...Is the BTL proposition now dead?

pphillips

With a limited company, the corporation tax rate of 19% applies to retained profits and dividend payments. Taking a salary from the company is not taxed at 19%, it's subject to income tax rules. You'll also have to pay the relevant income tax rate on any dividends you are paid by the the company above the £2000 annual allowance.

princeofpounds

Most of the game in BTL wasn't the rental yield (as you've pointed out, net of all costs it's often quite disappointing, and I agree with the others that voids etc. need modelling). It was the capital appreciation and high gearing. 

Buy a property for 100k, with 20k equity and 80k debt. Prices go up 10%, you sell for 110k, pay back the 80k mortgage and you now have 30k; a 50% gain!

The model works great when rates are declining and house prices are going up. Not so much the other way around, but it's been pretty much one-way traffic (barring the brief interruption of the GFC) since the early 90s so people forget about that. 

In your model you should include an estimation for capital appreciation - on average it should happen at at least an inflationary level - but would you ever want to pin a highly-geared business plan on it?

princeofpounds

Most of the game in BTL wasn't the rental yield (as you've pointed out, net of all costs it's often quite disappointing, and I agree with the others that voids etc. need modelling). It was the capital appreciation and high gearing. 

Buy a property for 100k, with 20k equity and 80k debt. Prices go up 10%, you sell for 110k, pay back the 80k mortgage and you now have 30k; a 50% gain!

The model works great when rates are declining and house prices are going up. Not so much the other way around, but it's been pretty much one-way traffic (barring the brief interruption of the GFC) since the early 90s so people forget about that. 

In your model you should include an estimation for capital appreciation - on average it should happen at at least an inflationary level - but would you ever want to pin a highly-geared business plan on it?

John464

Government intervention in the housing market, restricting supply with planning constraints, stealth taxes on developers, giving planning decisions to local Nimbys, and poor quality control (like dangerous cladding) whilst stoking up demand with taxpayer funded subsidies like Help to Buy and housing benefit, has raised prices.  
As long as prices are rising you can't go far wrong.
But how much longer can that continue?
As more people get priced out of home ownership will the political climate return to actually building more homes to increase the supply?
So far its just politician's promises., with a few 'affordable homes' that are as big a recipe for corruption as their planning system (who decides who gets a home at below market value)
But will a genuinely free market to build more homes and bring prices down actually happen?

MaxiRobriguez

John464 said:

Government intervention in the housing market, restricting supply with planning constraints, stealth taxes on developers, giving planning decisions to local Nimbys, and poor quality control (like dangerous cladding) whilst stoking up demand with taxpayer funded subsidies like Help to Buy and housing benefit, has raised prices.  
As long as prices are rising you can't go far wrong.
But how much longer can that continue?
As more people get priced out of home ownership will the political climate return to actually building more homes to increase the supply?
So far its just politician's promises., with a few 'affordable homes' that are as big a recipe for corruption as their planning system (who decides who gets a home at below market value)
But will a genuinely free market to build more homes and bring prices down actually happen?

The other outcome is, if there isn't a push for more homes, that 20-30 years down the line a bunch of millenials inherit their parents homes. Be generous and say 50% of them decide to live in them... you've then still got hundreds of thousands, perhaps millions, of additional homes coming on the market at the same time, increasing the supply, which are being marketed towards other millenials who (inheritance aside) don't have the capital to afford them.

Prices are going to face some headwinds sooner or later. The idea of perpetual inflation busting house prices is going to put a lot of people in a difficult spot at some point.

pbartlett

It may not be worth it with a mortgage - you have to pay 3% to borrow that money. With a mortgage you are essentially looking at a small income but a hopeful capital gain as the property value goes up.

If, however, you have cash in the bank and are looking to invest it, then a BTL for cash might be an option - you would get more return on your money that bunging it in a Marcus account or whatever. Plus, of course, the same potential capital gain.

The main obstacle at the moment is the possible abolition of section 21, meaning it might be difficult or impossible to evict a tenant and get your property back. Depends how they implement it of course.

Other looming considerations in the future might be large fees for a 'licence' and maybe rent controls.

John464

pbartlett said:If, however, you have cash in the bank and are looking to invest it, then a BTL for cash might be an option - you would get more return on your money that bunging it in a Marcus account or whatever. Plus, of course, the same potential capital gain.

Yes I agree
Property has gone up a lot and looks expensive, but then so do equities,
Although I'll stick to equities. 
Being retired I don't want the hassle, and feel the downside (and upside) is lower in my world tracker funds.
But if I was younger, and more wiling to take a punt, I might go for BTL.
I see capital gain /loss on property as the biggest factor, and thats inseparable from politics.