Sunday, Apr 27, 2008
BTL to the rescue
Independent: Buy to let keeps the housing blues at bay
In fact, British landlords are barely breaking into a sweat. "Our customers are not worried about falling house prices – they are making use of them to buy more property with enhanced negotiating power," says Lynsey Sweales, director at buy-to-let specialist The Money Centre. "They have experience in the field, owning an average of 7.2 properties each, which means they have an adequate financial cushion."
According to the latest buy-to-let index from lender Paragon, average monthly rents reached a new peak of £990 in February.
Posted by little professor @ 12:47 AM (3248 views) Add Comment
33 Comments
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1. little professor said...
I don't know anyone outside of London paying more than £900 a month in rent. This is more than 2/3 of the average take-home income. Methinks Paragone's average rent estimate is a bit skewed.
2. Amjidk said...
mwahahahaha this is funny...
3. Stevie Dee said...
@little professor,
Not if you are packing people in like sardines.
Example of last place (3 bed Edwardian converted into 5 bedsits):
5 box rooms each paying on average £280 inclusive with one room spare, so if house was full. £1680.
But as there were five: £1480
Property value despite 10% reduction £109,000 (£118,000)
After utility bills & council tax & agents fees (if applicable) was taken off the landlord would just about break even. Now talk of water bills being metered as a mandatory requirement, and inflationary pressures on gas & electricity, and of course changes in mortgage rates, the landlords are really at the point where they have to contribute to the mortgage. In truth, the living conditions in these places are Dickensian & a violation of Article 8 of the Human Rights Act. I call it "slave boat housing". These landlords have respectable jobs, but are quite inhuman, they have no consideration for tenants or whom is put with whom. The last place I lived in, one of the tenants kicked a dog to death. These people were hard-core white trash (chav's).
But with other landlords, who are more fairer and more vulnerable to the changes in the marketplace will inevitably play into the whole market and thus create cheaper asking prices for rent, and put these more unscrupulous scum, vermin, parasites out of business. There really needs to be legislation to protect the tenant, it is quite a disgrace that this occuring in 2008, remember the conservatives brought this idea in 1997 and labour merely followed suit. This just goes to show that it doesn't matter what political persuasion the current government is, they (the government) really blissfully ignorant to what is going on in towns & cities all over the country.
I think the philosophy is, if it has 4 walls and can fit a single mattress in it.. it's retailable innit.
In truth, it's a scandal, a f*cking disgrace.. and thankfully I don't live in such conditions now, but something truly has to be done about this, and people charged.
PARAGON = Parasites
4. Stevie Dee said...
Following on from my previous entry, 2 tenants were on housing benefit, imagine a house of five dss. The government are complicit and should be charged also, who knows the Government may ration benefits to 3 a property. Any solicitors reading this, fancy making a name for themselves and in British history, a modern day Wilberforce or Shaftesbury, please make a difference. And it would highlight to the fairer minded members in our society what a "shower" we have in his Labour Government. One silver lining is the credit crunch, the financial institutions in dissarray.. job losses, higher bills, inflation, we are all interdependent, and as an optimist and a believer in the "invisble hand", things should eventually sort themselves out.
5. gone-to-colombia said...
utter nonsense
6. who stole my pension? said...
Does anyone know how they calculate the average? I looked on their website but coudn't find an explanation.
7. confused76 said...
they are charlatans
sit on a huge book of bad loans
8. renting2 said...
Doesn't bear any resemblance to the reality of my contacts in the trade.
9. techieman said...
I will expand on a posting i made last week. This does have relevance so please bear with me.
If somone buys a commodity, well ok lets keep things simple let say they buy the FTSE100 index. They buy at a say 5000 for say £100 per point. Ok it goes up to 5500 but they maintain their position, it then goes to 6000. They have now - because of the move in their favour lessened their leverage and reduced their need to post margin. Instead of selling though they buy more (this is called pyramiding). If the buy the same they would obviously only need a pullback to 5500 for them to lose their profit. However they now create whats called an inverse pyramid and buy double the amount they buy at 6000. They can do that because they are using some of the profits to give them enough credit to buy more without them lodging additional deposits or margin.
Now their average is 5,666.
Now they are "controlling" a nominal value of £1.7m. And a move per point of £300. In effect they are in a similar postion to some BTL landlords. Clearly you can keep going with this example, (as some BTLrs have done). However lets say you stop at 8,000 - i.e. every 1000 points you double yuour position again.
You are now controlling £9.2m nominal and your average price is 7,267.
Ok so now you dont add to your postion and the FTSE goes to 10,000. Oh happy days - you are rich ON PAPER. You have £4.1m in paper profits. So what do you do? Ok well EXAMPLE 1 : you buy your own portfolio of shares for say £2m. You spend about £1m and are left with £1m.
Shares then start to go down (but only to 9,000) - you still have paper profits of 2.6m BUT you have spent 2m on shares (which are now worth 1.8m) and you have spent £1m. So you are "left" with negative £400k. Ouch!
Ok so what if you lived more frugally say example 2. Say you DIDNT buy any shares and you didnt spend any of the gains (say you were living off the dividends - or "rents").
Happy days return - you have £2.6m on paper (@ 9,000). Ok you think right - i know they now look cheap so i will buy some more as they are bound to go up again! I dont want to be grredy so i will use half the 2.6m as margin - and i buy the index at 9000 for £500. I am now averaging 7,700. So what happens now. ok either things go up OR they go down. This buying more as the market goes down means you need less of a move to get back to the profit where you were before in this example a move back up to 9,750 gets you back to where you were before [£4.1m] (and thats why people do it). OR say they continue to fall to 7,000. (or a 30% fall) and remember i stopped the orininal pyramiding at 8000 or a fall on that of 12.5%. Thats called "Averaging".
Now in either example you are in trouble because to matain your positions you will need to post margins - so that the people on the other side of your trades have security. Hmmm and how are you going to do that?
You can work out all sorts of examples where the only conclusion is that a relatively small fall for people that have "geared up" will put them in the proverbial sh*t. The safest method would have been to either build your pryamid early in the scheme (i.e in efect buy at 5,000 for £1,000 per point and then reduce that per point value to say £500 @ 6,000 £250 @ 7,000 etc.) or of course just buy your shares at 5,000 and hold em.
IMO MOST BTLrs have embarked on the inverse pyramid "scheme" and so as falls get worse these people who , didnt "stop" at 8,000 but carried on all the way up. Therefore any increase in dividends (a similar calculation could be made re the yields) will get eaten up and there will be forced sellers.
Therefore the moral is.....DOnt create inverse pyramids - especially in markets that are illiquid and to average a loss is to compound stupidity. BTLrs - stop reading this and start liquidating your portfolios if its not already too late!!!
10. little professor said...
"The rental income is based the verified expected rental income for house purchase cases."
In other words, what the liar developers are telling the BTLers they will receive in rent.
11. techieman said...
Incidentially EVERYBODY in the markets knows this stuff. But if you have been in a market that has gone up and that is perceived to always go up, then yes you would never have to learn this stuff ....UNTIL its too late and bites you in the ar*se. I am afraid thats life boys. If you learn this stuff with a relatively small position (its human nature only to learn by mistakes when they actually cost you) then thats not a problem , but when your whole wealth has been predicated on it .....then .....!
When i was younger and thought i was gonna make my first million "next week", this is exactly what happened - i had a largish position and had plenty of equity in my account. I then tried to average a losing position and for a while (hours) it went my way. I was very close to b/even on the whole position (i think 12 ftse points) and i had a OCO order either at that b/even or at a much lower level - the lower level was really i thought a joke and would never get there. Of course the market never got me to b/even and the loss more or less wiped out my account.
That was an expensive lesson but one which has earnt me hundreds of times what it cost me over the years. I was lucky though.
12. jack c said...
techieman - interesting input and comparisons and just to pick up on what (IMO) is the central point - "BTLrs - stop reading this and start liquidating your portfolios if its not already too late!!!" - residential property as an "investment" is regarded by many as high risk because it is illiquid. Unless someome is prepared to offload their portfolio at a significant discount (or is extremely lucky) many will simply be stuck in a market which IMO has at present stagnated.
13. uncle tom said...
This is just so ludicrous! Surely, no-one still believes that house price inflation is going to exceed wage inflation now?
Maybe a few still cling on to the vague hope - maybe those who havn't seen a newspaper or TV news bulletin for the last six months...
BTL simply doesn't add-up, unless house price inflation exceeds wage inflation, or rents rise to a level that hardly anyone can afford.
Serious money men, taking a consensus view of the current risks to the market, are unlikely to be tempted in at the moment, unless rents went up ten-fold, which, of course, they can't
14. jack c said...
UT - I share your view - lets see if greenbay enters the debate today to tell us how and why we are wrong?
15. Greenbay said...
very well jack i will.
I purchase bmv property, in this market its great because people are nervous and are accepting low offers, in south wales you can pick up an ex 3 bed council house for 85,000 i get rent on these for around £525 pr/month average mortgage payment £360 so after costs i make an easy £100 profit my investment is approx £2500 as i buy with cash and remortgage at its true value i.e 100,000.
So £1200 pr year profit divide by £2500 = 48% ROI try getting this in a bank!
now i would expect a capital gain in 5years time of approx £25,000 too, plus in 5 years time the rental would have incresed to around £600.
i average 2 per week so property works well with me... dont know what all the fuss is about to be honest.
i know what your all going to say what ifs, ie interest rates rises etc etc... been there done and heard it all before, i have been through 3 cycles and it has never ever change rates rise so do rents rates reduce capital rises. Any professional poperty investor will tell you the same..
Sorry people but there will not be a crash, not even close, i would advise you to look for a place to buy now whilst senitiment is low and you can get reduced prices, trust me this time next year property will rise again.
But keep up the doom mongering guys its great for my purchasing power :-)
16. techieman said...
Jack i hope Greenbay does enter the fray, maybe he can give us some more comedy input. His "i never sell i only remortgage and buy more" puts him exactly in the category i described. Personally i have no problem with him, but everyone i know that is in this market has partially liquidated - perhaps Greenbay bought what they were selling? He amuses me if he really is seriously so bullish, i expect to hear some news from BMS and Mortgage Express within the next month or so that might impact on him and any BTL mates. Thats not based on anything other than a hunch btw.
My point with all these guys is this. There are a few traders i know and respect who were trading very large values - one guy bought FTSE very near the recent plunge low and got out with £3m (that was his last "proper trade" as he called it). He now literally trades for fun - he trades at £30 a point, if you met him you would never know his worth and his demeanor is exactly the same whether he is making or losing lots of money. He is one example, most of the guys are very affable and dont ram down your throat their wealth or how stupid you are for not doing what they have done. They effectively are warrior traders pitting their wits against the other guys and not listening to market noise telling them that the pound is going to be worth 6 centimes next month or whatever.
THE BTLrs know only a bull market and WILL tell you how stupid you are for not buying into what they actually hope Is a ponzi scheme, where their capital gains are paid for by the mug renters. They DO wear the flashy suits and drive the baby Bs which they have purchased with borrowed (one way or another) money.
The market will purge these people from the "game". Its inevitable - and even if not now then the people who gear up must get in trouble - no market goes up in a stright line.
That said there is a place for regulated and sensible BTL in this country which makes a fair return and is an alternative for people to rent from rather than buy. I am actually all for BTL, but not in its spivvy current guise. Assuming that social housing does not receive funding going forward. BTL as a concept isnt wrong, its just the people that are in it are only incentivised by the "get rich quick" / greed culture.
17. Sneaker said...
It would be really nice if one day lying was made illegal. But until then, we just have to continue disbelieving almost everything that we are told.
18. Jonathan said...
@ little professor; £1100 - £1,400 rental pcm commonplace in Farnham for 2 - 3 beds. Increase of 20% in 18 months.
19. bystander said...
Excellent posts techieman.
20. jack c said...
techieman - I also have no real problem with greenbay other than the trumpeting of wealth bit, but I'm yet to be convinced of his overall argument (assuming he is a real charachter and not simply some spoof wind-up merchant). Several people I know both personally and professionally have liquidated all or part of their residential holdings (other than main residence and overseas holiday home) simply in the belief that they were satisfied with the returns made and that the market would reverse. Interested to hear more on your Mortgage Express comment as Mortgage Express no longer accept remortgage applications where the property has been owned for less than 6 months. Mortgage Express were the only company that would allow same day remortgage AND capital raise. There are a number of companies that will do same day remortgage on a like for like basis, but they will not permit capital raising as well. This is effectively (IMO) the end of 'the buy below market value and remortgage, capital raise and cash out on same day routine for the time being.
21. techieman said...
jack - i have to bow to your knowledge in this area. I really didnt know about the ME remortgage issue but i find it very interesting. As you know ME is part of BB so my view on this was that since they were most exposed to BTL then they would be restricting criteria aggresively. That "hunch" has perhaps been bourne out by what you just wrote - when did they do this? I wonder if i really am physic after all ;-). As for BMS again they have been quite relaxed and since they are part of HBOS i wouldnt be surprised to see HBOS come out with restricting criteria on all the subsidiaries in the group and that that will be in reaction to questions raised at the AGM. I havce posted separately on the HBOS posting.
The trumpeting of wealth bit is only really done by those people who dont know how to handle it so really its not his fault, if you come from new money its actually quite difficult - isnt that why lottery winners are offered counselling. To go back to my own experience i am actually very glad i lost alot of money - i was a bit of a pr*tt then (some would say i havent changed)!
Bystander - thanks - we havent seen eye to eye on some things so its good to find common ground! I may not agree with you but you do support your comments, and clearly are passionate about them.
22. jack c said...
techieman - Mortgage Express made the move as of midnight on Tuesday 22nd April 2008 - your hunch on BMS and ME seems very well founded to me.
There are HUGE changes in BTL funding taking place day by day (so much so it's very difficult to keep up) - I suspect greenbay will like many find that the re-maortgage re-mortgage options available in the past are no longer available now. Tough times ahead.
23. Davros said...
Buy to let doesn't work in a falling market. Where do you get a mortgage from? This is Britain's great sub prime.
24. new user 2007 said...
Greenbay
Circa 2011...Here is what really happened.
The alleged property with 10% equity (you have in past made comments that allege you don’t have much before buying the next one) mean you put in £8,500...
I am sure you are the only BTL who is somehow using low deposits BUT also allege that you are using a rate below 6%, so lets assume 6%...do you own a bank?
You are paying 6% on £76,500 i.e. £4,590pa or 382.5pm in interest. Of course that ignores void periods. Opporunity costs of the deposit and time, maintenance fees etc
Now the clincher...your £85,000 property will be worth £72,250 by 2010, assuming an increasingly accepted fall of 15% over that period. Your £8,500 capital has been wiped out and you owe £4,250...
That is around a 150% loss. If your figures EVER made sense you could be taken seriously, but you never do. Astonishing really
Everyone else...instead of BTLs (buy-to-let-ers) can we circulate a new term PRMs (PyRaMiders:)
25. new user 2007 said...
p.s. you are also accepting that prices have fallen for you to be picking up bargains. Or are you saying home owners are selling before BTL..interesting. At the same time pricex cannot fall?
Or are they the people who should not have had mortgages to begin with, in which case they are likely to be DSS and not high rent payers.
26. techieman said...
well Greenbay never disappoints does he :-) Infact he is one of the main reasons i log on! "I have been through three cycles" what cycles? you told me that you dont believe there is a cycle in the property market but now you have lived through 3 of em. If i have misunderstood and you mean interest rate cycles can you be specific?
"trust me this time next year property will rise again". Its dell boy economics - this time next year we will be millonhairs! Im sure we can find your posts that say property will not fall and now you are saying they will not crash (because a position that they will not fall is now clearly untenable).
Good luck with your portfolio Greenbay but i really cant comprehend why you (being a professional property investor) havent just played the cycle. Thats what most of my BTL / Developer mates have done, but clearly they aint as clever as you - obviously the east end barrow boys have got a lot to learn from you valley boys, or maybe the councils are more liberal with their money? Do i know nope, Do i care - not really. I can see now why you keep buying though spose if you buy up all of south wales you may have enough to make it worthwhile @ 1200s annual a pop.
If half of what he says is true (and lets face it that might not be the case, some of it sounds very implausable - see NU's post) then he is really setting himself up for a huge fall, as ive described above. Nothing more to say really except:
In the words of blakey "You've made my day" :-).
27. jack c said...
@Greenbay (15) - welcome to the debate - interesting opening line - "I purchase bmv property, in this market its great because people are nervous and are accepting low offers"
IMO the true value of a residential property is what someone is actually willing to pay - so in the example you give "in south wales you can pick up an ex 3 bed council house for 85,000" - this is infact the true market price ! - alternatively if you really think the property is worth £100K why not put it back on the market ie "spin or flip" it and make a straight £25K?
I have a friend who deals exclusively in BTL mortgages and his business is under HUGE pressure because of the current turmoil in the mortgage market and to be truthful I cant see how anyone is immune when it comes to BTL re-mortgages etc... but if you can enlighten me I'll pass on your tips and hopefully keep his business afloat.
28. Frank Bell said...
Every dog has it's day and as techieman and jack.c have mentioned, poor ol' Greenbay is lining himself up for a massive shock in the very near future, I had 5 BTL properties mostly bought in 1999/2000, then sold in 2007 and was happy to make enough in a far shorter period of time than I originally envisaged. As with equities and FX trades, if I hit a reasonable profit then I take it and don't worry about missing the opportunity to have held on for an even bigger gain.
Maybe, to some traders I could be classed as stupid for taking the gains too early but this Greenbay has lost the plot and in my opinion he is up to his neck in it, leaving it at least a year too late to have sold up and his only comfort is really that the housing market will recover well.
There is no chance of house prices getting back to their glory days for at least 9 or 10 years and I can't honestly see BTL being a good investment decision again unless one buys distressed properties at 50% or 60% of current market value. Rents will not be so good either in future and BTL legislation (although much needed) is strangling the smaller landlord financially along with help from letting agents.
Greenbay, wake up and IF you can still get out, then sell up now. I don't want to be paying towards your benefits in a couple of years time.
29. Ian said...
Rubbish - rents are falling 20% or more, voids are increasing - and some BTLs are finding banks asking for ££££s as the BTL equity margin has been cut by falling house prices.
In short - yes with record (temporaily) cheap mortgage rates BTL incomes can be great exceeding outgoings - but capital is being devastated, and price falls have a hell of a lot further to go.
The Brown government is bankrupt - so they may make noises about helping owners, but in the final analysis, they just do not have the cash.
30. techieman said...
frank bell - and Ian THIS is an old post from last year - i have linked to it - just to show newbies what we had to put up with this time last year. Your comments on it now are in effect with hindsight and not in real time, thats not an issue - i just mean you should put them on the new blog, to add to the debate. (8 comments at the time of writing) to be honest i didnt know this thread would still be available to link too.
Ian your point re rents is probably true but you cant argue with the bloggers on this thread because at that time what they posted also was probably true.
Frank - we think that Greenbay may already be out of the picture - i cant remember his last blog but we (understandably) haven't heard from him for quite some time.
31. mander said...
Still there it has been a big buble in rents especially in London but things look diffrent now because of unemployment and a lot Polish leaving the country. Strangely it has been mentioned in the media that 500 000 BTLers are defaulting and that should translate into 500 000 repos. But there is insurance that can easily be taken against a tenant defaulting. £ 100 for a year for £ 1000 rent per month. If for 500 000 BTL confirmed defaulting to cover at least 2-3 months defaults which £ is £ 2000-3000 money provided by the insurer. So charging only 100 per year then the isurer is loosing money.
Great manipulation is going on but it says that the UK is always 2 years behind US with regards to what is happening.
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