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SJJ

Btl Is Viable From 2006 Onwards.

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Greetings all, an attention-grabbing title for a long time lurker and occassional poster. I've got enough stashed away for what I would consider to be a 'traditional' deposit amount on a pleasant 2 up 2 down... but I have no intentions of buying. I'm in the bear camp for sure and have been for some time.

I can't help thinking though... statistically, someone will buy their first BTL in 2006 and they will make it work, genuinely. I agree that most will get hit, hard, as has been discussed many times, but what is the formula that will be used to weather the storm? Isn't the down market where skill is brought to the fore for maximum profit by those in the know?

Purely for some alternative discourse, how could BTL work for someone new joining the fray???

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Greetings all, an attention-grabbing title for a long time lurker and occassional poster. I've got enough stashed away for what I would consider to be a 'traditional' deposit amount on a pleasant 2 up 2 down... but I have no intentions of buying. I'm in the bear camp for sure and have been for some time.

I can't help thinking though... statistically, someone will buy their first BTL in 2006 and they will make it work, genuinely. I agree that most will get hit, hard, as has been discussed many times, but what is the formula that will be used to weather the storm? Isn't the down market where skill is brought to the fore for maximum profit by those in the know?

Purely for some alternative discourse, how could BTL work for someone new joining the fray???

You are definitely 100% right. A newbie BTLer could make money in 2006 by buying up at rock bottom prices one of the thousands of flats which will left behind by repossessed amateur muppets. They should be able to let it at slightly below market rent and therby avoid voids and still get a reasonable yield (because the price was so low).

Still, they'd have to have nerves of steel, as they might have to watch their asset plummet further in value before finally levelling out towards the end of 2008. You've got to be looking at at least a 5-10 year wait to see any capital gain.

frugalista

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....

A newbie BTLer could make money in 2006 by buying up at rock bottom prices one of the thousands of flats which will left behind by repossessed amateur muppets.

....

I don't think prices will reach rock bottom in 2006 if this crash plays out like every other crash (whether housing or stock market) over the past 200 years. They're still more or less at there all time high - it will be a drawn out affair, with many false dawns. You'll know we're at or near the bottom when all the experts say it's a bad time to buy...

Regards,

crude

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I don't think prices will reach rock bottom in 2006 if this crash plays out like every other crash (whether housing or stock market) over the past 200 years. They're still more or less at there all time high - it will be a drawn out affair, with many false dawns. You'll know we're at or near the bottom when all the experts say it's a bad time to buy...

Regards,

crude

Most of the new BTL's who have got involved over the past few years borrow about 80% of their purchase price.

This will never be self financing (ie pay off the capital and interest over say 10 -15 years) on rental return alone apart from at the very bottom of a big crash. Youve got interest at about 5.5%, capital repayments nearly double the monthly payments. Insurance at about 1/2 % property value . Repairs and renewals at about 1/2% property value. Rent voids at about 1% property value. Maybe agents fees You have to add stamp duty survey fees arrangement feees and legal fees to the purchase price

With this level of borrowing you need rents to be about 10% of property values for it to work. You just dont get this sort of yield on decent accomodation apart from when properties are selling really cheap apart HMO's which have got their own problems.

BTL on this basis very rarely stacks up without property price inflation. These people have looked to the rent to keep their heads mostly above water, expecting their real return to be from price increases. If they bought in say 2000 2001 2002 they should have built up enough equity for it to have been worthwhile. If they bought in 2004 2005 they are wasting their time

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This will never be self financing (ie pay off the capital and interest over say 10 -15 years) on rental return alone apart from at the very bottom of a big crash.

I've never worked out why anyone thinks that BTL should be self-financing in that way, or that you could ever expect it to be. No one investing in the stock market expects to be able to borrow money to buy shares and then cover the interest and capital repayments from the dividend yield alone -- why is property different?

A decent dividend yield for shares is around 2-3%, and you should expect to get the same kind of yield from property, with the bulk of your investment gain from capital appreciation roughly in line (over the long term) with the growth of the economy, the same as with shares.

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I've never worked out why anyone thinks that BTL should be self-financing in that way, or that you could ever expect it to be. No one investing in the stock market expects to be able to borrow money to buy shares and then cover the interest and capital repayments from the dividend yield alone -- why is property different?

A decent dividend yield for shares is around 2-3%, and you should expect to get the same kind of yield from property, with the bulk of your investment gain from capital appreciation roughly in line (over the long term) with the growth of the economy, the same as with shares.

capital gains 2005

property 3%

shares 16%

which is most viable right now as an investor ?

Edited by sign_of_the_times

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I've never worked out why anyone thinks that BTL should be self-financing in that way, or that you could ever expect it to be. No one investing in the stock market expects to be able to borrow money to buy shares and then cover the interest and capital repayments from the dividend yield alone -- why is property different?

A decent dividend yield for shares is around 2-3%, and you should expect to get the same kind of yield from property, with the bulk of your investment gain from capital appreciation roughly in line (over the long term) with the growth of the economy, the same as with shares.

Spot on.

And try going to a bank asking them to lend you 80% of what it is going to cost you to set up a new buisiness - its crazy. Normal rule of thumb is they will match youre investment - ie it will be a 50% gearing. Put that into the equasion and it gets more viable. Even 50% is too high for me.

I think you should expect a bit more of a yield than shares if you are doing some of the work yourself - decorating management keeping accounts, but not telephone numbers.

Same with capital growth, long term a fraction over growth in GDP or inflation should be fine. Not 20%!

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I've never worked out why anyone thinks that BTL should be self-financing in that way, or that you could ever expect it to be. No one investing in the stock market expects to be able to borrow money to buy shares and then cover the interest and capital repayments from the dividend yield alone -- why is property different?

A decent dividend yield for shares is around 2-3%, and you should expect to get the same kind of yield from property, with the bulk of your investment gain from capital appreciation roughly in line (over the long term) with the growth of the economy, the same as with shares.

When put that way it raises the question of why one should be allowed to offset loan interest against income from property but not for other types of investment. If rental income was taxed then the whole high geared BTL bubble wouldn't have occurred (in my opinion).

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I think if you were a professional investor in the markets you would be able to offset interest on business loans, and offset other costs such as office space and furniture and phone calls.

BTL is a business and as such expenses of the business are offset against revenue and I think that is wholly right. Cut the earning from BTL and you will surely see the standards in the business drop significantly.

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When put that way it raises the question of why one should be allowed to offset loan interest against income from property but not for other types of investment. If rental income was taxed then the whole high geared BTL bubble wouldn't have occurred (in my opinion).

Because you are taxed on the profit from the venture. And when calculating profit you deduct expenses including interest payments.

What may be a surprise is that if you are making a loss on a property you cant set that off against a profit from another property or another buisiness, you can only carry it forwards, and if you end up selling without ever making a profit then youve lost the money for all time.

Investments in the stock market are regarded as different because you are not trading and dont risk a trading loss.

I agree that if interest payments were not deductable BTL would virtually dissapear. Cant see it happening though. Would you apply that to commercial property too?

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Purely for some alternative discourse, how could BTL work for someone new joining the fray???

Well they need nerves of iron and it goes like this.

They must assume that

o We are in a new paridigm of low interest rates (nominal and real)

o The volatility of interest rates has also decreased

o Rents will in the long term increase in line with wage inflation

o The favourable tax treatment of loans to invest in property continues

o NOTHING will change this in the future!

On this basis they can make a (long term) profit as long as the rental yield more than covers

o the real interest measured over wage inflation

o voids

o maintenance

o insurance

o agent fees

A (tax free) 5% yield is probably sufficient.

Note that the only way to make it work is to keep MEWing whenever the rent rises above the nominal interest rate on the mortgage. However this requires a further assumption

o House prices have recently adjusted to the new paridgm and will now increase at the long term

average (in line with wage inflation) and the new adjusted rate .... and there isnt a HPC

The other problem is that in the initial years they have to invest money into the project each year to cover the shortfall until such time as the rent rises to cover this.

Of course if we get deflation or extreme interest rates then they go bankrupt.

I think if you were a professional investor in the markets you would be able to offset interest on business loans, and offset other costs such as office space and furniture and phone calls.

BTL is a business and as such expenses of the business are offset against revenue and I think that is wholly right. Cut the earning from BTL and you will surely see the standards in the business drop significantly.

Thats true if you create a company vehicle (with associated costs) and use commercial loans.

My question relates to investment as an individual without those costs and tax treatment.

If you think about it what we have is an accidental hang over from MIRAS. It also makes sense on a small scale if for instance I own a house and move abroad for a couple of years that I can offset my mortgage against rental income.

If you cut the earnings from BTL it would make sense if the yields were higher.... and houses cost less!!

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The other problem would be: who's going to lend them the money to buy a BTL flat if prices are sinking through the floor? We've already seen some lenders simply stop BTL lending, and more will follow if prices are dropping month by month.

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Because you are taxed on the profit from the venture. And when calculating profit you deduct expenses including interest payments.

What may be a surprise is that if you are making a loss on a property you cant set that off against a profit from another property or another buisiness, you can only carry it forwards, and if you end up selling without ever making a profit then youve lost the money for all time.

Investments in the stock market are regarded as different because you are not trading and dont risk a trading loss.

I agree that if interest payments were not deductable BTL would virtually dissapear. Cant see it happening though. Would you apply that to commercial property too?

Its true that if as a sole trader you borrow money to buy a fish & chip van you can offset loan interest against taxable profit on the business.

However my question remains whether BTL is closer in form to an investment on the stock market than that sort of trading?

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Its true that if as a sole trader you borrow money to buy a fish & chip van you can offset loan interest against taxable profit on the business.

However my question remains whether BTL is closer in form to an investment on the stock market than that sort of trading?

I suppose it depends how you do it - if its fully managed hands off never see the place use agents to do everything then i agree it looks closer to the stock market than driving a a chip van. Particularly if it was just one building.

On the other hand you could buy the chip van and get someone else to do all the work and just sit at home living off the profits but the loan interest would still be deductible.

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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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