem, would they ignore it, or intervene?

Chuck, rents have risen even with more and more BTL entrants to the market. I am very unconvinced that the supply/demand dynamic in the rental market is as simple as some people make it out over here.

I expect rents to rise, as they have been BTL tax or no BTL tax.

Generali

chucknorris wrote: »

I can't help thinking that property prices in London (where BTL is more prevalent) will dip or at least stagnate, and rents will rise. Rents rising would present the Gov with a problem, would they ignore it, or intervene?

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.

chucknorris

economic wrote: »

why do you say dip will be more prevalent in more btl locations?

I was talking about London, because the percentage of investors is higher in London, I think the impact will be greater there. I'm not predicting a crash, I just believe prices will be dampened.

mwpt

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.

Why won't it decrease underlying asset prices, so yield is maintained?

chucknorris

mwpt wrote: »

Chuck, rents have risen even with more and more BTL entrants to the market. I am very unconvinced that the supply/demand dynamic in the rental market is as simple as some people make it out over here.

I expect rents to rise, as they have been BTL tax or no BTL tax.

I think the number of landlords will slowly lower, rent rise would of course be partially offset by more owner occupiers buying.

Generali

mwpt wrote: »

Why won't it decrease underlying asset prices, so yield is maintained?

Because asset prices in the short term don't make the marginal BTL LL exit the market, costs do.

In the longer term, everything else being equal which it isn't, it's a downwards pressure on house prices.

That's especially the case in London where rentals make up a larger part of the market.