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    • pecuniam hominem
    • By pecuniam hominem 15th Jan 20, 1:03 PM
    • 22Posts
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    pecuniam hominem
    Investment return for landlords?
    • #1
    • 15th Jan 20, 1:03 PM
    Investment return for landlords? 15th Jan 20 at 1:03 PM
    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.
Page 1
    • DCFC79
    • By DCFC79 15th Jan 20, 1:08 PM
    • 35,622 Posts
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    DCFC79
    • #2
    • 15th Jan 20, 1:08 PM
    • #2
    • 15th Jan 20, 1:08 PM
    Maybe a forum for landlords would be a good option to post your question.
    • 00ec25
    • By 00ec25 15th Jan 20, 1:19 PM
    • 8,961 Posts
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    00ec25
    • #3
    • 15th Jan 20, 1:19 PM
    • #3
    • 15th Jan 20, 1:19 PM
    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)
    Last edited by 00ec25; 15-01-2020 at 1:22 PM.
    • theartfullodger
    • By theartfullodger 15th Jan 20, 1:50 PM
    • 10,766 Posts
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    theartfullodger
    • #4
    • 15th Jan 20, 1:50 PM
    • #4
    • 15th Jan 20, 1:50 PM
    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
    • pecuniam hominem
    • By pecuniam hominem 15th Jan 20, 1:58 PM
    • 22 Posts
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    pecuniam hominem
    • #5
    • 15th Jan 20, 1:58 PM
    • #5
    • 15th Jan 20, 1:58 PM
    Maybe a forum for landlords would be a good option to post your question.
    Originally posted by DCFC79

    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)
    Originally posted by 00ec25

    Thats fair. I can see the benefit if you get a BTL mortgage. It seems cash buyers are better of putting their capital elsewhere.


    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
    Originally posted by theartfullodger

    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.
    • seradane
    • By seradane 15th Jan 20, 2:03 PM
    • 44 Posts
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    seradane
    • #6
    • 15th Jan 20, 2:03 PM
    • #6
    • 15th Jan 20, 2:03 PM
    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.
    • pecuniam hominem
    • By pecuniam hominem 15th Jan 20, 3:07 PM
    • 22 Posts
    • 5 Thanks
    pecuniam hominem
    • #7
    • 15th Jan 20, 3:07 PM
    • #7
    • 15th Jan 20, 3:07 PM
    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.
    • BoGoF
    • By BoGoF 15th Jan 20, 3:20 PM
    • 5,893 Posts
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    BoGoF
    • #8
    • 15th Jan 20, 3:20 PM
    • #8
    • 15th Jan 20, 3:20 PM
    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.
    • Comms69
    • By Comms69 15th Jan 20, 3:35 PM
    • 10,415 Posts
    • 12,594 Thanks
    Comms69
    • #9
    • 15th Jan 20, 3:35 PM
    • #9
    • 15th Jan 20, 3:35 PM
    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.
    Originally posted by pecuniam hominem
    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 child
    • AdrianC
    • By AdrianC 15th Jan 20, 4:09 PM
    • 27,546 Posts
    • 27,721 Thanks
    AdrianC
    Maybe a forum for landlords would be a good option to post your question.
    Originally posted by DCFC79
    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...
    • caprikid1
    • By caprikid1 15th Jan 20, 5:00 PM
    • 956 Posts
    • 1,022 Thanks
    caprikid1
    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...
    Originally posted by AdrianC
    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.
    • steampowered
    • By steampowered 15th Jan 20, 6:38 PM
    • 3,788 Posts
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    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
    • By wine_night 15th Jan 20, 9:00 PM
    • 104 Posts
    • 142 Thanks
    wine_night
    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.
    Originally posted by seradane
    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
    • By Thrugelmir 15th Jan 20, 9:07 PM
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    Thrugelmir

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

    Originally posted by pecuniam hominem
    News travels fast. Early bird catches the worm. Thereafter the returns diminish.
    “Risk comes from not knowing what you are doing. – Warren Buffett”
    • tom9980
    • By tom9980 15th Jan 20, 9:32 PM
    • 1,580 Posts
    • 4,370 Thanks
    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.
    "there are now at least 176 rules and regulations relating to letting a property, so my advice is learn learn learn" Paul Shamplina
    • Crashy Time
    • By Crashy Time 16th Jan 20, 1:09 PM
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    Crashy Time
    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
    Originally posted by theartfullodger
    Why did BTL become so popular then in that case?
    • seradane
    • By seradane 16th Jan 20, 1:53 PM
    • 44 Posts
    • 40 Thanks
    seradane
    A leveraged property portfolio is higher risk than a non-leveraged share portfolio.
    Originally posted by steampowered
    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%.

    Why did BTL become so popular then in that case?
    Originally posted by Crashy Time
    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.
    Last edited by seradane; 16-01-2020 at 1:57 PM.
    • Cakeguts
    • By Cakeguts 16th Jan 20, 3:34 PM
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    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
    • By Thrugelmir 16th Jan 20, 3:58 PM
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    Thrugelmir
    Why did BTL become so popular then in that case?
    Originally posted by Crashy Time
    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.
    “Risk comes from not knowing what you are doing. – Warren Buffett”
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