Renting V Owning 2012-2016 The Arithmetic

[winkie]

Because you can't lose with bricks and mortar why would you sell a house? Just rent it out and get some renter scum to pay your mortgage off for you. It's your pension innit?

Why would you keep a house you can't use if you can keep and use the home you live in and own, and use and drip feed on any free cash that can be utilised?......working is for saving and making, pension is for using and spending.....then you die.

[acer]

Account

Profit on sale after all transaction costs...............23,599

Saving on rent.....................................................31,500 (at £700 per month)

Gross Profit.........................................................55,099

Less Costs

Repairs and Renewals.......................6000

Lost investment income at 2%..........19025........25,025

(on principal 246,680)

Net gain..............................................................30,074

Verdict 30 grand not worth the hassle and lack of freedom of renting. Renting wins hands down. especially as I do all the work, the garden, the financials, the DIY, the worrying and the missus does note. she was even at work yesterday while I did all the moving logistics. Not owning feels bloody wonderful. The net gain to me as an individual after all is only 15 grand, knowing what I now know I would have just rented.

I'm just wondering how you dealt with tax here. Most people pay the rent from money that has had tax and NI deducted from it, so to pay £700 rent, you would need to earn something like £1030 gross (based on marginal rates for a basic tax payer). Am I right in thinking profit from the house sale here would not be taxed? On the costs, repairs would be an after tax/NI expense, but your investment income could be shielded from tax. In short, I make the gain from owning £42,073 for a basic rate taxpayer using marginal rates.

Another thing I'm wondering is whether you could put a value on not being (potentially) always two months away from being kicked out of your rented home. As someone whose landlord has decided that he's bored of his BTL adventure now, perhaps I should attempt this. Costs are already racking up in terms of leave from work I'm having to take to do the move, having to spend more on a smaller place, costs of white goods that aren't supplied in the new place, etc.

Edited March 31, 2016 by acer

[SimonSays]

We didn't have a mortgage,

That makes it rather atypical. Given that Buy To Lets approximately 'wash their face' a more typical picture for someone paying for the use of the money removes the 'saving on rent' component. That figure is approx. the 'net gain' figure, removing any profit from the picture.

The headline on this example for me is: Over the last 4 years you need HPI just to stand still, when rates are at rock bottom.

[CunningPlan]

In my view renting is (with current interest rates) financially very similar to an IO mortgage over the medium term - but with a lot more freedom.

The only financial difference is dependent upon whether prices go up or down during your period of tenure.

Renters have lost financially for many a year - but that is about to change. Anyone that has rented for years and buys now will have made two timing mistakes of epic proportions.

[bushblairandbrown]

Is it not broadly reasonable to allow 3% rate for mortgage vs 5% for rent? Then the 2% difference makes oo marginally more cost-effective than renting but negligibly so. The significant difference depends on capital gains (I prefer to think of this as minimising capital loss since you always need somewhere to live so the idea of making money from house prices makes no sense to me, especially since rents are loosely tied to them). This makes house prices unstable because a major motive to buy is them going up (either to speculate or hedge). If they start going down, that gets turned on its head.

[Scunnered]

[edit] Meant to add, I'm paying £700/month rent. That's been covered by investment income for the last three years, (2015 I made over £12k) on a portfolio whose total net cost to date is £100k.

Is Capital Gains Tax not a problem with this kind of thing?

[Later, after a quick look at Google] Maybe not. It seems that you can earn up to £11,000 a year tax free, which is a lot more than I was expecting.

[CunningPlan]

Is it not broadly reasonable to allow 3% rate for mortgage vs 5% for rent? Then the 2% difference makes oo marginally more cost-effective than renting but negligibly so. The significant difference depends on capital gains (I prefer to think of this as minimising capital loss since you always need somewhere to live so the idea of making money from house prices makes no sense to me, especially since rents are loosely tied to them). This makes house prices unstable because a major motive to buy is them going up (either to speculate or hedge). If they start going down, that gets turned on its head.

I am renting at 4.2%. Without a massive deposit you would be looking at 3.5% for a five year mortgage fix. That 0.7% is a very slim margin for repairs and maintenance. Not to mention buying / selling costs which would easily eat up 5 years of that 0.7 'saving'. Buying is for the very long term only.

[porca misèria]

Is Capital Gains Tax not a problem with this kind of thing?

[Later, after a quick look at Google] Maybe not. It seems that you can earn up to £11,000 a year tax free, which is a lot more than I was expecting.

All my investments except my own one-man contracting company are fully tax-sheltered. No tax at all, except as already paid by the companies.

Not much tax on my hard-earned either, since I'm now on the government's "living wage" (£7.20/hour) and thus benefit hugely from the raised tax threshold. Though next year's extra dividend tax will make it a bit harder to pay myself efficiently above 5k divi + pension contribution.

[bushblairandbrown]

I am renting at 4.2%. Without a massive deposit you would be looking at 3.5% for a five year mortgage fix. That 0.7% is a very slim margin for repairs and maintenance. Not to mention buying / selling costs which would easily eat up 5 years of that 0.7 'saving'. Buying is for the very long term only.

Having a quick look I can see you're right that 3.5% is closer to the mark with a small deposit. I think you've done well to get 4.2% unless you're in London.

I'm not sure I agree buying only works out for very long term. Obviously not worth it for a year but if prices rise at 6-7%/yr for three years then for a £200k place say buying overheads of 1.5% (0.75% sd + fees) and selling fees of 2% then you're still going to be up about £12k. £4k/yr isn't huge but wouldn't say no. I'm not saying that such rises will continue, just that it has been a strong motive to buy and has worked out favourably.

[CunningPlan]

Buying overheads will be at least 4% where I am (woking) so forget the £200k place.

On a bog standard terrace that will be £12k. There goes your HPI profit.

[bushblairandbrown]

Ah yes. I agree buying anything at the prices in Woking is for the very long term. Possibly even longer term than a natural human life

[bushblairandbrown]

...have been dwelling on this for a little while this evening. Brought into clearer relief just how insane some of the positions a few friends have put themselves in buying £400k+ flats as (speculative) investments. They're going to have to hold them for a long time and hope to God HPI continues.

[Venger]

...have been dwelling on this for a little while this evening. Brought into clearer relief just how insane some of the positions a few friends have put themselves in buying £400k+ flats as (speculative) investments. They're going to have to hold them for a long time and hope to God HPI continues.

Do you expect priced-out see-no-value renter-savers to hold the hope of HPI for them?

The HPIers and BTLers, and their 'friends' seem to think renter-savers/priced-out/ value-for-earnings people on one side of the market, exist to carry and worry for their BTLers/HPIers.

It may come as a surprise to you, but if they have future hardship (HPC / debt more expensive), it won't bother me.

You obviously don't understand the taxation changes. It is precisely smaller unincorporated landlords that will be affected most. Without tax relief for debt interest, even a modest earner with one or two BTL properties will be dragged into the 40% tax band.

Had a sort of esprit de l'escalier moment on this. You are not admitting capital losses as a premise. This is the housepricecrash forum - you ought to consider that you could spend money on a house, have prices move against you and end up being compelled to sell for less, don't you think?

If you have £200k of equity in your own home and you put down £50k of savings on a BTL, find the market moves against you and end up losing £100k and having to sell your own home and hand over £50k to your lender to make them whole, you still have £150k. You may even avoid the unmentionable shame of renting.

Try that stunt with £200k in your own home and £50k of savings leveraged up, in the fullness of time, to £300k of portfolio equity and £1.5m of debt and the same move in house prices will bankrupt you and you'll be in an HMO.

[Bland Unsight]

...have been dwelling on this for a little while this evening. Brought into clearer relief just how insane some of the positions a few friends have put themselves in buying £400k+ flats as (speculative) investments. They're going to have to hold them for a long time and hope to God HPI continues.

It won't be enough. This is the problem with Ponzi finaced BTL. You need the HPI to run fast enough to cover the income vs expenses losses and you need to be able to remortgage in order to pull out some of the capital gain to cover the losses.

Changes in taxation (Clause 24), mortgage underwriting (new PRA rules) and in, the fullness of time,.BTL mortgage rates (BCBS risk-weights) are going to close the door on the use of cash out refinancing, so you'll need cover your losses month by month with other earnings.

If the investment you're covering is supposed to be your pension, you're totally f**ked. You are handing over disposable income to cover the shortfall on an investment that you propose to sell on for a gain - but why would anyone buy an investment property that costs money?

With aspiring owner-occupiers constrained by MMR who exactly is supposed to be ponying up the borrowing needed for you to cash in and win?

BTL is a money pit. If you were in by 2001 you can probably still exit and feel pleased with yourself, but later than that outside London and the South East your accounts will already be telling you that you are the mug money, even if you're not yet ready to accept it.

Ever thus to deadbeats.

Edited March 31, 2016 by Idlewild

[crashmonitor]

I pictured CM more like Mr Humphries than Roger Daltrey.

Now I could take that as a compliment as I'm a bit of a scruff and not the impeccably dressed John Inman. Daltrey would be proud of the dirty distressed pair of denims that I have currently got on except that they are crashmonitor £8 Primark distressed and dirty from manual work as opposed to Daltry's boutique pair. A leather jacket and t shirt complete my usual look. Also I walk like a man with hands in my pockets and long strides, so not really Inman.

Physically more like Daltry, not an inch of flab on me or oestrogen inside me. Heck these days I even fancy Mrs Slocombe. The question remains can Daltrey still get into his 30" waist jeans like CM can.

Edited April 1, 2016 by crashmonitor

[crashmonitor]

Just to clear up a few queries, the capital gain includes solicitors, stamp duty and surveyor at the point of purchase and solicitors and estate agents at point of exit,

The £700 per month rent is not out of the way for up North, and really you don't rent the same type of house as you woould buy...no point in maintaining somebody elses quarter acre garden and a two bedder wouldn't let out well. And indeed if you did rent that sort of house up north the yield would be extremely low at 2-3% and would probably come in at £700 pcm for a 250k place.

Also whether the income comes earned or unearned it makes very little difference to the tax treatment for me, another query made.

Re the insurance, I paid less for house and contents as an owner than for contents as a renter.

It's not that complicated it's a case of rent not expended against investment income lost, with the capital gain and repairs and renewals thrown into the mix. Bear in mind we are talking mortgage free, which isn't that unusual, most houses are actually.

If I have been low with the rent, so i was with the investment income, a Bearish 2%, so that's swings and roundabouts I reckon.

Edited April 1, 2016 by crashmonitor

[bushblairandbrown]

It won't be enough. This is the problem with Ponzi finaced BTL. You need the HPI to run fast enough to cover the income vs expenses losses and you need to be able to remortgage in order to pull out some of the capital gain to cover the losses.

Changes in taxation (Clause 24), mortgage underwriting (new PRA rules) and in, the fullness of time,.BTL mortgage rates (BCBS risk-weights) are going to close the door on the use of cash out refinancing, so you'll need cover your losses month by month with other earnings.

If the investment you're covering is supposed to be your pension, you're totally f**ked. You are handing over disposable income to cover the shortfall on an investment that you propose to sell on for a gain - but why would anyone buy an investment property that costs money?

With aspiring owner-occupiers constrained by MMR who exactly is supposed to be ponying up the borrowing needed for you to cash in and win?

BTL is a money pit. If you were in by 2001 you can probably still exit and feel pleased with yourself, but later than that outside London and the South East your accounts will already be telling you that you are the mug money, even if you're not yet ready to accept it.

Ever thus to deadbeats.

Sorry it wasn't clear but these are OOs (late-mid 20s working in London) who have bought their own home. It's less bad than BTL but IMO reckless to buy at prices >5x joint income. Doubtless BOMAD featured heavily so maybe the mortgage isn't as huge as expected.

[bushblairandbrown]

Do you expect priced-out see-no-value renter-savers to hold the hope of HPI for them?

The HPIers and BTLers, and their 'friends' seem to think renter-savers/priced-out/ value-for-earnings people on one side of the market, exist to carry and worry for their BTLers/HPIers.

It may come as a surprise to you, but if they have future hardship (HPC / debt more expensive), it won't bother me.

To be honest it won't bother me an awful amount either.

With respect to the will HPI continue question, it wouldn't shock me if it did for a whole longer. I think you're overlooking just how weak a position recent(ish) graduates are in. Lurked in to London jobs by much better pay (or just availability of jobs) than outside London only to discover extreme rents. Then they often meet someone and want to settle down. Near impossible to simultaneously find two jobs outside London in the same place with pay anywhere near what you're both on in London. In those situations paying extreme prices could seem like the only option to escape the 50% of after-tax-salary rent trap.

I think your talk of priced out is a little misleading. When people are willing to travel some distance in a commute and take on a whopping mortgage, not so many London workers are technically priced out. They just have to be desperate and forgo much quality of life. But given they don't have a great quality of life renting in London either, it's an appealing idea.

[bushblairandbrown]

Couple of autocomplete trips there. Whole = while and lurked = lured.

[Bland Unsight]

...have been dwelling on this for a little while this evening. Brought into clearer relief just how insane some of the positions a few friends have put themselves in buying £400k+ flats as (speculative) investments. They're going to have to hold them for a long time and hope to God HPI continues.

Sorry it wasn't clear but these are OOs (late-mid 20s working in London) who have bought their own home. It's less bad than BTL but IMO reckless to buy at prices >5x joint income. Doubtless BOMAD featured heavily so maybe the mortgage isn't as huge as expected.

Anyone buying their own home as a speculative investment is dancing a mental tightrope that will require a well-planned regimen of White Russians and weed in order to keep their mind sufficiently limber.

One of the things that interests me is how we are getting so at ease with bonkers HPI. Earlier in this thread, at post #35 you casually assume HPI at 6%-7% for three years.

Let's say that the house price was £100k. Three years of 7% HPI will take it to £123k, (up 23%, obviously). Earnings look to be growing at 2% annualised. If the household is on £20k pa then that will grow to £21.2 k (up 6.1%).

Even over the relatively short time period you propose the effect of relatively small differences in the rate at which the prices and earning compound quickly take prices well away from wages. Is that politically sustainable? We are getting sold a political narrative that it is all the BTLers fault. What happens next, do we turn over another 3 million homes to the leveraged PRS or do we throw the speculators under a bus and let house prices adjust back down to wages (to some degree)?

[bushblairandbrown]

One of the things that interests me is how we are getting so at ease with bonkers HPI. Earlier in this thread, at post #35 you casually assume HPI at 6%-7% for three years.

Let's say that the house price was £100k. Three years of 7% HPI will take it to £123k, (up 23%, obviously). Earnings look to be growing at 2% annualised. If the household is on £20k pa then that will grow to £21.2 k (up 6.1%).

I basically agree with you, and entirely so in principle.

I wasn't assuming HPI was going to continue at 6-7%, I just looked up a loose figure for the past three years here (which is presumably low for the SE) because I wanted to make the point that people have recently benefited on paper from buying over renting even over quite short periods.

Price/earnings is so ludicrous now that I don't consider it to be directly relevant. You say prices will be taken well away from wages; I say they already are. The government has shown its position and until it changes it, possibly in a Swiss Euro-peg style event, I don't think it really makes a difference what the p/e is. I wish I had your expectation of an impending crash but I don't see the reduction of leveraged landlords as inconsistent with sustained house price inflation.

[Bland Unsight]

Price/earnings is so ludicrous now that I don't consider it to be directly relevant. You say prices will be taken well away from wages; I say they already are. The government has shown its position and until it changes it, possibly in a Swiss Euro-peg style event, I don't think it really makes a difference what the p/e is. I wish I had your expectation of an impending crash but I don't see the reduction of leveraged landlords as inconsistent with sustained house price inflation.

Agreed that they are well out of whack. Agreed that the leveraged landlords might get rinsed and it transpire that they were not materially moving the market. I don't presume to know and I don't think it is possible to know. I like to speculate, and I think that maths stacks up behind the supposition that they can provide a floor under prices.

However, once they are rinsed, and with self-certified lending also washed out of the market, it will at least be a fair fight and the market will reflect what households can pay with earnings. We shall see what we shall see.

[thewig]

You(Bricks + Mortar) <> Lose

Price(T+1) > Price(T) = Don't miss out

[Venger]

...have been dwelling on this for a little while this evening. Brought into clearer relief just how insane some of the positions a few friends have put themselves in buying £400k+ flats as (speculative) investments. They're going to have to hold them for a long time and hope to God HPI continues.

Sorry it wasn't clear but these are OOs (late-mid 20s working in London) who have bought their own home. It's less bad than BTL but IMO reckless to buy at prices >5x joint income. Doubtless BOMAD featured heavily so maybe the mortgage isn't as huge as expected.

To be honest it won't bother me an awful amount either.

With respect to the will HPI continue question, it wouldn't shock me if it did for a whole longer. I think you're overlooking just how weak a position recent(ish) graduates are in. Lurked in to London jobs by much better pay (or just availability of jobs) than outside London only to discover extreme rents. Then they often meet someone and want to settle down. Near impossible to simultaneously find two jobs outside London in the same place with pay anywhere near what you're both on in London. In those situations paying extreme prices could seem like the only option to escape the 50% of after-tax-salary rent trap.

I think your talk of priced out is a little misleading. When people are willing to travel some distance in a commute and take on a whopping mortgage, not so many London workers are technically priced out. They just have to be desperate and forgo much quality of life. But given they don't have a great quality of life renting in London either, it's an appealing idea.

You keep on counting the HPI. There may be a limit to those people willing to make such sacrifices... further out, with whopping mortgages.

If they choose to pay whacky prices to 'escape renting' that's their own decision. MMR here. Bomad you think helped your friends buy their £400K boxes, so banks will say thank you very much Bomad. Now with BTLers panicking. (Notable property interests have been selling into the reflation of last few years.)

Bomad's money into your pal's £400K boxes means the investor/hpier minds (like them, their parents, and you if in similar position - if you're not an older outright owner) takes the hit of HPC.. not bank balance sheets.

I basically agree with you, and entirely so in principle.

I wasn't assuming HPI was going to continue at 6-7%, I just looked up a loose figure for the past three years here (which is presumably low for the SE) because I wanted to make the point that people have recently benefited on paper from buying over renting even over quite short periods.

Price/earnings is so ludicrous now that I don't consider it to be directly relevant. You say prices will be taken well away from wages; I say they already are. The government has shown its position and until it changes it, possibly in a Swiss Euro-peg style event, I don't think it really makes a difference what the p/e is. I wish I had your expectation of an impending crash but I don't see the reduction of leveraged landlords as inconsistent with sustained house price inflation.

You keep on counting the HPI. HPC is coming. You've misread Gov's intentions imo. Gov/BoE can be subtle - they're not guaranteeing HPI. There can be misdirection involved. We're in a market. Bomads for your London buyer pals, and their own complict in accepting the bomad... well bomad money can run out, and seize up, as prices begin to fall.

Luckyone: My expectation is that this market segment will behave in the same fashion as any other market which has topped out. Supply will increase, volume will decrease for quite a while before prices begin to crumble.

Many of us think that the entire market pricing structure is driven by the high priced segment, as all other properties are priced based on compromises versus the ideal (location, size, commuting etc). When the top end crumbles, everything else will follow.

There have been a lot of discussions on this site related to the fact that the poor market fundamentals will require a catalyst before prices resume their logical downward path. The new property tax regime, along with the decoupling of mortgage rates from the Base Rate, will, in hindsight, prove to be the catalysts.

And more now with C.24 and BTL housevestor stamp duty hike.

[bushblairandbrown]

You keep on counting the HPI.

I'm not counting on HPI. I'd be delighted if there was an HPC and I hope you're right (which shouldn't be a huge surprise on this forum). Let's see how it plays out.