Friday, Feb 15, 2008
Spot the ridiculosity in this story.
Press Association: House prices boost rental returns
Buy-to-let investors made average returns of more than 16% during 2007 on the back of rising property prices and increasing rents, figures show.
The average landlord made returns of 16.3% on their property during the year, excluding the cost of mortgage interest and fees, up from returns of 13.5% in 2006, according to Birmingham Midshires.
The rise was partly driven by a 10.7% jump in house prices last year, but the group said most of the gains were seen during the first half of 2007. Rents also rose by 13% over the year.
Posted by little professor @ 03:06 PM (736 views) Add Comment
10 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. cyril said...
"People looking to rent a home in Scotland saw the biggest jump in costs during the year, with rents there soaring by nearly 23%, while there were also strong rises in the North at 18.2% and in Greater London at 15.4%"
I'm glad Gordon Brown has got inflation under control.
2. Sceptic2008 said...
Not ridiculous at all.
Not all investors in residential property will take on debt to finance their investments, and investors which do will have varying degrees of leverage. The net return would be different for each of them. This is why the article looks at what the return would be if it were entirely financed by equity, as it's the most meaningful comparison.
On the basis of the article, owning residential property to rent was a very good investment over the last 12 months, even if the rental yield was comparatively poor. And, by implication, those returns would have been magnified for anyone with lots of leverage.
Obviously, this year looks like it will show flat to negative returns (after rental yields), and the year after may be even worse, if we get double digit house price falls. These returns will be dreadful if it's your classic, highly-geared BTL investor, but for someone with lots of money, who owns the house outright, they will probably get a better return from housing this year than equities, which are already down 10%+ year - to -date
I think people often forget that residential investment property can be a sensibel part of a portfolio if (a) you don't take on too much debt to fund it, (b) you make relatively small investments over a long period (c) you hold it over a long period of time and (d) it's not more than 20% of your overall savings.
3. inbreda said...
If you're going to put the sentence "excluding mortgage costs" ni bold, then you should also highlight the fact that this return includes the capital appreciation over the last year, which is still positive.
Taking mortgage costs, admin/maintenance costs and price increases in the last three months, the loss would be eye-watering I'm sure.
4. monty032 said...
It's about as valid as using EBITDA (earnings before interest, tax, depreciation and amortisation) in valuing companies. "Look how much money we would be making if we didn't have to pay our bills."
5. su said...
I wonder if the soaring rents is due to changes in rental property in the last year. I'm guessing that if more expensive (e.g. 3/4 bed detached) aren't selling, these properties may be coming onto the rental market, supplementing the more usual flats and ex-local authority housing which attract cheaper rents.
Renting out a new build also seems to be part of the sales patter in Scotland if you express an interest in buying in the future. "Buy now, or you may miss out. These properties are selling like hot cakes! If you don't want to move in straightaway, buy and rent out - there's a good rental demand for high quality homes like these!"
6. Njp said...
I could also make huge returns renting out Ferraris at £5 a week if I conveniently ignore the hire purchase payments and other costs, such as insurance. What a ridiculous article!
7. The Haunted said...
My rent did not go up at all, nor for the year before.
8. Plato said...
Marvelous what can be done with figures. All the profit is down to property price rises over the period. The rest is loss. Of course the returns are hypothetical until you actually sell and cash in. This whole debt problem has arisen because of this hypothesis. BTL for the amateur is disastrous - but then that's the Idea.
9. new user 2007 said...
Sceptic...
could always short the stock market, use futures and options (these are after all just leveraging but using paper). The problem is that most do not balance anything. The ones who have been in property for years do, but the bulk of BTL entered in the last 3 years as an alternative to the stock market and not in parallel.
I suspect most of these get excited about leverage up but are blind to it working the other way. This leverage also means that it could be worse than the stock market...a £1m portfolio with 25% equity means that a 10% fall in house prices is actually a 40% capital loss.
10. new user 2007 said...
I have seen the following profile often, but this is based on 2007 in my area...
Buy a house for 250k, with a 15% deposit i.e. 37.5k (we will ignore the opportunity cost involved in that). The mortgage is 212.5k i.e. £12,750 pa interest (at 6%). The rent on that is currently £13,800 pa. But lets include void periods, maintenance, opportunity cost, time, possibly managament fees etc and the return is negative.
Of course the house price increased to 290k over one year, so there has indeed been a return of 106% because of the capital in the that year (the 37.5k deposit becomes 77.5k). Now lets have a 5% fall in house prices. The 290k becomes 275.5k i.e. a loss of 23% on the 77.5k.
So the 106% gain in the best case scenario is replaced by a 23% loss per year for 2 years. Would you want to capitalise the gains or continue to subsidise tenants while losing money on the capital side as well. This will be the interesting thing to see. I can't see the logic of not selling in this realistic scenario.
VIs seem to be saying that the surge in BTL over the last 3 years has in no way kept up with popn growth. This is just not factual at all, even if taking into account FTB not able to enter the market and popn growth in general. And certainly in the area I am talking about rents have not been rising as BTL has surged here.
They just have to stop buying at these prices i.e. that FTB cannot afford and prices will fall. I think they will at best continue almost break even on the rental side. Hence my belief that they will start selling in droves from April (when the CGT rules come in)
...no one seems to take into account the GCT on sale. The ones who made a return are probably commiting tax fraud as no one ever talks about the tax on this income (although this applies to any investment)...fraud because I think many do it precisely to evade taxes, something they cannot do on the stock exchange.
It all depends on sentiment and access to debt. No one knows how they will go, but I think down.