Investment return for landlords?

steampowered

Property is, of course, only one type of investment.

For most people stocks and shares are a much better investment.

There is a problem in that a lot of people don't feel they understand stocks and shares, or fear them, so feel much more comfortable going for property even though the returns on property are poor and taxes high.

The point missing from your post is that property is an easy asset class to leverage. Of course leverage does increase the risk massively - a leveraged property portfolio is higher risk than a non-leveraged share portfolio.

wine_night

seradane wrote: »

Now, this is coming from a non-landlord, but as I understand it, one of the things that property has that almost every other form of investment doesn't is leverage.

You are using a cash example, but let's say you used a 25% deposit = 30k. Your repayments (assuming interest only) are approx £120/mo (from a random quick search of BTL mortgage comparison site) = £1440/year.

Let's take that off your final figure of £3200/year. This brings your income down to £1760/year. BUT you're no longer looking at ROI on 120k, you're ROI on 30k. So all of a sudden your ROI is back up to 5.9%.

And then if your property goes up by 15k to 135k, you've suddenly earned 50% on your money over 10 years - a much nicer figure than 12%!

(And then rinse, repeat with the rest of your cash)

Now, that may still not be worth it to you, but you have to admit those numbers are a bit healthier and start to look more like decent returns.

Spot on about the leverage. Also many BTL landlords have interest only mortgages, so the outgoings are less than you would have on say your capital and interest repayment mortgage on your main residence.

Some years there will be minimal repairs, no tenancy changeovers and the return is reasonable. There's no shortage of tenants out there so landlords can generally pick the best ones. Plus BTL mortgage interest rates are very competitive.

However, there's a lot of headwinds in the BTL market thanks to the measures introduced by the government in the last few years and I imagine some landlords are looking at reducing their portfolio as the risks, costs and responsibilities start to outweigh the returns.

Thrugelmir

pecuniam_hominem wrote: »

Why not put your capital in another investment which generates reasonably consistent returns without all the headache?

News travels fast. Early bird catches the worm. Thereafter the returns diminish.

tom9980

Returning an average of 7% per year of the original purchase price on rental income after costs and about 5.5% per year on capital gains, so 12.5% total per year.

Until the property is sold and further costs added who knows what those final figures will look like.

Crashy_Time

theartfullodger wrote: »

You seem to be assuming landlords will make money. Not always true, returns can and have been negative.

Like any business there are risks and unexpected bills plus rent is not always paid (by tenant, agent or rent-insurance company)

I've had years where I declared losses to HMRC

Why did BTL become so popular then in that case?

seradane

steampowered wrote: »

A leveraged property portfolio is higher risk than a non-leveraged share portfolio.

Also true - caveat to my above scenario: if your £120k property loses £15k, then you've lost 50% of your money instead of 12.5%.

Crashy_Time wrote: »

Why did BTL become so popular then in that case?

Bricks & mortar are a real "thing" that you can point to and say you own. Easier perhaps to see the value in that (real or otherwise) than something else like stocks which perhaps requires a bit more understanding of our economic systems (and also appears a lot more volatile as the news loves to report on single day stock crashes!).

Not saying that's necessarily true, just that the above might be the beginner investor's perception.

Edit: Another thought - perhaps BTL returns are a lot easier to "calculate", because you have actual (well, ballpark) figures you can use, like estimated rental income, wheras stocks you just have to guess/hope that they will continue to rise in line with what they've done in the past.

Cakeguts

We are doing it as a pension. Only one small interest only mortgage left now. We wanted to index link the pension. Index link the returns to earnings rather than the imaginary inflation rate. It has worked well. However we did start doing this in 1990 and we have invested in good areas so that we can select our tenants most of whom are not looking for a long term home although we have some that are. Most are just renting for the time being because that is what suits them now. People tend to think that all tenants are renting because that is their only option for housing. This is not the case. There are a lot of tenants who are renting because that suits them at that time and later they will buy or even buy again.

Thrugelmir

Crashy_Time wrote: »

Why did BTL become so popular then in that case?

Money became cheaper to borrow. The Bradford and Bingley copied the US concept of securitising debt and selling it on. Thereby releasing further funds to advance. The rest is now history. Debt securitisation was the ultimate downfall of the Northern Rock as well.