For those thinking of becoming a LL

ognum

As we are nearing the tax year end I thought I would look at how much tax I need to pay on the rental properties I have. So did some basic calculations.

This year has been a bigger year for paying out than usual, I like to keep my properties in good condition and respond to the tenants needs and wishes.

I have had one, my first and I hope only eviction with some work needed on the flat after that. I have court costs, bailiffs costs and locksmith costs.

I have replaced a central heating boiler inanother property and replaced a glass conservatory roof. Other than that I have done basic LL stuff, the odd leak and repair hear and there. I have insurance etc and pay an 8% management fee. I have NO mortgages

Without going into specific figure I have paid out approx 37% of the rent I took in.

If I had mortgages to pay I would make nothing for sure. I am now selling the flat that is a long way away and had the evicted tenant. My other properties are close by and give me a good return and of course they have capital growth but I will have to pay tax on that. I have just bought another local property.

If I could put the money into the bank and make a good return I would we have stocks and shares etc so want to spread the risk.

I don't feel sorry for myself I just want people to think carefully and understand the costs that have to come out of rent.

ThePants999

How much of the rent you pay back out as costs isn't a particularly meaningful figure, though. The real question is, what's the return on your capital. If your properties were worth X a year ago and Y today, and you've received R in rent and paid out C in costs, what's (Y + R - X - C) / X? And what's the variability of that return, and how much of your time has gone on dealing with this investment? That's what people really need to know in order to compare rental property with other forms of investment.

sparky130a

This should be a sticky!

Lokolo

ThePants999 wrote: »

How much of the rent you pay back out as costs isn't a particularly meaningful figure, though. The real question is, what's the return on your capital. If your properties were worth X a year ago and Y today, and you've received R in rent and paid out C in costs, what's (Y + R - X - C) / X? And what's the variability of that return, and how much of your time has gone on dealing with this investment? That's what people really need to know in order to compare rental property with other forms of investment.

And also year by year isn't a great comparison.

For example, the OP has paid out for X, Y and Z. But would they expect to be paying out the same every year? For one thing, I'd be concerned if boilers were being replaced every year. And also, the OP even admitted this is the first time they've had to really evict someone.

My investment funds have gone up 18% this year, which is great. But if they have one bad year, does that make it a bad investment?

Swings and roundabout for sure. But it is a good warning that it's not all gold plated.

G_M

I don't think ognum intended this as either a definitive statement of his tax liability, or as a complete statement of his investment return.

It is an interesting snapshot providing a message to potential new LLs, particulaly those who see letting as a simple panacea to the low returns offered by savings & the uncertainties of the stock market.

Not to detract from the useful additional contributions though.

ognum

Lokolo wrote: »

And also year by year isn't a great comparison.

For example, the OP has paid out for X, Y and Z. But would they expect to be paying out the same every year? For one thing, I'd be concerned if boilers were being replaced every year. And also, the OP even admitted this is the first time they've had to really evict someone.

My investment funds have gone up 18% this year, which is great. But if they have one bad year, does that make it a bad investment?

Swings and roundabout for sure. But it is a good warning that it's not all gold plated.

You are right, it feels like I have done a lot of repairs this year but I haven't yet done a comparison.

i just wanted others to understand it's not all money in!

ognum

eggha wrote: »

return on capital is not the sum of capital plus revenue

your formula is a perfectly valid "increase in net wealth" calculation, but it is not return on capital anymore than it is an assessment of positive or negative revenue

in terms of monitoring "success" then all 3 calculations are needed:
- net wealth
- return on capital employed
- net revenue (especially given the tax changes for higher rate taxpayers wef April)

if you do not have the cash in hand to ride out a scenario such as increased capital but negative revenue then a single net wealth formula is of little use

Yes this is true but my simple aim was to answer all the posters here who say 'my rent will pay my mortgage so I should keep a property' rather than sell it.

I simply wanted to make the point that you do have to have the funds to mange you properties well and the rental return should be enough to cover unexpected expenditure not just the mortgage.

For myself I am happy with my return, I need to spread risk so this is part of my strategy.

eddddy

Letting property is a business, and returns will vary a lot depending on how well you run the business. (A more competent LL might make a good profit, where a less competent LL might not.)

As a trivial example, ognum mentioned he replaced a boiler. Do you get a Worcester Bosch (which will last 15 to 20 years), or a budget boiler? Do you get BG to install it, or a small local firm? That decision alone could make a difference of £2k to £4k on your income in the year (and impact your income in future years).

As another example... How well do you profile your tenants? Do you target tenants who work for secure employers, and who are likely to want to stay in your property for many years? Or do you accept any tenant your agent finds, as long as they pass a referencing check?

There are also bigger issues about how good you are at choosing the best properties to buy for letting, keeping a good handle on your letting agent etc.

Cakeguts

I just want to add to this that there are many people who seem to think that any property will do. The people who want to keep a property that they used to live in or their parents lived in and rent it to cover their mortgage don't understand that not every property bought to live in is suitable as a rental if you want to attract the kind of tenants that make your life easier. Choosing the right property also means that you can get the choice of good tenants.

Crashy_Time

Cakeguts wrote: »

I just want to add to this that there are many people who seem to think that any property will do. The people who want to keep a property that they used to live in or their parents lived in and rent it to cover their mortgage don't understand that not every property bought to live in is suitable as a rental if you want to attract the kind of tenants that make your life easier. Choosing the right property also means that you can get the choice of good tenants.

Exactly, and to attract good long term tenants it has to be priced competitively IMO. The next problem for landlords will be EE nationals returning home because of the exchange rate or that the "vibe" in the UK has shifted?

zebulon

Crashy_Time wrote: »

The next problem for landlords will be EE nationals returning home because of the exchange rate or that the "vibe" in the UK has shifted?

I don't think due to the exchange rate, the opposite actually but maybe I don't see what you mean ? (Right now someone's 1 Euro - if from euro zone - is worth c. £0.10 more compared to day before referendum)
But then Brits living in EU may be coming back if getting income paid in GBP (a colleague had rent raised because her LL abroad were losing on exchange rate)
Vibes and uncertainty yes probably !

Sorry this was off topic but I wondered if I missed something re. exchange rate! (currently waiting to move some EURO ...)