Returns For Buy-To-Let Investors To Slump 40%

[The Masked Tulip]

Rental yields are falling and experts warn that a rise in interest rates could hit house price growth... so says the Times in a full page article today. It almost reads - IMPO - like a VI warning to Osborne and Carney not to raise IRs.

You can read an extract at the below Sunday Times link:

http://www.thesundaytimes.co.uk/sto/business/money/investments/article1398904.ece

[cybernoid]

The estate agent Savills has predicted that average total returns for new investors going into buy-to-let will fall from 11.6% this year to 7.1%

Rightyo then.

The actual real world examples Ive seen (some sold by savills) barely broke even, and thats when they bought before 2008. 'New investors'? 7.1 % is utterly unachievable, with any gain at all looking decidedly unlikely.

At least they're starting to identify the direction of travel. Clowns.

[MattW]

I'm seeing a lot more property come onto the market with sitting tenants. Asking prices at the same level as 'sold with vacant possession' properties.

[cybernoid]

It almost reads - IMPO - like a VI warning to Osborne and Carney not to raise IRs.

If that was the intention claiming a fall to 7.1% return won't garner much sympathy, id have thought it would have the opposite affect.

Full steam ahead boys

[Executive Sadman]

I'm seeing a lot more property come onto the market with sitting tenants. Asking prices at the same level as 'sold with vacant possession' properties.

Ive noticed this too. Appears cheaper to buy with tenants than without

[The Masked Tulip]

If that was the intention claiming a fall to 7.1% return won't garner much sympathy, id have thought it would have the opposite affect.

Full steam ahead boys

It will garner sympathy from those who think it is their divine right to make a fortune from btl.

[disenfranchised]

VI warning to BOE/Treasury, or VI warning to their VI readers to bail now before the music stops?

The gross yield reported is probably real terms negative yield if they are heavily mortgaged, but the average small time BTL mentality in my experience is that as long as the rent covers most of the mortgage, you sit tight and pay out, as in a couple of decades you won't have a mortgage & the rent will be steady income. Round here, a small running deficit of a couple of grand a year on two leveraged BTLs for a couple of decades will give you an income of around 12k a year in today's money when paid off. You also get to leave this to your kids. 8k a year goes into my work pension with a prediction of 9k a year annuity in 32 years time that dies with me. So, whilst the figures don't look like an impressive yield for outright owners, they only stop working for borrowers VS a pension scheme (which is of course, what many think of it as) when IR's go up a fair bit.

I suspect the crunch is how indebted the LL is, and whether they can plough more cash into the BTL whilst servicing their own debts... How many BTL boomers will retire with a BTL mortgage that was supposed to 'pay for itself' running at a worsening deficit they are prepared to service? I also suspect a lot who jumped in 2004-6 after the 2003 stock market plummet are starting to see their 'nest egg' needing some cash spending on it to keep it up to spec, which won't help them either!

Maybe some interesting times ahead. I wonder how many LL's have any intention of trying to call the top of the market & bail, rather than taking the 'safe as houses' approach and hanging in to their ruin.

Edited April 13, 2014 by disenfranchised

[dances with sheeple]

So if you are barely breaking even, a 40% slump means you would just financially implode on that investment? Must have been a few BTL fans choking on their cornflakes today. All of a sudden the media has switched to "We have a housing bubble" and "rates are going up". UK PTB have got the nod from the US that rates are going to rise, mainly to hurt Russia maybe?

Whatever is behind this, we are back to the full on Bear Headlines of a few years ago, always good for sentiment

[dances with sheeple]

Rental yields are falling and experts warn that a rise in interest rates could hit house price growth... so says the Times in a full page article today. It almost reads - IMPO - like a VI warning to Osborne and Carney not to raise IRs.

You can read an extract at the below Sunday Times link:

http://www.thesunday...icle1398904.ece

Or a warning to BTL sheeple to cut their price and get out, allowing a hardworking couple to buy their pad, and a bank to lend some money?

[long time lurking]

I'm seeing a lot more property come onto the market with sitting tenants. Asking prices at the same level as 'sold with vacant possession' properties.

Same here ,you can also speculate on the financial problems the vendors have just by looking at the price the places are on the market for

[Monkey]

For all the hastle it could be being a landlord, and having your investment illiquid, 7% just isnt worth it IMO.

I'd rather get less of a return, but know i can lay my hands on actual cash in a short period of time (30 days or less).

[long time lurking]

VI warning to BOE/Treasury, or VI warning to their VI readers to bail now before the music stops?

The gross yield reported is probably real terms negative yield if they are heavily mortgaged, but the average small time BTL mentality in my experience is that as long as the rent covers most of the mortgage, you sit tight and pay out, as in a couple of decades you won't have a mortgage & the rent will be steady income. Round here, a small running deficit of a couple of grand a year on two leveraged BTLs for a couple of decades will give you an income of around 12k a year in today's money when paid off. You also get to leave this to your kids. 8k a year goes into my work pension with a prediction of 9k a year annuity in 32 years time that dies with me. So, whilst the figures don't look like an impressive yield for outright owners, they only stop working for borrowers VS a pension scheme (which is of course, what many think of it as) when IR's go up a fair bit.

I suspect the crunch is how indebted the LL is, and whether they can plough more cash into the BTL whilst servicing their own debts... How many BTL boomers will retire with a BTL mortgage that was supposed to 'pay for itself' running at a worsening deficit they are prepared to service? I also suspect a lot who jumped in 2004-6 after the 2003 stock market plummet are starting to see their 'nest egg' needing some cash spending on it to keep it up to spec, which won't help them either!

Maybe some interesting times ahead. I wonder how many LL's have any intention of trying to call the top of the market & bail, rather than taking the 'safe as houses' approach and hanging in to their ruin.

Yep thats the game with a repayment mortgage ,but the majority of the late comers to the BTL game are playing the IO game which will only work IF theres massive HPI

From the peak around my way( 05/06) prices are level in the best case and in the worst case (1 bed flats ) 15-20% down with only 15 years left of the mortgage for the magical HPI to do its work

Unpaid caretakers comes to mind

Edited April 13, 2014 by long time lurking

[dances with sheeple]

VI warning to BOE/Treasury, or VI warning to their VI readers to bail now before the music stops?

The gross yield reported is probably real terms negative yield if they are heavily mortgaged, but the average small time BTL mentality in my experience is that as long as the rent covers most of the mortgage, you sit tight and pay out, as in a couple of decades you won't have a mortgage & the rent will be steady income. Round here, a small running deficit of a couple of grand a year on two leveraged BTLs for a couple of decades will give you an income of around 12k a year in today's money when paid off. You also get to leave this to your kids. 8k a year goes into my work pension with a prediction of 9k a year annuity in 32 years time that dies with me. So, whilst the figures don't look like an impressive yield for outright owners, they only stop working for borrowers VS a pension scheme (which is of course, what many think of it as) when IR's go up a fair bit.

I suspect the crunch is how indebted the LL is, and whether they can plough more cash into the BTL whilst servicing their own debts... How many BTL boomers will retire with a BTL mortgage that was supposed to 'pay for itself' running at a worsening deficit they are prepared to service? I also suspect a lot who jumped in 2004-6 after the 2003 stock market plummet are starting to see their 'nest egg' needing some cash spending on it to keep it up to spec, which won't help them either!

Maybe some interesting times ahead. I wonder how many LL's have any intention of trying to call the top of the market & bail, rather than taking the 'safe as houses' approach and hanging in to their ruin.

Yes, and when they have a long void (plenty round here with no tenant for months) combined with rising interest rates they may be unable/unwilling to subsidise the investment any longer, leading to a nice flow of lower end flats onto the market, which puts pressure on all the levels above?

[dances with sheeple]

Yep thats the game with a repayment mortgage ,but the majority of the late comers to the BTL game are playing the IO game which will only work IF theres massive HPI

From the peak around my way( 05/06) prices are level in the best case and in the worst case (1 bed flats ) 15-20% down with only 15 years left of the mortgage for the magical HPI to do its work

Unpaid caretakers comes to mind

True. There is so much downside to this market that it is scary, and that is from someone who isn`t mortgaged up!

[cybernoid]

Yep thats the game with a repayment mortgage ,but the majority of the late comers to the BTL game are playing the IO game which will only work IF theres massive HPI

From the peak around my way( 05/06) prices are level in the best case and in the worst case (1 bed flats ) 15-20% down with only 15 years left of the mortgage for the magical HPI to do its work

Unpaid caretakers comes to mind

This has been my experience also, the vast majority of buy to lets are interest only.

They pay a deposit, get interest only on the rest and the income after costs barely covers the interest. When they sell after costs etc their profit is no different than what they would have got from putting that deposit in the bank, and thats when theres HPI. With absolutely crazy HPI and lucky timing they can come out ahead, but that is the minority and in my view not worth the risk and landlord hassle.

Those that bought before the bubble with no mortgage just get an income of course, but the yields are poor. Most of them compare what they paid with the income and think its a great deal, but the point of yield is to compare with alternative investments… the cash they have tied to generate that income is the value today, not the value paid eons ago. But then again, their lack of basic financial nous leads to subsiding a renters living costs so they can keep believing it if they like. Having said that, some just like a physical asset and fair play to them, but the road to riches it certainly is not.

Ive no idea what savills are smoking, probably ignoring yield and factoring in predicted HPI, who knows, in any event that they think they can put a percentage profit figure (this year!?) on an average when the timing of buying and selling and location makes such an enormous difference is pretty ridiculous. That they put these figures to the nearest tenth of a percent is just a joke.

Edited April 13, 2014 by cybernoid

[davidg]

The actual real world examples Ive seen (some sold by savills) barely broke even, and thats when they bought before 2008. 'New investors'? 7.1 % is utterly unachievable, with any gain at all looking decidedly unlikely.

7% in the SE is impossible. In somewhere like Shropshire and points north it is only achievable by knowledgeable buyers who buy cheap (at auction) and renovate to rental standard themselves or using low cost labour - not easy given brickies are earning 100K/yr at the moment ;-).

In the SE two bed flats are thought to give the best rate of return but you are looking at 150k down (outside London) for a rental of 600 pcm which is 4.8% excluding costs. Probably more like 3% if you factor in voids and maintenance. It is a leveraged investment to boot, a lot of risk for 3% return. It only works if, as another poster says, over 25 years you have paid off the mortage with the rental.

For a 150K purchase you might be able to borrow 100K on a BTL mortage. You are going to be paying 500pcm on that even with today's interest rates. Ok a 0.5% rise in rates (doubling) isn't going to hurt too much but 3-4% could start to be a bit eye watering.

[spyguy]

Don't believe those yields. I don't think anyone LL since 1998 has achieved anywhere near that.

I do have a bubbling-up anecdote that I've noticed for a few months.

Rentals with > 2 bedrooms are getting impossible to let.

I've been seeing voids increases, year on year, since 2007ish. 2 months is pretty standard and should be factored into any yield figures.

The slowness of >2 bedrooms rentals is probably down to few families qualifying for more than 2 bedrooms now, as you now need about 4+ kids and risk running into the housing cap.

I would guess this has created a surplus of 3+ social housing, which has reduced the price of 3+ bedrooms private sector rentals.

Private tenants tend to rent as little house as possible. I'd never take on a rental with a spare room.

Social tenants are now also targetting smaller places.

[disenfranchised]

Private tenants tend to rent as little house as possible. I'd never take on a rental with a spare room.

I have 3 spare rooms. Rent of 725 VS about 550 for a 2 bed flat, I'd much rather pay more for a detached property with driveway, garage, garden and space. Small rental was fine when I could envisage buying, but life is too short to always live for tomorrow. Well worth a couple of hundred a month to me.

[The Knimbies who say No]

Rightyo then.

The actual real world examples Ive seen (some sold by savills) barely broke even, and thats when they bought before 2008. 'New investors'? 7.1 % is utterly unachievable, with any gain at all looking decidedly unlikely.

At least they're starting to identify the direction of travel. Clowns.

Prices in my area would have to drop by over a third to hit 7% gross yields on BTL on a 3 bed semi for new entrants. Sub 5% is as good as it gets, gross with no voids etc.

[Venger]

You can read an extract at the below Sunday Times link:

http://www.thesunday...icle1398904.ece

If you click on the pic of the newbie BTLers cashing in their pension, it takes you to an interactive map of their figures, on BTL/HPI island.

Rents and yields

Click on a marker to see the average rent, house price and percentage yield at that location.

Source: Chesterton & Humberts/Zoopla

[billybong]

The UK only has limited control of it's own interest rates (the general trend that is) - except for short periods of time. It's more or less obliged to follow the general US interest rate trend although sometimes it's ahead and sometimes it lags.

So it might be a VI appeal not to increase interest rates for as long as possible but eventually where US rates go/are going then UK rates have to follow.

A comparison of US/UK historical interest rate charts shows the correlation.

Usually the UK base rate is a bit higher than the US rate partly it seems because the UK is so prone to inflation - so in time likely there'll be some making up to do.

Edited April 14, 2014 by billybong