Return on BTL equity

westernpromise

I have a BTL with a £289k mortgage, that's worth about £900k (conservatively). If sold there would be CGT of about £100k.

The net equity is therefore about £511k. It lets for £2400 a month; after management charges, tax and other costs I reckon the net is around £9k a year.

The true net return on this as I see it is 9/511, which is 1.8%. The rent's drifted up over the years but not as fast as the equity, so in effect return on equity has declined even though this is only because so much equity has accumulated. Is there a generally agreed on way to work out the return on a BTL that takes this into account?

lisyloo

I’m not sophisticated, but that looks to me as though you are only looking at income.

Wouldn’t the return on your investment be income plus net capital gain?

westernpromise

Well this is what I'm wondering. The 9/11 is indeed just current return on equity. If I flogged the property, the equity is what I'd have to invest. So I'd look at what £511k might earn in something else versus what it actually does earn in property.

1.8% after tax on that amount seems actually not bad. It is better than 1-year bonds, for example, which I guess tie your money up for a similar amount of time, but where if you want a monthly income, you are looking at 1.8% gross on such a sum.

At the time it became a BTL 15 years ago it was probably worth about £400k, i.e. the then equity of £111k has increased to a net £511k (after CGT) over that time. I make that a 10.5% annual return.

I guess I am trying to find out if there is a more convenient / intuitive way of quantifying investment performance that recognises this blend.

Chucknorris for example is all about the income. So am I really. But suppose prices fall £100k while rents rise (the former typically driving demand into the latter). This would have the odd effect of improving return on net equity. Instead of netting 9k on 511k maybe I'm netting 10k on 400k. My return has gone up to 2.5% net.

This ought to dissuade landlords from selling, because how are they going to get 2.5% net return on £400k anywhere else? But at the same time, a £100k price decline would be a ~22% YoY reduction in equity and would reduce the return on initial equity to 9%.

There must some way of blending these into a single return figure...?

movilogo

The true net return on this as I see it is 9/511. It lets for £2400 a month; after management charges, tax and other costs I reckon the net is around £9k a year.

2400*12 = 28,800. If that leads of net return of 9000 only that seems very low ROI.

BTW, ROI = (rental income-expense) / invested value of your asset

Don't use current market value of your house but use what you paid to acquire it.

Also, ask yourself what you are banking on - cash flow or capital gain.

westernpromise

movilogo wrote: »

2400*12 = 28,800. If that leads of net return of 9000 only that seems very low ROI.

BTW, ROI = (rental income-expense) / invested value of your asset

Don't use current market value of your house but use what you paid to acquire it.

Also, ask yourself what you are banking on - cash flow or capital gain.

From the £28,800 there is a 15% management charge deduction, mortgage of about £3,000, service charges of £1,800, expenses of about £1,000 and 50% tax on what's left.

I'm not sure the market value of the house helps. I only put £65k in to buy it and value now versus value then is a measure of HPI, not investment return.

Sailtheworld

westernpromise wrote: »

Well this is what I'm wondering. The 9/11 is indeed just current return on equity. If I flogged the property, the equity is what I'd have to invest. So I'd look at what £511k might earn in something else versus what it actually does earn in property.

1.8% after tax on that amount seems actually not bad. It is better than 1-year bonds, for example, which I guess tie your money up for a similar amount of time, but where if you want a monthly income, you are looking at 1.8% gross on such a sum.

At the time it became a BTL 15 years ago it was probably worth about £400k, i.e. the then equity of £111k has increased to a net £511k (after CGT) over that time. I make that a 10.5% annual return.

I guess I am trying to find out if there is a more convenient / intuitive way of quantifying investment performance that recognises this blend.

Chucknorris for example is all about the income. So am I really. But suppose prices fall £100k while rents rise (the former typically driving demand into the latter). This would have the odd effect of improving return on net equity. Instead of netting 9k on 511k maybe I'm netting 10k on 400k. My return has gone up to 2.5% net.

This ought to dissuade landlords from selling, because how are they going to get 2.5% net return on £400k anywhere else? But at the same time, a £100k price decline would be a ~22% YoY reduction in equity and would reduce the return on initial equity to 9%.

There must some way of blending these into a single return figure...?

You've been wondering and posting about what to do with this place for how many years? Do you really think there's a magic number that'll help you finally make a decision?

If you want to liquidate the investment and compare what you'd get with an alternative then, yes, there's no choice but to take into account the CGT. Effectively you're currently getting a yield on a potential CGT liability.

Comparing the yield on bonds vs one London flat that has a single tenant at a time is comparing apples and oranges. There's far more risk, hassle and effort associated with your BTL than holding 'minimal' risk assets. i.e. don't be surprised the yield on your BTL is higher - it should be as you should be demanding a premium for that risk. The question is whether that risk premium is high enough. It looks like slim pickings which is no wonder given the amount you have to shell out in expenses.

There are plenty of reasons why you might accept such a low risk premium. For a start there's the CGT - maybe it's better to accept the return (and risk) if it allows you to hold forever and avoid it although there's still IHT to consider. You probably don't need the cash so can afford to swallow the yield and take a punt that capital values and/ or rents will take a leap upwards? Maybe you just like being a landlord?

Give it away to your kids. If you'd spent the last few years doing this instead of pondering this first world problem you'd currently be enjoying sticking two fingers up at the tax man at the start of each tax year the grim reaper allowed you to see.

westernpromise wrote: »

From the £28,800 there is a 15% management charge deduction, mortgage of about £3,000, service charges of £1,800, expenses of about £1,000 and 50% tax on what's left.

£28,800 minus 15% = £24,480
£24,480 minus £3,000 = £21,480
£21,480 minus £1,800 = £19,680
£19,680 minus £1,000 = £18,680
£18,680 minus 50% = £9340

How much risk are the management companies taking? The mortgage company? The DIY store when you decorate and replace the white goods at the end of each tenancy? The tax man?

Give yourself the opposite first world problem. i.e. you're unhappy with the returns on your minimal risk assets and looking for more yield. Given the figures above would you consider buying a single BTL flat where only 30% of the rent ends up in your back pocket. No, of course not, and I'm pretty sure, in this case, you'd be pointing out the risk differential too.

chucknorris

westernpromise wrote: »

I have a BTL with a £289k mortgage, that's worth about £900k (conservatively). If sold there would be CGT of about £100k.

The net equity is therefore about £511k. It lets for £2400 a month; after management charges, tax and other costs I reckon the net is around £9k a year.

The true net return on this as I see it is 9/511, which is 1.8%. The rent's drifted up over the years but not as fast as the equity, so in effect return on equity has declined even though this is only because so much equity has accumulated. Is there a generally agreed on way to work out the return on a BTL that takes this into account?

A few years ago I amended my CGT spreadsheets to compare the net return from my BTL properties to both equities (taxed at only 32.5%) and individual corporate bonds.

The results currently show that I am marginally better off staying with the properties compared to equities, and worse off with bonds. So on a strictly financial comparison I would rather stay in property, but other considerations have nudged me to start selling up. I must add that most of my remaining properties are (good quality) ex LA properties (so nevertheless stigmatised), which results in a higher yield than your properties. The financial case for you selling is more significant than mine, but of course you will also (like me) have other factors to take into account.

chucknorris

westernpromise wrote: »

Well this is what I'm wondering. The 9/11 is indeed just current return on equity. If I flogged the property, the equity is what I'd have to invest. So I'd look at what £511k might earn in something else versus what it actually does earn in property.

1.8% after tax on that amount seems actually not bad. It is better than 1-year bonds, for example, which I guess tie your money up for a similar amount of time, but where if you want a monthly income, you are looking at 1.8% gross on such a sum.

At the time it became a BTL 15 years ago it was probably worth about £400k, i.e. the then equity of £111k has increased to a net £511k (after CGT) over that time. I make that a 10.5% annual return.

I guess I am trying to find out if there is a more convenient / intuitive way of quantifying investment performance that recognises this blend.

Chucknorris for example is all about the income. So am I really. But suppose prices fall £100k while rents rise (the former typically driving demand into the latter). This would have the odd effect of improving return on net equity. Instead of netting 9k on 511k maybe I'm netting 10k on 400k. My return has gone up to 2.5% net.

This ought to dissuade landlords from selling, because how are they going to get 2.5% net return on £400k anywhere else? But at the same time, a £100k price decline would be a ~22% YoY reduction in equity and would reduce the return on initial equity to 9%.

There must some way of blending these into a single return figure...?

A very significant factor in pushing me to sell is my age (61) combined with the fact that we don't have children. I don't mind having to hold equities a bit longer than planned (which is more than property anyway), but I don't want to be hit by a property correction just as I'm about to sell, which could force me to be a landlord well into my 70's. I must admit that I dislike being a landlord these days, it has been over 28 years, and I've had enough of it. Although I might keep one property until my mid 70's anyway, just for portfolio diversity, although I may feel that a REIT is good enough by then.

westernpromise

chucknorris wrote: »

A few years ago I amended my CGT spreadsheets to compare the net return from my BTL properties to both equities (taxed at only 32.5%) and individual corporate bonds.

The results currently show that I am marginally better off staying with the properties compared to equities, and worse off with bonds. So on a strictly financial comparison I would rather stay in property, but other considerations have nudged me to start selling up. I must add that most of my remaining properties are (good quality) ex LA properties (so nevertheless stigmatised), which results in a higher yield than your properties. The financial case for you selling is more significant than mine, but of course you will also (like me) have other factors to take into account.

Indeed. One such consideration is that there is a good chance one or other kiddiwink will need a London base either during or after university; or indeed each in succession. The transaction costs of selling up and buying back into a £900k flat that one or both can use are now so huge that it feels more rational to hold. I also expect transaction costs to continue to rise. Stamp duty buying the property in question was £2,500 in 1999 (actually it might not even have been that), but would be £35,000 buying it today. The flat's value has gone up by a factor of about four, whereas the transaction tax has gone up by a factor of fourteen. In another twenty years, the transaction penalties won't be lower. They'll be higher.

My timescales are intergenerational anyway. In the last 60 years there have been maybe 6 when it was smart to sell London property and buy back in later. The rest of the time you'd have lost even with nil transaction penalties. Those are not good odds. In 50 years' time, will my daughters regret not still having a west London flat in the family? I reckon so.

Sailtheworld

If you're so sure it would be foolhardy to sell and you're in the process of setting up a Westernpromise wealth fund for future generations why do you keep routinely agonising about whether alternative investments might yield tuppence halfpenny more or less.

If it's reassurance you're after no problem - you're doing the right thing. Just imagine your daughter's regret in her seventies if she didn't have the exact same London flat you're renting out now.

Not that it matters. You'll be long gone and if your kids don't spend it your grandchildren will. Which generation depends on how much you inherited or stand to inherit. If it's a pile it'll be your daughters who'll spend it. If you're the first in your family to have decent wealth it'll be your grandchildren who blow it.

Thrugelmir

A rise in interest rates would diminish your income very quickly.