Btl = Bought Too Late

[Prude]

The "To Let" board has just gone back up on a property near me.

It is a 3 bed detached and they want £725pcm for it. It was sold approx 9 months ago (advertised at £230K and sold for £220K) and was rented out immediately. The current tenants have clearly given notice.

If we say for arguments sake that the BTLer has put up 20% then they have invested around £45K and the bank has put up £175K.

Therefore with BTL mortages being around 6% APR then interest only payments alone = £10500 pa. Loss of deposit rate interest (net) on £45K would be another £1500pa. That's a nice neat £12K in interest pa or £1000 pm.

If we further assume there will be a management fee from the agent (£50 pm) , repairs £250pa, insurance £150pa, and that an average of 1 month per year not let, then income from rent = £7K.

Therefore a yearly deficite of around -£5000. So to break even the BTLer, in this and many other recent cases, needs capital appreciation of 2 - 2.5%pa for the deal to make any sense.

However according to Nationwide the long term trend in HPI over 50 years is only 2.4% pa!

This is a massive gamble where the best result is to break even. But of course we all know that in the current market there is a possible huge downside.

I'm a gambler - but this is a no brainer.

[bubbleturbo]

They are starting to wise up though as I am seeing a huge amount of properties appearing on rightmore with "no chain", when you look at the pictures they are vacant and look typical BTL - magnolia walls, laminate floors, etc.

[Prude]

They are starting to wise up though as I am seeing a huge amount of properties appearing on rightmore with "no chain", when you look at the pictures they are vacant and look typical BTL - magnolia walls, laminate floors, etc.

I expect to see a huge sell off and I am quite surprised that we haven't seen more evidence of this up to this point. 'Professional' BTLers should have got out 18mths ago.

The point of this thread was to wonder just what advice the new BTLers are getting? "Oh yes sir - BTL wonderful idea, never fails, property goes up and up, you'll have a great pension asset etc.." When they get to the maths though the only thing they can be spinning is the future outlook for HPI. Are they telling the property doubles every 5 years as people want to believe?

[Converted Lurker]

I expect to see a huge sell off and I am quite surprised that we haven't seen more evidence of this up to this point. 'Professional' BTLers should have got out 18mths ago.

The point of this thread was to wonder just what advice the new BTLers are getting? "Oh yes sir - BTL wonderful idea, never fails, property goes up and up, you'll have a great pension asset etc.." When they get to the maths though the only thing they can be spinning is the future outlook for HPI. Are they telling the property doubles every 5 years as people want to believe?

All together now...It`s because they`re in it for the ....... .......

[mhifoe]

"a yearly deficite of around -£5000. So to break even the BTLer, in this and many other recent cases, needs capital appreciation of 2 - 2.5%pa for the deal to make any sense"

They may go on believing the dream, and subsidising the poor return for a year or two, but as the losses mount up, the "long term gains" will recede further and further into the future, until the invetor gets fed up

I think some of the people who are BTLing are failing to investigate their local rental market.

In my area, a 2 bed flat can be rented for about 500pcm, but looking on rightmove there are people trying to rent 'luxury' apartments for double that. As you can rent a 4 or 5 bed house for £800 pcm, they don't have a chance in hell of renting their properties.

[OzzMosiz]

I think some of the people who are BTLing are failing to investigate their local rental market.

In my area, a 2 bed flat can be rented for about 500pcm, but looking on rightmove there are people trying to rent 'luxury' apartments for double that. As you can rent a 4 or 5 bed house for £800 pcm, they don't have a chance in hell of renting their properties.

Yep I concur (as I am in the same area). Can rent a 3 bed detached for around 700-800pm - which I'm

hoping to do sometime this year.

[underpressuretobuy]

I think some of the people who are BTLing are failing to investigate their local rental market.

Agreed. I think anyone getting into the BTL market for the first time right now has done so purely on the basis of listening to friends and relatives talking about the money they've made in property and / or BTL.

This combined with the continuing endless programmes - How to make a million by being a property developer or by buying at auction etc. etc. - sets an environment where those who never do any research other than to listen to those around them (particularly if they have a personality that demands friends who agree all the time - yes men) feel that now is the time to invest and make money just like everyone else.

I still don't know whether my sister will become a proper BTL investor later this year by buying a second property but talking to her about it any further is a waste of time.

She knows that property prices always go up and anyone who thinks any different is as stupid as someone trying to argue that the sky is green and the grass is blue, as far as she is concerned the gains people have made (in the past) speak for themselves as proof positive that the property market is the safest place to invest.

Any attempt to introduce facts / graphs / research to counter this argument leads to disdain, boredom, disbelief and finally (inexplicably) anger.

In the end you have to resign yourself to the fact that you are either the sort of person is prepared to do a bit of research or you aren't.

Many of the people who are investing in BTL for the first time now probably believe that they are go-getters - the kind of people who don't just sit around thinking about an idea, mulling it over, researching it, weighing up the pros and cons, no, they get out there and just do it, making it work by sheer instinct and basic downright genius.

Deep down inside I suspect these people know that those of us tedious enough to look into these things properly may have a point but feel that questioning what you are doing simply undermines the whole project and isn't very entrepeneurial.

Anyway I would say that, according to my would-be BTL sister I am "mortgage-phobic".

Edited January 12, 2006 by underpressuretobuy

[right_freds_dead]

In my area, a 2 bed flat can be rented for about 500pcm, but looking on rightmove there are people trying to rent 'luxury' apartments for double that. As you can rent a 4 or 5 bed house for £800 pcm, they don't have a chance in hell of renting their properties.

i see that to.

who wants to pay 'luxury' prices on temporary accomodation ?

on top of that - where is the luxury in a 4 storey flat block on an old industrial area. no garden. no community. no space. noisy neighbours. wheres the luxury ?

are yes. its the kitchen. its new. and thats it.

[Irkuiem]

I think some of the people who are BTLing are failing to investigate their local rental market.

In my area, a 2 bed flat can be rented for about 500pcm, but looking on rightmove there are people trying to rent 'luxury' apartments for double that. As you can rent a 4 or 5 bed house for £800 pcm, they don't have a chance in hell of renting their properties.

I have noticed the same thing for the last year or so. In my local paper among the now numerous adverts for properties to let I find that the individual private ads (for housing I should add) now ask for more than the letting agents for the same sort of place. So I ask the question. Why rent a place from a possibly struggling private landlord, when you can get more security over problems and deposits from letting agents for cheaper?

Do these landlords not take any notice of the local rents anymore?

[mercsl]

Yawn...in any sort of investing some people will not do their homework, so what? These people would have stuffed up buying shares and the like just as well.

Thing is all you lot focus on the bad stuff...

Edited January 12, 2006 by mercsl

[MarkG]

Do these landlords not take any notice of the local rents anymore?

I suspect many of them are getting to the point where they either get a tenant who'll pay their mortgage for them or go bankrupt soon: so asking for sensible rates just isn't an option... they'll just go bankrupt a few months later.

[marcus]

However according to Nationwide the long term trend in HPI over 50 years is only 2.4% pa!

What!

What simpleton said that

No one can believe that surely. 25 years ago we were all supposed to drive round in a spacecraft and eat pills for dinner.

[Guest Bart of Darkness]

They may go on believing the dream, and subsidising the poor return for a year or two, but as the losses mount up, the "long term gains" will recede further and further into the future, until the invetor gets fed up

The current state of the market is certainly not going to encourage their dreams of vast property profits.

[dipsy]

The current state of the market is certainly not going to encourage their dreams of vast property profits.

For the first time this week I saw 2 adverts for houses in our local property paper (Reigate/Redhill) that were advertised as having sitting tenants. Before I have just seen "vacant possession" - those BTLers are jumping.

[Prude]

However according to Nationwide the long term trend in HPI over 50 years is only 2.4% pa!

What!

What simpleton said that

No one can believe that surely. 25 years ago we were all supposed to drive round in a spacecraft and eat pills for dinner.

Marcus you are reflecting one of the fundamental reasons we have this ridiculous house price bubble. People just believe without question that property goes up and up exponentially. You can't fail. Can you?

Look at Nationwide historical data and look at the best fit trend line over the past 50 years for house prices adjusted for inflation. You'll see it's 2.4%.

[JohnG]

However according to Nationwide the long term trend in HPI over 50 years is only 2.4% pa!

and

Look at Nationwide historical data and look at the best fit trend line over the past 50 years for house prices adjusted for inflation. You'll see it's 2.4%.

And the issue is?

2.4% real growth compounded for 50 years is fantastic! Fire up Excel and work it through for yourself.

For a geared property (leveraged if you want to pretend you are American!), and providing rents are sufficient to cover mortgages, voids etc. a landlord will continue to make capital gains even when house prices are falling in real terms, so long as there is a nominal increase in value.

Consider this -

Prop value £50k

Mortgage £40k

Equity £ 10k

General Inflation 5%

House price inflation 2%

Therefore Real house price deflation 3%

After year 1

Nominal prop value £51k

Real prop value (50k *97%) £48.5k

Equity £11k

Real value of equity (£11k *95%) £10,450

So even though the real value of the property has gone down by £1.5k, the real value of landlord's equity has gone up by £450 or 4.5%. Not a huge amount, but I think it illustrates the point.

[LondonBuyer]

Someone said above in relation to amateur BTL landlords that these people would only stuff up just as badly if they invested in shares or unit trusts etc.

I don't think this can be quite true, because in general gearing (borrowing many times your initial investment to magnify your gains and losses) is not available to private individuals for investing in shares or other financial investments. For BTL schemes it is, and on very easy terms, too.

Put simply, these idiots will ruin themselves buying a BTL with 5x gearing. Suppose such a person buys a house costing £ 100K with £ 20K cash, and a mortgage of £ 80K. Then if houses fall by 40%, they will have a house worth £ 60K and £ 80K debt. If they sell out at that point, they will have lost their original stake of £ 20K, and also the further £ 20K they owe over and above the value of the house.

If they had stuck to buying duff unit trusts which went down by 40% they would only have lost 40% of their original stake or £ 8K. In other words, 5x gearing equals 5X losses.

Many such people can lose £ 8K over ten years without really noticing as inflation and their own lack of simple arithmetic mask the effect. £ 40K is a different matter and will ruin them.

They may be gullible, but it is still a tragedy. What makes it worse is they do not expect it because in this consumerist age every other form of investment (at least in the UK) is regulated to stop people being rooked this way and so they are not on theit guard.

[Prude]

andAnd the issue is?

It was(is) that Marcus and many others think that houses go up by much more than this annually without checking the stats.

[apom]

I expect to see a huge sell off and I am quite surprised that we haven't seen more evidence of this up to this point. 'Professional' BTLers should have got out 18mths ago.

The point of this thread was to wonder just what advice the new BTLers are getting? "Oh yes sir - BTL wonderful idea, never fails, property goes up and up, you'll have a great pension asset etc.." When they get to the maths though the only thing they can be spinning is the future outlook for HPI. Are they telling the property doubles every 5 years as people want to believe?

They were waiting to sell it to Sipp's investors..

I know of someone who held his loss maker for over a year expecting to see it regain the level at which he bought it..

The amount of people out there ready to invest in Sipp's was allegedly very high..

Was it as high as those desperate to sell to the Sipp's boom investors.

BTL looses money across most of the country IF BOUGHT AT TODAYS PERCIVED VALUE.

It looses money where I am.

FTB's down to around 7% of the market..

[Prude]

For a geared property (leveraged if you want to pretend you are American!), and providing rents are sufficient to cover mortgages, voids etc. a landlord will continue to make capital gains even when house prices are falling in real terms, so long as there is a nominal increase in value.

The whole point of the this thread is to demonstrate that for new BTLers, rents are not sufficient to cover the mortgage, voids, insurance etc... In fact they could be subsidising rents to the tune of £400 per month on the property in the initial example.

It shows that in the current climate BTLers need the 2.4% expected long term annual capital growth just to break even on the deal.

If you would like to fool yourself that BTL still makes sense in a stagnant market then so be it.

[JohnG]

The whole point of the this thread is to demonstrate that for new BTLers, rents are not sufficient to cover the mortgage, voids, insurance etc... In fact they could be subsidising rents to the tune of £400 per month on the property in the initial example.

It shows that in the current climate BTLers need the 2.4% expected long term annual capital growth just to break even on the deal.

If you would like to fool yourself that BTL still makes sense in a stagnant market then so be it.

BTL can still make sense today in the high yield/low growth sector of the market (Burnley, anyone?). I was just pointing out that 2.4% real appreciation is not to be sneezed at, and that effective capital growth can be achieved even when real values are falling, so with 2.4% real growth long term BTLers won't just be 'breaking even' they'll be making money hand over fist. Personally, I'm not in the 'yield' end of the market, so I'm not buying ATM.

[Casual Observer]

FTB's down to around 7% of the market..

That's worse than it seems in fact, APOM. Old hands returning to the market, after a gap, are classed as FTBs e.g. divorcees who have rented a while, STRs etc.

The true ratio of Virgin FTBs is probably about 5%, IMO

[Prude]

BTL can still make sense today in the high yield/low growth sector of the market (Burnley, anyone?). I was just pointing out that 2.4% real appreciation is not to be sneezed at, and that effective capital growth can be achieved even when real values are falling, so with 2.4% real growth long term BTLers won't just be 'breaking even' they'll be making money hand over fist. Personally, I'm not in the 'yield' end of the market, so I'm not buying ATM.

I'm not sure on the historical data for this but it seems to me that getting long term 'real growth' of 2%ish is entirely possible without any risk by putting your money on deposit.