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pecuniam_hominem
Posts: 50 Forumite
Wasn't sure if this belong in this forum or savings & investments. Interested in any Landlords who can shine a light on my figures below
I have always been curious as to how landlords actually make money. I know of one landlord, and they have said they barely make any money and they are getting out of the business.
Let's say you buy a house up north, for 120k cash. That will get you a three bed semi (roughly). You can rent that out for around £550-650 per month (lets stick with £600).
Every year you get 12 x 600, so £7200. Rent alone gives you 6% ROI per year. Not amazing, but better than keeping it in a bank. Arguably you could get better long term gains on the stock market... but let's run with this.
Now lets look at the overheads. I have no clue on these figures, so bear with me, maybe someone can give me some input. Once you include some form of Landlord insurance, repairs on the property, agent fees etc, lets just say it wipes out 2k per year. You are left with roughly £5000 per year. Your ROI is now down to 4%. Getting towards not worth it territory.
Now the landlord I know, has had 1 bad tenent in every 3. That bad tenant usually means months of unpaid rent, needing to redorate the property etc. So even missing out on three payments in a year, brings you down to £3200. That is 2.6% ROI.
Add in their actual time spent managing this, why is it worth it? Am I missing something major?
Even if that property valuation goes from £120k to £135k in 10 years, that is only 12% over 10 years, which is just over 1% per year,
Also bear in mind that you can't compound your returns (reinvest them in the property) or easily buy a new property. Unlike stocks where you can just buy more stocks.
Am I missing something major? Don't even get me started on if that Landlord is also paying a mortgage.
I guess the benefit is if you have the money to get a Buy to let mortgage, and rent it out you can in theory make someone else pay for your property via rent, I can see why that is attractive.
Landlords, what kind of return do you get?
From the figures above, it just isn't worth it.
I have always been curious as to how landlords actually make money. I know of one landlord, and they have said they barely make any money and they are getting out of the business.
Let's say you buy a house up north, for 120k cash. That will get you a three bed semi (roughly). You can rent that out for around £550-650 per month (lets stick with £600).
Every year you get 12 x 600, so £7200. Rent alone gives you 6% ROI per year. Not amazing, but better than keeping it in a bank. Arguably you could get better long term gains on the stock market... but let's run with this.
Now lets look at the overheads. I have no clue on these figures, so bear with me, maybe someone can give me some input. Once you include some form of Landlord insurance, repairs on the property, agent fees etc, lets just say it wipes out 2k per year. You are left with roughly £5000 per year. Your ROI is now down to 4%. Getting towards not worth it territory.
Now the landlord I know, has had 1 bad tenent in every 3. That bad tenant usually means months of unpaid rent, needing to redorate the property etc. So even missing out on three payments in a year, brings you down to £3200. That is 2.6% ROI.
Add in their actual time spent managing this, why is it worth it? Am I missing something major?
Even if that property valuation goes from £120k to £135k in 10 years, that is only 12% over 10 years, which is just over 1% per year,
Also bear in mind that you can't compound your returns (reinvest them in the property) or easily buy a new property. Unlike stocks where you can just buy more stocks.
Am I missing something major? Don't even get me started on if that Landlord is also paying a mortgage.
I guess the benefit is if you have the money to get a Buy to let mortgage, and rent it out you can in theory make someone else pay for your property via rent, I can see why that is attractive.
Landlords, what kind of return do you get?
From the figures above, it just isn't worth it.
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Comments
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Maybe a forum for landlords would be a good option to post your question.0
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your assumptions are reasonable for that scenario, there are many other scenarios., such as the fact you assume the purchase is for cash
many will be with a interest only buy to let mortgage and that will be the biggest cost, with tax being the next largest impact on net return
sweeping generalisations:
low income yield property = rely on capital growth for investment performance. eg: high purchase cost housing down south paid for by a mortgage funded by the tenant (exposed to tax rules of course)
high income yield = low capital growth. The business is based on/exposed to quality of tenant and quality of property re repairs etc (the scenario you suggest being at the bottom end of this generalisation)0 -
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 HMRC0 -
Maybe a forum for landlords would be a good option to post your question.
You are probably correct. It was hard to classify.your assumptions are reasonable for that scenario, there are many other scenarios., such as the fact you assume the purchase is for cash
many will be with a interest only buy to let mortgage and that will be the biggest cost, with tax being the next largest impact on net return
sweeping generalisations:
low income yield property = rely on capital growth for investment performance. eg: high purchase cost housing down south paid for by a mortgage funded by the tenant (exposed to tax rules of course)
high income yield = low capital growth. The business is based on/exposed to quality of tenant and quality of property re repairs etc (the scenario you suggest being at the bottom end of this generalisation)
Thats fair. I can see the benefit if you get a BTL mortgage. It seems cash buyers are better of putting their capital elsewhere.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
Which begs the question, why bother? Take a business, a 10-20% return on capital is classed as good. Yes you can have some years of losses, but the theory is the gains fair outweight those losses.
Why not put your capital in another investment which generates reasonably consistent returns without all the headache?
This isn't critcism, just curious.0 -
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.0 -
Thanks Seradane. That makes far more sense. I can see the financial gain now and can very much see why it is worth it. I didn't factor in interest only mortgages. I don't know much about them, but from what I read you only pay the interest and at the end of the mortgage term you have to sell the property? You then keep any gain in value (or bear any loss) and the bank is happy because they earn interest payments.
Win win. Interesting.0 -
But you have to put seradene's example into context. You are going to have additional expenses on that £1760 after interest. Also tax. So what is the net yield?
And buy in the wrong area and little capital growth.0 -
pecuniam_hominem wrote: »Wasn't sure if this belong in this forum or savings & investments. Interested in any Landlords who can shine a light on my figures below
I have always been curious as to how landlords actually make money. I know of one landlord, and they have said they barely make any money and they are getting out of the business.
Let's say you buy a house up north, for 120k cash. That will get you a three bed semi (roughly). You can rent that out for around £550-650 per month (lets stick with £600). Very few landlords buy outright in cash.
Every year you get 12 x 600, so £7200. Rent alone gives you 6% ROI per year. Not amazing, but better than keeping it in a bank. Arguably you could get better long term gains on the stock market... but let's run with this.
Now lets look at the overheads. I have no clue on these figures, so bear with me, maybe someone can give me some input. Once you include some form of Landlord insurance, repairs on the property, agent fees etc, lets just say it wipes out 2k per year. You are left with roughly £5000 per year. Your ROI is now down to 4%. Getting towards not worth it territory.
Agency fees are typically 15% so that's 1100 a year. Insurance around £300, repairs vary ofcourse, but you want a sinking fund. And ofcourse the all important tax man will be taking 20% also. So in reality you're down to £4k already
Now the landlord I know, has had 1 bad tenent in every 3. That bad tenant usually means months of unpaid rent, needing to redorate the property etc. So even missing out on three payments in a year, brings you down to £3200. That is 2.6% ROI. - 3payments? HAHA try 6-7
Add in their actual time spent managing this, why is it worth it? Am I missing something major?
Even if that property valuation goes from £120k to £135k in 10 years, that is only 12% over 10 years, which is just over 1% per year,
Also bear in mind that you can't compound your returns (reinvest them in the property) or easily buy a new property. Unlike stocks where you can just buy more stocks.
Am I missing something major? Don't even get me started on if that Landlord is also paying a mortgage.
I guess the benefit is if you have the money to get a Buy to let mortgage, and rent it out you can in theory make someone else pay for your property via rent, I can see why that is attractive.
Landlords, what kind of return do you get?
From the figures above, it just isn't worth it.
Landlords typically make very little. The gains are in the increased property price and often, but not always, the property will eventually pass on to a child0 -
Yeh, I think MSE have one that has plenty of landlords posting... <looks around>Maybe a forum for landlords would be a good option to post your question.
OP - you're right, returns are generally poor currently. People aren't doing the sums properly and are assuming that the "good old days" are still with us.
Capital growth used to be fantastic. Tax benefits made leveraging via mortgage worthwhile. Yields used to be good.
Now - less so. And, yes, experienced landlords are getting out. And some of those properties are being bought by naive newbies to the industry... And, no, that isn't going to be good for their tenants...0 -
Yeh, I think MSE have one that has plenty of landlords posting... <looks around>
OP - you're right, returns are generally poor currently. People aren't doing the sums properly and are assuming that the "good old days" are still with us.
Capital growth used to be fantastic. Tax benefits made leveraging via mortgage worthwhile. Yields used to be good.
Now - less so. And, yes, experienced landlords are getting out. And some of those properties are being bought by naive newbies to the industry... And, no, that isn't going to be good for their tenants...
Couldn't agree more, BTL became a must have after dinner conversation. So many feel they missed out and now can get in on the act.0
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