Tuesday, May 29, 2007
A long-term investment is just a short-term one gone wrong
Firstrung: Why the economy is nothing like a brick, Soft landing? Wishful thinking
John Stepek - Moneyweek.com covers a lot of ground in todays' newsletter; the economy, interest rates, buy to let and the volume of negative property related articles in the mainstream press to name just four subjects. If there is a finer commentator than John, for explaining Economic matters in a simple non patronising way to our readership, then we've yet to find him or her. When John is on form he's a delight to read, nice work John...
Posted by converted lurker @ 01:41 PM (30 views) Add Comment
7 Comments
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1. Realist said...
He has summed up the current state of BTL beautifully below....the current fundamentals fly in the face of this "in it for the long term" nonsense that gets trotted out regularly.
"A property is the same. The reason you buy property as an investment, rather than a home, is because you think it will make you money. Again, the current value is dictated by the income that you expect the home to generate now and in the future. And that usually means how much rent you can expect to fetch for it.
But if the rental yield is actually negative just now, then that suggests the property is already over-valued. That means there's no reason for the capital value to rise in the future - in fact, it should probably fall before it goes any higher."
2. paul said...
The elastic band and brick analogy - to be fair - is not his own. I think I saw an article in the Observer using that one.
His observation that the brick will cling on until forced to let go is original enough though, AFAIK.
3. chilli said...
"rental yield is actually negative just now"
I must be missing something, but for rental yield to be negative, that means you are paying someone to live in your property - doesn't make sense. Unless you are factoring in mortgage repayments.
Very good article: Something I continually hear from these property bulls is "you have to be in it for the long term". Craziness!!!!
4. cyril said...
@chilli: by rental yield negative I guess he means you're losing money on your BTL. E.g. Mortgage + Depreciation costs > Rent
5. Realist said...
Paul - he actually says in the article that the brick analogy isn't his own!
6. converted lurker said...
Chilli, that's right, many are paying some one else to live in their property by funding the gap between rent in and buy to let mortgage paid out!
7. Kaitain said...
That doesn't seem quite right, although it's quite a complex issue. Really, the important thing is that the total rent coming in over the whole mortgage period exceeds the *interest* payments you've made, not the total payments. The reason is that (as a BTL-er) you are not yourself renting the property from someone and then subletting it to someone else, in which case subletting at lower than the rental rate you're paying is clearly a bad state of affairs. Instead, you are actually going to *own* the property outright at the end of it. So let's assume that we're in an inflationless world (yes, I know, we're simplifying here) where everyone agrees that the house is and always will be worth 300k. You take out a mortgage that will involve you paying 500k over 20 years, and rent the property out. During that 20 years, you receive 400k's worth of rent. Now this isn't enough to cover the mortgage payments, so it could be said that you've lost money renting it out. But this isn't actually the case. You have spent 500k on the house, you've received 400k in rental income and you now have an asset that is worth 300k. You have effectively paid 100k for a 300k asset, so it was still worth your while, opportunity costs notwithstanding (could your time and money have been spent more effectively elsewhere?). The the basic assertion that a rent that doesn't cover the mortgage is a losing proposition is therefore not necessarily correct. What you have to look at, however, is all the other stuff, i.e. the fact that the value of the property will NOT stay the same, that interest rates are NOT 0%, that average inflation is generally factored into the interest rates on the mortgage, capital gains taxes, stamp duty etc.