Buy To Let Business Basics

[Imp]

In my limited experience of business, there are some basic rules which should be followed. These have been gleaned from people experienced in running businesses, both large and small.

1) Cash is King. For any small business it is important to maintain a positive cash flow. It is very easy to have a profitable business which runs out of cash. More small businesses fail due to cash flow than any other cause.

2) The business must be profitable from day 1. You need to start getting returns on your investment straight away. If you start off making a loss, it is difficult to turn it round to making a profit.

3) If you are selling something at a loss, the quickest way to make a bigger loss is to sell more of them.

Current buy to let businesses (as that is what they are, even if the landlord only owns a single property) seem to be breaking all these rules if they are buying now using a mortgage to buy the properties. In this case, we can expect to see landlords going belly very shortly.

[Guest]

Er.... Doh!

It's a long term investment!

There is good debt and bad debt. Anything to do with property is always good debt.

Besides, I sense much fear in you.* Your fear is holding back your potential. Release your potential and buy now, before it's too late.

* With apologies to George Lucas who doesn't deserve to have his stuff mis-quoted in a context like this.

[rockdoctor]

2) The business must be profitable from day 1. You need to start getting returns on your investment straight away. If you start off making a loss, it is difficult to turn it round to making a profit.

Hasn't harmed Amazon's share price

[dogbox]

In my limited experience of business, there are some basic rules which should be followed. These have been gleaned from people experienced in running businesses, both large and small.

1) Cash is King. For any small business it is important to maintain a positive cash flow. It is very easy to have a profitable business which runs out of cash. More small businesses fail due to cash flow than any other cause.

2) The business must be profitable from day 1. You need to start getting returns on your investment straight away. If you start off making a loss, it is difficult to turn it round to making a profit.

3) If you are selling something at a loss, the quickest way to make a bigger loss is to sell more of them.

Current buy to let businesses (as that is what they are, even if the landlord only owns a single property) seem to be breaking all these rules if they are buying now using a mortgage to buy the properties. In this case, we can expect to see landlords going belly very shortly.

Most investors see B2L as a pension alternative. They never went deeply into the daily current account of thier pensions, they wont with thier B2Ls.

B2L is yesterdays news. The new crusade is foreign property - Germany, Morocco, Belize, Lithuania, Estonia and co. Presumabmly you bears are'nt gonaa sit this little adventure out too, right? I mean, most of us can find £5000 for a plot. Or will fear reign supreme?

[Imp]

Hasn't harmed Amazon's share price

Remember the DotCom boom and bust? I would say Amazon is the exception rather than the rule. Countless non-profit making companies went under as soon as people stopped giving them money.

[IPOD]

Hasn't harmed Amazon's share price

That's it, quote one of the handful of dot.com survivors from the tech bubble and neglect to mention all the thousands of tech IPO's that never made a profit from day one and subsequently sank without a trace. You really should read up on survivorship bias:

http://www.investorwords.com/5814/survivorship_bias.html

The tendency for failed companies to be excluded from performance studies due to the fact that they no longer exist. Survivorship bias causes the results of some studies to skew higher because only companies which were successful enough to survive until the end of the period are included.

[eek]

Hasn't harmed Amazon's share price

The assumption your making is incorrect. In the very early days Amazon was profitable. It was during the going for growth stage when Amazon became unprofitable (as they expanded from one small warehouse to a rather large number of them and from books to near enough everything).

Even then on a sale by sale basis Amazon is profitable (its just that they now have rather larger fixed costs than they had in the early days). This is somewhat unlike the average new BTLer who on a day by day basis loss making (everyday they have to pay £30 interest same they only receive £600 once a month in rent).

[doogie]

In my limited experience of business, there are some basic rules which should be followed. These have been gleaned from people experienced in running businesses, both large and small.

1) Cash is King. For any small business it is important to maintain a positive cash flow. It is very easy to have a profitable business which runs out of cash. More small businesses fail due to cash flow than any other cause.

2) The business must be profitable from day 1. You need to start getting returns on your investment straight away. If you start off making a loss, it is difficult to turn it round to making a profit.

3) If you are selling something at a loss, the quickest way to make a bigger loss is to sell more of them.

Current buy to let businesses (as that is what they are, even if the landlord only owns a single property) seem to be breaking all these rules if they are buying now using a mortgage to buy the properties. In this case, we can expect to see landlords going belly very shortly.

I totally agree with all this apart from 2).

Your business can still be viable even if its start-up costs exceed day 1 revenues, as long as you move into the black before the bank cuts off your overdraft facility.

[NJP]

I don't entirely agree.

As long as rent covers about 50% of the monthly mortgage and maintenance costs, which over 25 years equates to the interest portion of a repayment mortgage, the return from BTL should be no worse than a savings account in the long term.

I'd be surprised if many BTLs were covering less than 50% of their costs even in today's market. However, there are definitely better investments to be had at the moment than residential property.

I guess it comes down to their expectations. If they bought recently and thought that their tenant would pay their mortgage for them without any shortfall, or if they were relying on price appreciation to offset the shortfall in the short term, they may well bail out.

Edited December 12, 2005 by NJP

[theChuz]

Most investors see B2L as a pension alternative. They never went deeply into the daily current account of thier pensions, they wont with thier B2Ls.

B2L is yesterdays news. The new crusade is foreign property - Germany, Morocco, Belize, Lithuania, Estonia and co. Presumabmly you bears are'nt gonaa sit this little adventure out too, right? I mean, most of us can find £5000 for a plot. Or will fear reign supreme?

ahh db are you bull or bear today on uk property? i can never keep up

[munro]

Imp, you're quite right that BTL breaks all the rules as to being a business. The reason is simply that BTL isn't a business, it's speculation - see this thread:

http://www.housepricecrash.co.uk/forum/ind...0392&hl=paradox

This is also the reason why I don't think you'll see a lot of BTLers going belly-up soon, because they aren't business people and they won't respond rationally. They have a blind faith that property WILL go up as long as they hold on long enough - as anyone who bought 88/89 and went into negative equity will testify. THose who held on long enough saw prices come back. They will absorb their losses and hang on by their fingernails until or unless they go bust and get repossessed. They will NOT crystallise their losses.

This is why I'm no longer over-bothered by VI ramping, because the VIs are right in this respect. On another thread Phil Spencer is quoted as saying if you're going to BTL, be in it long term - I think it says there 15-20 years. On the basis of past evidence he'd be right. Hang in there long enough and think of it as a forced savings scheme - most people can't/won't save unless coerced - and all will be well.

I really do think (and on this I agree with Dogbox) that rational analysis of the UK housing market is largely to miss the point, because you're dealing with agents who aren't rational. It's based on fear, sentiment and a profound distrust of governments and pension companies. I still think, though, that there will be a very long-drawn out and deep slump in house prices, but it will be a long, agonising affair with significant numbers of people forced to the edge (or over) of financial ruin before they'll crystallise their losses and move on. What is different this time is oil and demographics

[IP Newcomer]

B2L is yesterdays news. The new crusade is foreign property - Germany, Morocco, Belize, Lithuania, Estonia and co. Presumabmly you bears are'nt gonaa sit this little adventure out too, right? I mean, most of us can find £5000 for a plot. Or will fear reign supreme?

Well that's fair enough, but it rather misses the point of BTL. BTL was an understandable, real, business. You didn't have to know much about business to understand the figures in BTL. You also did not have to keep up to date with the takeover rumours or industrial uses - you just had to rent out for more than you paid out. Also the rules are fairly easy to get to grips with as long as you are renting to households rather than multiple occupancies.

Obviously if you made a capital gain on this it was "gravy" (although for most late comers it was the main sustenance).

Now look at foreign property. You can't walk past your house to know it's there. You are unlikely to understand the rules for renting - even if there is a reliable summary of them in English. You have to worry about rental changes without reading about it in the newspapers. You have to worry about exchange rates as well as anything else. Oh, and you can't go around and fix a broken washing machine.

Foreign property is fine for sophisticated investors - but it is rather irresponsible to encourage the BTL muppet brigade to get in on the act. It's like asking someone who only invests in a FTSE tracker to put their money in silver derivatives.

I really do think (and on this I agree with Dogbox) that rational analysis of the UK housing market is largely to miss the point, because you're dealing with agents who aren't rational. It's based on fear, sentiment and a profound distrust of governments and pension companies. I still think, though, that there will be a very long-drawn out and deep slump in house prices, but it will be a long, agonising affair with significant numbers of people forced to the edge (or over) of financial ruin before they'll crystallise their losses and move on. What is different this time is oil and demographics

Well all short term markets are irrational. All long term markets are rational. It's the medium term where the money is made by rational people.

[munro]

Hi IPN, not wanting to be too dim, but what counts as a short, medium or long term market? I keep hearing this joke that a long-term investment is a short-term one gone wrong, but without some idea as to what peeps who know their stuff (not me, I'm a distinctly amateur theoriser!) have in mind as timescales, I find it hard to know what to make of your reply.