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Adam

Money Morning

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Amateur landlords are the new tech investors. What on earth do I mean by that? Let me explain...

Buy-to-let borrowing is soaring. Buy-to-let mortgage specialist Paragon reports that lending activity is 60% higher than a year ago. The Council of Mortgage Lenders says buy-to-let lenders issued a record 130,400 loans in the second half of 2005. Investment property now accounts for 8% of the total outstanding mortgage market.

And with the Association of Residential Letting Agents claiming that rental property currently generates an annual return of 22.7%, it’s no surprise people are flocking to buy.

You heard correctly - a 22.7% annual return. That sounds good. Almost too good to be true…

And unfortunately, it is to good to be true. You can take my word for it, but looking at the maths is a good way of showing why you should never trust statistics from a partisan source. So here’s how Arla composes that juicy double-digit return.

They assume that the landlord is buying a property priced around £285,315, with a 25% deposit. So the landlord pays £77,035 up front and takes on a mortgage of £213,986.

Assuming a gross annual rental yield of 4.99% - which is apparently the average yield achieved by Arla’s members – the landlord takes in annual rent of £14,233.

Of course, a property isn’t let out all of the time, so Arla throws in a month-long void period, again based on the average reported by their members. That cuts the annual rent by £1,061 to £13,162.

But at 6.25%, mortgage interest repayments come in at £13,374. So that means in the course of a year (not including any repairs, broken boilers, or dodgy tenants), the landlord is actually making a grand loss of £212.

So where on earth does that 22% annual gain come from?

Well, here’s the clever bit. After all those meticulously calculated numbers (right down to the last £1), Arla makes a whopping great leap of faith. It assumes that every year, for the next five years, property values will rise at 8.8% a year. That means that £285,000 property would be worth nearly £435,000 by the end of 2010.

So even though the landlord has lost money every year on the rental income, by the end of five years, the value of his initial deposit (£77,035 remember) has more than doubled. And that’s how you get a 22% annual return on a flat that loses the owner money every year.

This is clearly fantasy. Arla says the 8.8% is based on the national average rise between 1984 and 2004. But if you invested in property at the start of 2005, you would have been lucky to see any house price growth at all. And even the most optimistic forecaster would be stunned if house price growth hits anywhere near 8% this year.

Worse still, the figure contradicts the group’s own findings. In the introduction to the report, Arla reports that its members reckon the average “capital asset value” – ie, the price - of rented homes fell 1.5% during the period. Meanwhile, the average value of rented flats “throughout the country” fell, by as much as 9% - in just three months. If you annualise that, that’s a fall of 36%.

So there you have it. Don’t fall for the hype – buy-to-let is officially a loss-making investment. And remember to look carefully when vested interests wheel out their statistics.

And don't expect things to get any better. UK consumers can't afford to pay higher rents. They are already struggling with soaring energy prices and ever-increasing council tax bills - as the record number of UK bankruptcies demonstrates.

And it's not just consumers feeling the pain. Banking giant Barclays saw bad debt provisions surge 44% to £1.57bn during 2005, driven mainly by overstretched UK borrowers defaulting on their credit cards.

Let's think about that for a minute. That's £1.57bn that Barclays expects it will never see again. Annual turnover for the entire group came in at £18bn, so that's not peanuts by any manner of means.

That money doesn't just vanish into thin air. Someone must be benefiting from it - and subscribers can find out who, by reading MoneyWeek's recent debt cover story. Just click here: How to profit from bankruptcy (http://www.moneyweek.com/file/7796)

And if you’re not yet a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek. (http://www.moneyweek.com/file/194)

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How on earth do ARLA think they can get away with suggesting nearly 10% yoy growth?

At least they are actually confirming what we already know, BTL is a mugs game at the moment.

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My father is becoming a BTL landlord soon.

He bought a flat for 170K in manchester.

Expected to get £1000pcm.

Now revised down to about £750pcm

Cash flow is negative. He admits this.

He expects capital appreciation over the next seven years.

I have no problem with anyone being a landlord it's a free country.

But now?

Read my sig:

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Its like I said the other day about Rightmoves ramping - its plain & simple fraud, & why the "authorities" haven't stamped it out shows their apathy to the economy & peoples welfare in general. If I started a company promising huge returns for investors, even though the numbers clearly illustrated that it wasn't true, I'd be banged up in prison for God knows how long. This seems no different to me, convincing people to part with their hard earned (or should that be easily borrowed?) cash with a tissue of lies, so that someone else benefits from it. They are the epitomy of Confidence Tricksters.

Edited by Bubble Pop Electric

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  • 302 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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