Jump to content
House Price Crash Forum
Sign in to follow this  
Timak

Rental Arbitrage

Recommended Posts

I was on holiday last week in Dorset.

Saw lots of nice houses when out and about with for sale signs outside so I thought I'd look up how much they were on the market for.

Expensive is the answer - it is a very desirable area so it is to be expected - however I imagine the price/earnings ratio is particularly high as there don't seem to be many jobs in these pretty towns outside of tourism.

So I thought I'd look at the rental market.

I live in Cambridge - house is "worth" about £200k and would rent easily for about £850 a month.

In Dorset I'd be able to get something "worth" about £350k for a similar amount of rent.

Now obviously Cambridge has jobs and Dorset doesn't but I wonder if later on in life a better plan might be to use the rent differentials between the "jobs" area and the "lifestyle" area to fund a nice life in a house I'd be unable to buy?

It makes you wonder why potential rental yield isn't used more to calculate the value of a property. Are people really that attached to the idea of ownership that they'd be willing to pay almost twice as much to buy the Dorset cottage as the Cambridge terrace even if they could own the Cambridge and live in the Dorset property?

Share this post


Link to post
Share on other sites

This is exactly what we are doing at the moment. Our local economy will not support rental prices above £850/£900 per month.

We are renting a lovely house in the countryside which would cost around £250,000 to £300,000 to buy. We are renting at £850 per month which I think is a bargain as the mortgage on our crappy town £115k centre town house cost £650 per month with our old NR mortgage.

I reckon that we must be paying around an extra £100 per month in real terms as we do not pay buildings insurance, repairs or decorating. I dread to think how much we spent when we owned our Victorian town house. Must have been near £5k on repairs including painting, scaffolding, pipes etc.. between 2006 and 2011

Share this post


Link to post
Share on other sites

Just to add..

£850 per month for 25 years = £255,000

90% Mortgage @ 5.5% = (£):1,409.33 per month

Deposit (£): 25,500

Total loan amount (£):229,500

The total interest (£):193,299

Total for buying (£):448,299

Add on buildings insurance, new carpets ever 8 years, redecoration, a new kitchen, a new bathroom, a new boiler (all need replacing in 25 years)

Lets say £50k then we get a total of around £500k

It would be interesting if someone could calculate total rental payments for 50 years with 2% (BOE target) inflation.

I know that renting would be more over 50 years but with houses being so expensive why take the gamble? The upside would be break even.

Share this post


Link to post
Share on other sites

Just to add..

£850 per month for 25 years = £255,000

90% Mortgage @ 5.5% = (£):1,409.33 per month

Deposit (£): 25,500

Total loan amount (£):229,500

The total interest (£):193,299

Total for buying (£):448,299

Add on buildings insurance, new carpets ever 8 years, redecoration, a new kitchen, a new bathroom, a new boiler (all need replacing in 25 years)

Lets say £50k then we get a total of around £500k

It would be interesting if someone could calculate total rental payments for 50 years with 2% (BOE target) inflation.

I know that renting would be more over 50 years but with houses being so expensive why take the gamble? The upside would be break even.

Add into the equation cost's of moving if and when landlord wants you out of the property at two months notice .

Not actual costs but things that give quality of life during that 50 year timescale , like being able to decorate and change things when you want , knowing it is you that will decide if and when you move, peace of mind if you have children attending local schools.

There are pluses and minuses to both . In times of high inflation with wage inflation to match buying property wins hands down over renting , my parents had a choice 50 years ago , buy for £5 per week or rent for £2.50 a week . They choose buying and within a few years their mortgage was less than renting , they lived for years with a tiny mortgage and finished paying it back over 30 years ago. So have lived rent and mortgage free for 30 years . The rent on the £2.50 per week house would be over £100 per week now and in a grotty area. They also have an asset worth over £300k . When you rent you never build up any asset .

Share this post


Link to post
Share on other sites

I was on holiday last week in Dorset.

Saw lots of nice houses when out and about with for sale signs outside so I thought I'd look up how much they were on the market for.

Expensive is the answer - it is a very desirable area so it is to be expected - however I imagine the price/earnings ratio is particularly high as there don't seem to be many jobs in these pretty towns outside of tourism.

So I thought I'd look at the rental market.

I live in Cambridge - house is "worth" about £200k and would rent easily for about £850 a month.

In Dorset I'd be able to get something "worth" about £350k for a similar amount of rent.

Now obviously Cambridge has jobs and Dorset doesn't but I wonder if later on in life a better plan might be to use the rent differentials between the "jobs" area and the "lifestyle" area to fund a nice life in a house I'd be unable to buy?

It makes you wonder why potential rental yield isn't used more to calculate the value of a property. Are people really that attached to the idea of ownership that they'd be willing to pay almost twice as much to buy the Dorset cottage as the Cambridge terrace even if they could own the Cambridge and live in the Dorset property?

It's fairly standard for property that is in the "aspirational" sector to produce rubbish yields.

It doesn't even matter if high paid jobs are available. Most renters rent what they need, not what the aspire to and there are very few people who need to live in a cute cottage in the middle of nowhere and they will only do so if the rent is cheap

tim

Share this post


Link to post
Share on other sites

Just to add..

£850 per month for 25 years = £255,000

90% Mortgage @ 5.5% = (£):1,409.33 per month

Deposit (£): 25,500

Total loan amount (£):229,500

The total interest (£):193,299

Total for buying (£):448,299

Add on buildings insurance, new carpets ever 8 years, redecoration, a new kitchen, a new bathroom, a new boiler (all need replacing in 25 years)

Lets say £50k then we get a total of around £500k

It would be interesting if someone could calculate total rental payments for 50 years with 2% (BOE target) inflation.

I know that renting would be more over 50 years but with houses being so expensive why take the gamble? The upside would be break even.

edit: prob easier to use present values

Edited by Ash4781

Share this post


Link to post
Share on other sites

I was on holiday last week in Dorset.

Saw lots of nice houses when out and about with for sale signs outside so I thought I'd look up how much they were on the market for.

Expensive is the answer - it is a very desirable area so it is to be expected - however I imagine the price/earnings ratio is particularly high as there don't seem to be many jobs in these pretty towns outside of tourism.

So I thought I'd look at the rental market.

I live in Cambridge - house is "worth" about £200k and would rent easily for about £850 a month.

In Dorset I'd be able to get something "worth" about £350k for a similar amount of rent.

Now obviously Cambridge has jobs and Dorset doesn't but I wonder if later on in life a better plan might be to use the rent differentials between the "jobs" area and the "lifestyle" area to fund a nice life in a house I'd be unable to buy?

It makes you wonder why potential rental yield isn't used more to calculate the value of a property. Are people really that attached to the idea of ownership that they'd be willing to pay almost twice as much to buy the Dorset cottage as the Cambridge terrace even if they could own the Cambridge and live in the Dorset property?

Didn't retirees try this in the Costas? And the currency arbitrage caned them?

Share this post


Link to post
Share on other sites

I was on holiday last week in Dorset.

Saw lots of nice houses when out and about with for sale signs outside so I thought I'd look up how much they were on the market for.

Expensive is the answer - it is a very desirable area so it is to be expected - however I imagine the price/earnings ratio is particularly high as there don't seem to be many jobs in these pretty towns outside of tourism.

So I thought I'd look at the rental market.

I live in Cambridge - house is "worth" about £200k and would rent easily for about £850 a month.

In Dorset I'd be able to get something "worth" about £350k for a similar amount of rent.

Now obviously Cambridge has jobs and Dorset doesn't but I wonder if later on in life a better plan might be to use the rent differentials between the "jobs" area and the "lifestyle" area to fund a nice life in a house I'd be unable to buy?

It makes you wonder why potential rental yield isn't used more to calculate the value of a property. Are people really that attached to the idea of ownership that they'd be willing to pay almost twice as much to buy the Dorset cottage as the Cambridge terrace even if they could own the Cambridge and live in the Dorset property?

F'king Hell Timak...keep it to yourself can't you? Next thing fat Kirsty will do a programme about it. "Dorset Upwardly Mobile Village Rental Shafting Ladder" or something. I hope you get fri99ing Osborne and his charmless family as next door neighbours.

Share this post


Link to post
Share on other sites

Just to add..

£850 per month for 25 years = £255,000

90% Mortgage @ 5.5% = (£):1,409.33 per month

Deposit (£): 25,500

Total loan amount (£):229,500

The total interest (£):193,299

Total for buying (£):448,299

Add on buildings insurance, new carpets ever 8 years, redecoration, a new kitchen, a new bathroom, a new boiler (all need replacing in 25 years)

Lets say £50k then we get a total of around £500k

It would be interesting if someone could calculate total rental payments for 50 years with 2% (BOE target) inflation.

I know that renting would be more over 50 years but with houses being so expensive why take the gamble? The upside would be break even.

At £850pm with 2% rental inflation per year over 50 years total spent on renting would be £862k. No asset at the end of it.

Current house price of £255k would be, with above criteria, £600k (rounded up as you underestimate the cost of buying and owning). With 2% per year average HPI, asset price is £670k.

Share this post


Link to post
Share on other sites

Not as simple as that , you will be assessed for tax on the rental income of the residence you are renting out....you cannot offset the rent you are paying on your new home against this. If you are a higher rate tax payer you lose 40% of your net rental money straight away.

If you are both not working then split the income husband and wife and of course each get your personal tax free allowance and a lower tax rate if your share of rent is higher than the personal allowances.

Oh and watch out exposing your principal residence to capital gains tax.... Various tricky rules you need to be aware of

Edited by mercsl

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 276 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.