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mightytharg

How To Make A Profit On Buy-to-let?

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Just a question on how you guys and gals calculate whether Buy-to-Let is a viable investment.

If I invest 100K in Bonds and get a 6% return getting me 106K.

So would you compare it like this?

I invest in 100K in housing I would need to cover my expenses and upkeep (Say 1K) plus get 6K to cover what I would have had in interest if I'd invested in the Bonds, say 107K.

This is what I have been reading, but it sounds completely wrong to me for these reasons:

During the year I have been investing in Bonds, the government have been printing more money, deliberately targetting inflation and so on, that's why I need the 6% return. During the same year they haven't printed any houses (although perhaps they should have done). They've left my house alone and not stolen little bits of it.

Therefore isn't a profitable Buy-to-Let one that covers its expenses and upkeep (plus a little bit), not one that covers its expenses + upkeep + return I would have got if it had been money +a little bit.

Obviously in either case (Bonds/Houses) you would have to earn a bit more if you borrowed the money to invest but this shouldn't affect the comparison much, especially with interest rates being more or less equal to inflation.

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Money is money. If BTL makes you 3k a year on your 100k investment and a savings account makes you 5k a year on the same money, then BTL is crazy.

Of course today if you buy a 300k 'executive apartment' to BTL odds are you're _losing_ 50k a year even if you haven't realised yet.

During the same year they haven't printed any houses (although perhaps they should have done).

In the next year, about fifty new two-bed flats will be built on the road where I used to live. That's a heck of a lot more than 6% 'flat inflation', which is why anyone buying one today for 300k will be selling it in a few years for more like 50-100k.

Edited by MarkG

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Money is money.

And houses are houses. I don't think it's the same.

To put it another way. If I get a £100K buy-to-let on a 100% interest only mortgage in 2006. I rent it for 10 years and the rent covers just enough to pay the mortgage and keep the house in the same condition as it was when I bought it.

So now it's 2016. Have I broken even over the 10 years? I still have the house and I still owe £100K. On the face of it, yes.

But... I now owe £100K in 2016 pounds, not £100K in 2006 pounds and therefore I have made a healthy profit.

I think this might explain a bit why you think the current buy-to-letters are all mad. They are including the time value of money in their business plans. Of course, I could be wrong - that's why I asked the question.

(there are other topics that cover whether the houses in your street will go down in price so I won't answer that)

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But... I now owe £100K in 2016 pounds, not £100K in 2006 pounds and therefore I have made a healthy profit.

It's different when you're spending borrowed money. However, you're assuming that in 2016 you'll be earning far more than in 2006, which is, IMHO, unlikely. You're also assuming that you can actually rent out a 300k flat for more than the cost of the mortgage and maintenance, and voids, and... everything else.

Basically what you've just proven is that BTL only makes sense in a high-inflation environment and/or where rents are rather higher then mortgage payments. Which 99% of people here would probably agree with.

I think this might explain a bit why you think the current buy-to-letters are all mad.

No, I think they're mad because they're buying at the top of a bubble and hoping for high wage inflation to eliminate their debts.

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Therefore isn't a profitable Buy-to-Let one that covers its expenses and upkeep (plus a little bit), not one that covers its expenses + upkeep + return I would have got if it had been money +a little bit.

An interesting point.

You could argue that over a long term investment horizon, house prices do rise - whether it is in line with inflation, GDP growth or earnings is a matter for debate.

This means that you should treat returns on BTL the same way as for an indexed security - and discount appropriately.

For example, a 10 year government bond has a yield of about 4.3%, while a 10 year inflation linked bond has a yield of 1.4%, because the value of the bond increases in line with RPI, which markets evidently expect to be about 2.9%.

Similarly, over the long term you could argue that the yield on BTL should be lower than an equivalent investment which doesn't involve an appreciating asset.

However, this doesn't take into account the fact that a BTL investment is both illiquid and more risky than a deposit account, and should therefore be expected to have a higher overall yield.

It also doesn't say anything about timing. It is not sensible to accept lower yields based on expectations of house price appreciation if you believe that house prices are at the top of the cycle at the moment - if anything you should demand higher yields as a cushion.

Edited by Biriani

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So now it's 2016. Have I broken even over the 10 years? I still have the house and I still owe £100K. On the face of it, yes.

But... I now owe £100K in 2016 pounds, not £100K in 2006 pounds and therefore I have made a healthy profit.

Err, where is this mythical profit? If the rent is still only just covering the interest payments, then you are making no profit from the income from the property. If the house is still only "worth" £100K, then you have made no capital gains.

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wrt bonds, the yield on bonds is already reflecting inflation expectations. If Inflation was seen to be high going out a few years, the yield on bonds would be much higher. This is to compensate an investor for the fall in value of the capital sum and would arise out of market mechanisms and be reflected in rising base rates set by the BoE.

The yield on property should be higher than the bond yield at any point in time because:

1 ) you will always be able to redeem gilts for the face value at expiry, so there is zero capital risk. A house may go up or down in value, due both to macro (eg recession) and local (eg chavs) influences.

2 ) when you buy gilts you lock in the yield, whereas rental yields fluctuate with demand and supply of rental property.

3 ) the rents must be capable of keeping the house maintained. As well as decorating, all that lawn cutting etc adds up. Gilts don't need sparkies, pumbers, chippies or brickies.

4 ) the rents should cover management fees (bonds need no management).

5 ) transaction costs, including agents fees, lawyers fees and surveyors fees are significantly larger for property.

6 ) property attracts taxes on transaction including stamp duty and, if not OO, cgt.

7 ) property needs to be insured against fire, flood and other damage an dthe insurance must come out of the rental yield. The fact that unoccupied buildings are uninsurable adds significantly to the capital risk during voids.

Edited by Sledgehead

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I always thought the concept of time value of money was that money you have now is worth more than money you will have in the future.

And if you have an asset worth £100k now and liabilities of £100k now, you're worth nothing. In ten years time if you still have an asset worth £100k and liabilities of £100k, you are still worth nothing. You only make a gain if the asset appreciates. Will it, won't it, may as well throw a coin.

Edited by Imp

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wrt bonds, the yield on bonds is already reflecting inflation expectations. If Inflation was seen to be high going out a few years, the yield on bonds would be much higher. This is to compensate an investor for the fall in value of the capital sum and would arise out of market mechanisms and be reflected in rising base rates set by the BoE.

The yield on property should be higher than the bond yield at any point in time because:

1 ) you will always be able to redeem gilts for the face value at expiry, so there is zero capital risk. A house may go up or down in value, due both to macro (eg recession) and local (eg chavs) influences.

2 ) when you buy gilts you lock in the yield, whereas rental yields fluctuate with demand and supply of rental property.

3 ) the rents must be capable of keeping the house maintained. As well as decorating, all that lawn cutting etc adds up. Gilts don't need sparkies, pumbers, chippies or brickies.

4 ) the rents should cover management fees (bonds need no management).

5 ) transaction costs, including agents fees, lawyers fees and surveyors fees are significantly larger for property.

6 ) property attracts taxes on transaction including stamp duty and, if not OO, cgt.

7 ) property needs to be insured against fire, flood and other damage an dthe insurance must come out of the rental yield. The fact that unoccupied buildings are uninsurable adds significantly to the capital risk during voids.

Excellent post!

Be nice to get some real net BLT yields, with all the deductions you mention. I'm sure the majority are now well below gilts, if not negative (! what's the price of a gilt with a negative yield?? :blink: )

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  • 301 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%



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