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Wuluf

Btls Subsidising Tenants Is A Win/win Situation

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And there is no middle man..

In essence tenants are helping BTLs to purchase an Asset and for doing so BTLs are allowing tenants live in accomodation below current (purchase) market price. The loss/gain by is not monetary as both in this scenario get what they want (BTL - asset, Tenant - accomodation) at a cheaper price.

http://home.earthlink.net/~green/whatisan.htm

"The Theory of Comparative Advantage

When we begin to seek an answer to the questions raised above, the response we are most likely to meet from both market participants and commentators alike is that each of the counterparties in a swap has a "comparative advantage" in a particular and different credit market and that an advantage in one market is used to obtain an equivalent advantage in a different market to which access was otherwise denied. The AAA company therefore raises funds in the floating rate market where it has an advantage, an advantage which is also possessed by company BBB in the fixed rate market.

The mechanism of an interest rate swap allows each company to exploit their privileged access to one market in order to produce interest rate savings in a different market. This argument is an attractive one because of its relative simplicity and because it is fully consistent with data provided by the swap market itself. However, as Clifford Smith, Charles Smithson and Sykes Wilford point out in their book MANAGING FINANCIAL RISK, it ignores the fact that the concept of comparative advantage is used in international trade theory, the discipline from which it is derived, to explain why a natural or other immobile benefit is a stimulus to international trade flows. As the authors point out: The United States has a comparative advantage in wheat because the United States has wheat producing acreage not available in Japan. If land could be moved -- if land in Kansas could be relocated outside Tokyo -- the comparative advantage would disappear. The international capital markets are, however, fully mobile. In the absence of barriers to capital flows, arbitrage will eliminate any comparative advantage that exists within such markets and this rationale for the creation of the swap transactions would be eliminated over time leading to the disappearance of the swap as a financial instrument. This conclusion clearly conflicts with the continued and expanding existence of the swap market.

It would seem, therefore, that even if the theory of comparative advantage does retain some force -- not withstanding the effect of arbitrage -- which it almost certainly does, it cannot constitute the sole explanation for the value created by swap transactions. The source of that value may lie in part in at least two other areas."

Edited by Wuluf

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And there is no middle man..

In essence tenants are helping BTLs to purchase an Asset and for doing so BTLs are allowing tenants live in accomodation below current (purchase) market price. The loss/gain by is not monetary as both in this scenario get what they want (BTL - asset, Tenant - accomodation) at a cheaper price.

Indeed, lots of BTL'ers should go out and buy as much property as possible using interest only mortgages then rent the places out for less than the mortgage payments, the greater the shortfall each month means the greater the competitive advantage!

Can anyone else see any shortcoming with a landlord renting money off the bank then renting the property out with a negative carry?

Opps, the BTL'er is the man in the middle!

Edited by BuyingBear

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Indeed, lots of BTL'ers should go out an buy as much property as possible using interest only mortgages then rent the places out for less than the mortgage payments, the greater the shortfall each month means the greater the competitive advantage!

Anyone else see any shortcoming with a landlord renting money off the bank then renting the property out with a negative carry?

Opps, the BTL'er is the man in the middle!

I rent for approx 85% of the most competitive IO mortgage I could find in the market (which I quite possibly couldn't get as a ftb), admittedly the landlord is mortgage free and has owned the place for around 20yrs. However, rent increases just aren't feasible (Bristol BS6), given the choice of alternative properties at the same price. I also get to move if I fancy a trendy new kitchen or bathroom but without the diy (thank god for progammes encouraging property renovation and btl!!! ;) )

Quite seriously though, I doubt I would change anything in the flat if I owned it and this way is a hell of a lot cheaper

Edited by RobertPaulson

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If a landlord is in effect subsidising my rent on a property that has already depreciated since our occupation and is very likely to continue depreciating in the coming years - then how is this win/win?

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If a landlord is in effect subsidising my rent on a property that has already depreciated since our occupation and is very likely to continue depreciating in the coming years - then how is this win/win?

You win and the bank wins (they hope).

The BTL'er is doing nothing but taking a massive long position on a large hedge, he has no control over interest rates, rent or general HPI and there is no counterbalance to offset losses should things turn sour.

Of course the same people wouldn't want to play on the stock market because of "undue risk" :lol:

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This rather backs up the question in my previous thread. So once you own the property outright it is quite realistic to let the property well below market rental rates because you no longer have interest to pay. Now I fully accept that commercial letters would take a different view, but for the private individual it is a method of retaining an asset and covering running costs and more.

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This rather backs up the question in my previous thread. So once you own the property outright it is quite realistic to let the property well below market rental rates because you no longer have interest to pay. Now I fully accept that commercial letters would take a different view, but for the private individual it is a method of retaining an asset and covering running costs and more.

Depends on the landlord of course, but most johnny-come-latelys in the BTL field don't own anything but an IO mortgage and without capital growth through rampant HPI they come unstuck, nor are they sentimentally attached to the property, despite the fact they may be emotionally attached to the notion of property, their property may just be one of thousands of anonymous boxes built specifically for investors and not 'real' people.

Say you did own a property outright that you've owned for years which rents for £800 a month and is "worth" £200k, why would you sit on such a low yield aside from an obvious act of selflessness? You could sell the property and dump the money into a deposit account and earn a greater return with less hassle and without ever having to worry about the losing the capital.

Obviously some people do this because they intend to live in the property at some point or they are emotionally attached and just want someone to look after it, but I doubt that consitutes most BTL'er out there. Some may be financially naive and fail to realise that failing to even tread water is a losing position.

Of course by accepting a 'negative yield' they are spiking the rental market for all those new BTL'ers who absolutely need to cover a mortgage taken out at today's market prices, any shortfall comes out of their pocket, they will probably tire of this quite quickly.

You pay interest on a loan because you deprive somebody of the money for a certain term and they have to be rewarded for their deferred consumption (though FRB screws up this theory somewhat), likewise when you own an asset outright you should be rewarded for the interest you are being deprived of if the capital was put to work in other fields. If you are a OO then the mortgage payment or loss of interest (if owned outright) is compensated for by the fact you don't have to pay rent, though now the compensation isn't enough from a rational point of view, but you may choose to live in an area despite that.

Edited by BuyingBear

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And there is no middle man..

In essence tenants are helping BTLs to purchase an Asset and for doing so BTLs are allowing tenants live in accomodation below current (purchase) market price. The loss/gain by is not monetary as both in this scenario get what they want (BTL - asset, Tenant - accomodation) at a cheaper price.

http://home.earthlink.net/~green/whatisan.htm

"The Theory of Comparative Advantage

When we begin to seek an answer to the questions raised above, the response we are most likely to meet from both market participants and commentators alike is that each of the counterparties in a swap has a "comparative advantage" in a particular and different credit market and that an advantage in one market is used to obtain an equivalent advantage in a different market to which access was otherwise denied. The AAA company therefore raises funds in the floating rate market where it has an advantage, an advantage which is also possessed by company BBB in the fixed rate market.

The mechanism of an interest rate swap allows each company to exploit their privileged access to one market in order to produce interest rate savings in a different market. This argument is an attractive one because of its relative simplicity and because it is fully consistent with data provided by the swap market itself. However, as Clifford Smith, Charles Smithson and Sykes Wilford point out in their book MANAGING FINANCIAL RISK, it ignores the fact that the concept of comparative advantage is used in international trade theory, the discipline from which it is derived, to explain why a natural or other immobile benefit is a stimulus to international trade flows. As the authors point out: The United States has a comparative advantage in wheat because the United States has wheat producing acreage not available in Japan. If land could be moved -- if land in Kansas could be relocated outside Tokyo -- the comparative advantage would disappear. The international capital markets are, however, fully mobile. In the absence of barriers to capital flows, arbitrage will eliminate any comparative advantage that exists within such markets and this rationale for the creation of the swap transactions would be eliminated over time leading to the disappearance of the swap as a financial instrument. This conclusion clearly conflicts with the continued and expanding existence of the swap market.

It would seem, therefore, that even if the theory of comparative advantage does retain some force -- not withstanding the effect of arbitrage -- which it almost certainly does, it cannot constitute the sole explanation for the value created by swap transactions. The source of that value may lie in part in at least two other areas."

what you have to remember is that it was a speculative market that drove prices so high.

The gains have gone.

Now, it is plausible that you can subsidise as your pension a property at todays prices and at todays interest rates.

But IR's change, there is an oversupply of rental properties and although it is said that 10% voids are average you have to consider that many properties are rented out for years..

And a few can stand empty for a year.

The ability to subsidise the entire mortgage can only work for some.

3 months voids are common..

and who knows more about that sort of thing then those of us who actually rent..

That would be most on here then.

There are better returns against invesment out there with much lower risk then BTL.

Which is why these new builds are struggling to be sold.

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Problem: this swap works because the Landlord ASSUMES that:

+ There is litlle risk of a fall in property prices (because, if it came, then the landlord is bearing a cost which is higher than the short term subsidy),

+ There is a serious possibility of recouping more than the "subsidy" in long term price rises.

As long as the final asset price is more than the BTL'ers contribution to the purchase (+ [for arguments sake] compounded interest at the risk free rate) then it is still a win.

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I agree with the notion that there could be long-term profits in it, but only if the BTL is purchased on a repayment mortgage, otherwise the IO mortgage is only being used to generate current returns!

If, at the end of subsidising a BTL for 25 years a BTLer owns the property then there could be some scope for gains.

For example:

[A]

BTLer A buys property today with mortgage repayments (on repayment mortgage) of £850 per month

He rents it out for £650 a month (optimistic), making a £200 loss per month (ignoring fees, voids....)

After 25 years he owns the property having only paid around £200 a month for it.

BTLer B buys property today with mortgage payments (IO mortgage) of £750 per month

He rents it out for £650 a month (again, optimistic), making a £100 loss pcm (ignoring fees, voids....)

After 25 years he has made a whopping compounded loss and owns nothing.

If BTLers really are in it for the long term then they need to own an asset at the end of it, otherwise all they have is years of negative cashflow and a mortgage to repay.

If they are in it for the short term ( and choose an IO mortgage) then they need to make monthly profits.

I think the biggest risk isn't the monthly cashflow, its the depreciating asset.

Option [A] is a bad investment that could come good in the long-term, but still a bad investment.

option is an insane investment, as it provides negative cashflow from the offset and will not improve over time. If house prices fall it also means selling at a loss to exit the investment.

_____________________________________________________________________

A landlord that I used to rent from bought the flat I rented for £152K (he admitted this was with a 90% IO mortgage).

Building management fees/ground rent etc: £135 pcm

Letting agent fees: 10% (finding fee + rent collection only)

He rented it out for £645 pcm.

£645 - 10% - £135 = £445.5 income per month after costs (ignoring voids)

Add in 10% voids and its probably more like £400.95 before maintennance costs (although it is new build and most things under warranty until a few years time).

His mortgage would likely be in the region of £550 per month, plus he has around £15500 of capital tied up which at 5% interest could be making £775 a year before tax.

I reckon his monthly losses are in the region of £150 per month.

Since he has bought the flat he has twice tried to sell it, and is now trying for a third time (after failing to find tenants for 3 months). His asking price is now the same as his original purchase price.

If he does sell right now (Jan 2006) he will have lost money for 36 months (36 x £150 = £5400), lost money on the transactions (stamp duty, EA fees, legal fees, mortgage fees etc) and likely achieve only (average for this area) 91% of asking if lucky enough to sell.

I'd estimate that this whole BTL adventure will have cost him about:

9% loss on original property purchase price: £13950

Stamp duty on £155K @ 1%: £1550

Assume 1.5% EA fees for selling at 9% down: £2115.75

Monthly losses total: £5400

Legal fees buying/selling: £1000

____________________________________________________________________

TOTAL LOSS (if he can sell now, I doubt it): £24015.75 (roughly, of course)

____________________________________________________________________

And he bought into all of this BTL madness to boost his pension, using equity from his main property (MEWed for BTL deposit).

Edited by non-FTBer

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I like your thinking Wuluf. Here are some comments of my own:

- The landlord is buying an investment rather than an asset so to speak.

- The tenants is buying accomodation and related services that they may not be able to afford as an OO like maintenance.

- In my case, the landlord has access to much cheaper finance than FTB's have and also knowledge and skills in maintenance that the tenants don't have.

- My tenants pay a very good return on my investment, over 6%. So they IMO aren't on the surface getting an advantage off me. But in reality, they are sharing, so therefore are paying less per person that they would be if they bought.

- In principle I agree with this line of thinking, but it's important that tenants use the advantage of renting by hoarding what they save so they can transfer that benefit into home ownership at a later date. If they spend the gain on consumables, they'll find later that the gain slipped through their fingers.

Edited by Time to raise the rents.

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I like your thinking Wuluf. Here are some comments of my own:

- The landlord is buying an investment rather than an asset so to speak.

- The tenants is buying accomodation and related services that they may not be able to afford as an OO like maintenance.

- In my case, the landlord has access to much cheaper finance than FTB's have and also knowledge and skills in maintenance that the tenants don't have.

- My tenants pay a very good return on my investment, over 6%. So they IMO aren't on the surface getting an advantage off me. But in reality, they are sharing, so therefore are paying less per person that they would be if they bought.

- In principle I agree with this line of thinking, but it's important that tenants use the advantage of renting by hoarding what they save so they can transfer that benefit into home ownership at a later date. If they spend the gain on consumables, they'll find later that the gain slipped through their fingers.

Ah, yes grasshopper but you are forgetting the fact that most recent BTL newbies buy small flats not HMOs.

I agree that there is still scope for profits in HMOs, even at current silly prices.

But could you buy a new build 2 bed flat and turn a profit??

Would you buy a 2 bed new build flat? I think not.

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Ah, yes grasshopper but you are forgetting the fact that most recent BTL newbies buy small flats not HMOs.

I agree that there is still scope for profits in HMOs, even at current silly prices.

But could you buy a new build 2 bed flat and turn a profit??

Would you buy a 2 bed new build flat? I think not.

Well on that note, you have to agree with me on the following point which I was going to add before, but decided not to as I was in a hurry.

- Where there is no disadvantage for the landlord (like having to subsidise), that should errode eventually. The way that will errode is most probably through the landlord's property rising in value, so that they are no longer achieving the yield that they wanted, but as they are in positive cash-flow, their subsidy to the tenants is only apparent if they realise that they are earning less on their capital in the property than they might earn in an equally secure investment.

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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% +
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      • Even
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      • up 5%



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