So What's The Attraction With Btl?

[bumpy]

I continue to see people raving about BTL and think I must be missing something.

A typical 2 bed BTL in my area is £200,000 and this would command a rent, fully let all year, of £750pm or £9000. Surely maintenance, agents fees, vacant periods and repairs must devour more than £1000 per year. Profit is therefore less than £8k per year.

Now if I put that £200,000 in a long term deposit account I should get at least 4% or £8000 and I dont have to get out of bed.

So can someone explain what the attraction is?

[letmein]

I continue to see people raving about BTL and think I must be missing something.

A typical 2 bed BTL in my area is £200,000 and this would command a rent, fully let all year, of £750pm or £9000. Surely maintenance, agents fees, vacant periods and repairs must devour more than £1000 per year. Profit is therefore less than £8k per year.

Now if I put that £200,000 in a long term deposit account I should get at least 4% or £8000 and I dont have to get out of bed.

So can someone explain what the attraction is?

Buy house for £60k (£12k deposit required)

Receive £400 per month after agent fees and insurance

Pay mortgage £320 (reduces after fixed period).

So the government kindly pay off the mortgage. In 25 years have a house worth x with monthly income of £400 pm or sell a spend elsewhere.

There are downsides (repairs, voids, a bit of hassle), but most people over egg them.... In my experience I cannot get one to pay for itself when the house if bought at over £80k. So your £200k house I wouldn't touch....

[GinAndPlatonic]

Awooga.....

[Wurzel Of Highbridge]

Buy house for £60k (£12k deposit required)

Receive £400 per month after agent fees and insurance

Pay mortgage £320 (reduces after fixed period).

So the government kindly pay off the mortgage. In 25 years have a house worth x with monthly income of £400 pm or sell a spend elsewhere.

There are downsides (repairs, voids, a bit of hassle), but most people over egg them.... In my experience I cannot get one to pay for itself when the house if bought at over £80k. So your £200k house I wouldn't touch....

Guaranteed income since there will never be another council housing boom.

[Monkey]

you've put £200k in one house. theres your problem.

buy 20 houses @ 200k each with 10% deposit.

Interest only Mortgage,

rent out at £700pcm each

which is £8400 per property per year.

get a deal with LA for fee and general repairs for £6000pcm to cover all

so (£8400 x 20) - £6000 = £162,000 per annum

mortgage around £600 PCM per property = £144,000 per annum

£162k - £144k = £18k proffit for the first year.

leverage more money buy proving ot the bank your now a company

dont declare tax to tax man. dont do any major repairs/updating properties. raise rents by at leats 5% per year every year.

in 20 years time sell all the properties for at leat 200% proffit, its your pension and your a canny investor. your rich.

that beats 20 years of 4% interest per year

[bumpy]

you've put £200k in one house. theres your problem.

buy 20 houses @ 200k each with 10% deposit.

Interest only Mortgage,

rent out at £700pcm each

which is £8400 per property per year.

get a deal with LA for fee and general repairs for £6000pcm to cover all

so (£8400 x 20) - £6000 = £162,000 per annum

mortgage around £600 PCM per property = £144,000 per annum

£162k - £144k = £18k proffit for the first year.

leverage more money buy proving ot the bank your now a company

dont declare tax to tax man. dont do any major repairs/updating properties. raise rents by at leats 5% per year every year.

in 20 years time sell all the properties for at leat 200% proffit, its your pension and your a canny investor. your rich.

that beats 20 years of 4% interest per year

But what about rising interest rates and falling house prices. Where does that leave you?

[Sledgehead]

But what about rising interest rates and falling house prices. Where does that leave you?

Under an administration that rewarded prudence and valued self-reliance, f**ked.

In this country? Bailed out.

[cybernoid]

Without the value of the place going up it's a waste of time, most barely cover costs.

Assume you've got 20k to invest. Buy a flat for 200k, you can maybe ask 700 a month to rent it. Finger in the air guess at an income from that is 7k a year, after letting agents, void periods, insurance, blah blah. BTL mortgage of 180k interest only let's say 5%, cost per annum there of 9k. Most do interest only as they don't have the cash to make up the shortfall between rental income and higher mortgage repayment cost.

So in that example you're losing 2k a year. With lunatic low interest rates on your BTL mortgage maybe you'll go into positive territory, maybe you'll be in profit to the tune of 3k a year. On a 20k investment you might think you've done a smart thing to be getting a 15% return, but seriously where is 3k a year going to get you. And at what risk? Debt of 180k on an asset that will not rise in value, and is more likely to fall. It only has to fall in value to the tune of 1.5% a year and that's your profit gone... and this is with low borrowing costs.

Borrowing costs are set to rise, values of properties are falling and this is going to continue, incomes are falling putting your income from tenants at risk and/or increasing your void periods.

You could put that 20k in the bank and get 3%. Difference between the two is 12%. For such a large exposure to a such a huge downside it would be a daft thing to do.

However there's plenty of daft people about. They will think they're smart when they get their 3k a year, I could only get 600 quid from the bank a year aren't I a smart investor! And I own a property! When in fact they owe 180k on an asset losing 9k a year at least, an asset they won't be able to sell that will become a millstone round their neck for years and years. Then they lease an audi with the 3k. Im such a success!

[porca misèria]

Without the value of the place going up it's a waste of time, most barely cover costs.

Depends on many things.

Most rentals seem to be at the low end: buy for £100k, let out for £600/month. Go upmarket, buy for £300k and let for £900/month and you're not in it for the profit - though it might still make sense if, say, you're on secondment for a couple of years.

[cybernoid]

Depends on many things.

Most rentals seem to be at the low end: buy for £100k, let out for £600/month. Go upmarket, buy for £300k and let for £900/month and you're not in it for the profit - though it might still make sense if, say, you're on secondment for a couple of years.

At the lower end you have more issues with tenants, it all comes down to the ballpark of my example.

For the amount of debt you take on secured against an illiquid depreciating asset the returns are simply not worthwhile. And thats in the short term. Longer term what you thought was your profit is more than lost when you come to sell.

[dangermaus]

My landlord bought our place for £125k, is renting it out for £625 a month so getting 6% return before anything is taken into account.

I've looked into it and his LA charges £30 a month for collecting the rent + 250 for organising the tenancy so a total of £610 a year.

He's down to circa £6900.

Assuming he got a 4% deal and put 25k in he'll be paying £6400 in mortgage.

Even if he put in 50k he'll be paying £4800 a year in mortgage

£500-2000 profit a year on £25-50k cash + he's had to fix the boiler twice, there's damp coming in the roof which he'll need to fix soon too.

Saw him looking at a house next door last week so he obviously thinks he's doing well.

[The White Horse]

Assuming he got a 4% deal and put 25k in he'll be paying £6400 in mortgage.

If he borrowed 100k at 4% and paid interest only then his mortgage would be £4000 pa.

Edited November 4, 2012 by Russ W

[cybernoid]

If he borrowed 100k at 4% and paid interest only then his mortgage would be £4000 pa.

So 'making' 3k a year, same ball park as my example. It's that kind of figure, in exchange for secured borrowing of 6 figures against an illiquid depreciating asset. And you've locked up your 20k+ as well. There's a million and one ways to make a poxy 3k in a year without any downside, it's beyond dumb.

Falls of 2.5% + over a year removes your profit. Then there's the buying and selling costs as well, with maintenance as already mentioned.

It was never a money maker without capital appreciation. To be getting into it now is astounding.

[porca misèria]

So 'making' 3k a year, same ball park as my example.

Did you just say making 3k a year net on 20k of his own money? A 15% return sounds like you just found an attraction!

[cybernoid]

Did you just say making 3k a year net on 20k of his own money? A 15% return sounds like you just found an attraction!

Read the rest?

[Vagabond]

Read the rest?

I gave up after this;

There's a million and one ways to make a poxy 3k in a year without any downside, it's beyond dumb.

Really? For 20k of your own money? I can't think of one reliable way let alone the million others. Leverage is the key with BTL. Do it right and base it on rent gained as opposed to capital appreciation and it can be a great money maker for average Joe.

Edit - Plus buying into the whole cycle theory pretty much guarentees you capital appreciation at somepoint if you can wait it out.

Edited November 7, 2012 by Vagabond

[cybernoid]

I can't think of one reliable way let alone the million others

Oh well.

Leverage is the key with BTL. Do it right and base it on rent gained as opposed to capital appreciation and it can be a great money maker for average Joe.

Leveraged loan on depreciating asset is not a good idea. The reason the 'average joe' likes it is because if he was above average he wouldn't be stupid enough to do it.

Edit - Plus buying into the whole cycle theory pretty much guarentees you capital appreciation at somepoint if you can wait it out.

Good luck with that

[Vagabond]

Oh well.

Yes I guess my unrealised fortune and playboy life style will remain just that. Whereas I shall be expecting to read about your Buffet-esque returns in your upcoming autobiography.

Leveraged loan on depreciating asset is not a good idea. The reason the 'average joe' likes it is because if he was above average he wouldn't be stupid enough to do it.

You say that but I would argue that it depends on the rate of return against the depreciation. If you leverage 20k up to 100k on a BTL which pays for itself and subsequently drops to 90k or 80k was it still stupid?

Good luck with that

Ah. Not a believer in the cyclic nature of assets/markets then?

[cybernoid]

You say that but I would argue that it depends on the rate of return against the depreciation. If you leverage 20k up to 100k on a BTL which pays for itself and subsequently drops to 90k or 80k was it still stupid?

It won't pay for itself, thats the point. You'll be lucky to cover the interest.

Ah. Not a believer in the cyclic nature of assets/markets then?

Over what time span? None of us will see 2007 levels again in our lifetimes, if you want to wait till after you're dead for a modest return you go right ahead. See Japan.

[Vagabond]

It won't pay for itself, thats the point. You'll be lucky to cover the interest.

Depends on the house. Even in my horrifically overpriced area its possible to find houses/fats you can rent for circa 500/month for 100k. With 20k deposit, a 25 year repayment and 5% interest rates that amounts to 333/month interest only leaving you 170/month to cover voids, maintenance etc and far more than covering the interest.

I'd guess oop north you can find flats for less than that amount which rent for the same or just a bit less. Assuming you could find 5% returns on your 20k for 25 years you'd have about 65k so even if house prices dropped 35% over the next 25 years and stayed there you'd still not be worse off.

Simplistic maybe but you get the idea..

Over what time span? None of us will see 2007 levels again in our lifetimes, if you want to wait till after you're dead for a modest return you go right ahead. See Japan.

Lets face it, if any of us could accurately predict what was going on with house prices we wouldn't be posting here.

[mk1mini]

Lets face it, if any of us could accurately predict what was going on with house prices we wouldn't be posting here.

Post of the year!

I'm not a BTL'er. However if prices do drop by 50% (as another thread predicts) I will be filling my boots!

[Rozza]

Depends on the house. Even in my horrifically overpriced area its possible to find houses/fats you can rent for circa 500/month for 100k. With 20k deposit, a 25 year repayment and 5% interest rates that amounts to 333/month interest only leaving you 170/month to cover voids, maintenance etc and far more than covering the interest.

Lets take your example and see how it works

£170 a month left after mortgage interest, now you have to pay tax on that so even assuming its done through a company so you pay 20% tax you still only have £136 a month. (or £1632 a year)

Now you have buildings insurance say £200 a year, maintenance - another £2-300 (better hope nothing goes wrong really)

So now im down near £1000 "profit" a year, assuming no void periods, damage or anything else

So i can stick the 20k in a rubbish account and make 3% on it (possible to get more than that but lets go low) and make £600 a year, or i can buy a house, pray i have no voids, have to manage the rental myself and make an extra £400 a year

Oh and at the end of it i have to hope the price has gone right up so when i sell it i make enough to cover solicitors fees etc

[isg]

Lets take your example and see how it works

£170 a month left after mortgage interest, now you have to pay tax on that so even assuming its done through a company so you pay 20% tax you still only have £136 a month. (or £1632 a year)

Now you have buildings insurance say £200 a year, maintenance - another £2-300 (better hope nothing goes wrong really)

So now im down near £1000 "profit" a year, assuming no void periods, damage or anything else

So i can stick the 20k in a rubbish account and make 3% on it (possible to get more than that but lets go low) and make £600 a year, or i can buy a house, pray i have no voids, have to manage the rental myself and make an extra £400 a year

Oh and at the end of it i have to hope the price has gone right up so when i sell it i make enough to cover solicitors fees etc

Maintenance is tax deductable as is buildings insurance to landlords.

[Rozza]

Maintenance is tax deductable as is buildings insurance to landlords.

Doesnt make a big difference really, you can offset two maybe three hundred a year in the example posted as the tax is next to nothing.

The point is the scenario given doesnt give gains anywhere near comparable to the risk

Edited November 21, 2012 by Rozza

[isg]

Doesnt make a big difference really, you can offset two maybe three hundred a year in the example posted as the tax is next to nothing.

The point is the scenario given doesnt give gains anywhere near comparable to the risk

There is no risk house prices always go up. Don't they?