Lure 'o' Btl - Anecdotal

[Levy process]

In the last week, I've heard two people I know arranging to buy new houses, but keep the old one on as a BTL. More people are muttering about it. Absolutely no fear of HPC amongst the people I know. No idea where they're getting the cash either.

[AteMoose]

its whats keeping the market up, the idea is the rent pays off the morgage, and you end up with an income when you need to retire.....

[Time to raise the rents.]

This must be partly down to the spread of knowledge that the tax office took a new position a couple of years ago that the value of the existing property when first let forms the basis for the loan that's interest is tax deductible.

So you bought a place in 1995 for 100k. Under the old rules, a 100k loan's interest would be deductible. Under the new rules, it's worth 400k when it was first let, so the owner has therefore put 400k into their rental business, so a loan's interest up to 400k is deductible.

Under the old rules, it was better to sell, buy yourself a new place, then buy a new BTL. Many people wouldn't have done that, they would have just moved.

Under the new rules, you don't need a buyer, just a lender and a tenant. You can move tax efficiently & become a landlord. IMO many people will do this & realise the benefit of being a landlord & maybe even buy another BTL.

[Hopeful FTB]

its whats keeping the market up, the idea is the rent pays off the morgage, and you end up with an income when you need to retire.....

I know 4 people who have done this (all have more than 300k in mortgages)- so, have they been very financially astute or not?

[Time to raise the rents.]

This must be partly down to the spread of knowledge that the tax office took a new position a couple of years ago that the value of the existing property when first let forms the basis for the loan that's interest is tax deductible.

So you bought a place in 1995 for 100k. Under the old rules, a 100k loan's interest would be deductible. Under the new rules, it's worth 400k when it was first let, so the owner has therefore put 400k into their rental business, so a loan's interest up to 400k is deductible.

Under the old rules, it was better to sell, buy yourself a new place, then buy a new BTL. Many people wouldn't have done that, they would have just moved.

Under the new rules, you don't need a buyer, just a lender and a tenant. You can move tax efficiently & become a landlord. IMO many people will do this & realise the benefit of being a landlord & maybe even buy another BTL.

Quoting myself, but who cares.....

These rules add fuel to the HP fire IMO by making more places available to tenants & less available to buyers. But why would I object to that? I am after all a bull on this forum!

[BillyShears]

I've heard similar. Now everyone is convinced a crash is impossible, why not leverage to the hilt and fill your boots. Classic disaster scenario.

If they get repossessed and the sale price of the BTL house doesn't cover their mortgage, will the lender come after the other house?

Billy Shears

[Guest Guy_Montag]

This must be partly down to the spread of knowledge that the tax office took a new position a couple of years ago that the value of the existing property when first let forms the basis for the loan that's interest is tax deductible.

So you bought a place in 1995 for 100k. Under the old rules, a 100k loan's interest would be deductible. Under the new rules, it's worth 400k when it was first let, so the owner has therefore put 400k into their rental business, so a loan's interest up to 400k is deductible.

Under the old rules, it was better to sell, buy yourself a new place, then buy a new BTL. Many people wouldn't have done that, they would have just moved.

Under the new rules, you don't need a buyer, just a lender and a tenant. You can move tax efficiently & become a landlord. IMO many people will do this & realise the benefit of being a landlord & maybe even buy another BTL.

I think you credit the general population with too much knowledge on tax law. I think most people do this because there mate has done it - eventually it might get back to a tax lawyer along the line. Though I may be wrong.

But surely this is wide open to fraud, can I not get someone to "value" my subsiding, ex-council flat in the Gorbals at £500k? After all there seems to be little or no regulation of estate agents.

[lulu]

I know 4 people who have done this (all have more than 300k in mortgages)- so, have they been very financially astute or not?

Sadly I think probably yes, the government are going to be desperate to not let anything too bad happen here no one is going to put interest rates up if it means the whole property market crumbles.....

Its these wallies that are being protected and FTB's are getting shafted from every angle (well from what I can gather). I dont have a hugh amount of sympathy with the STR's aparently loosing money but it is criminal what is going on with FTB's just now.

[Guest Winners and Losers]

Quoting myself, but who cares.....

Why change the habit of a lifetime.

[mercenarul]

The two people I know who needed to move house both ended up doing this, not because either of them wanted to go into BTL but because they could not find a buyer after months of trying to sell. Both houses were not over priced either.

They were advised to rent it out till the market picks up again by their EA's. One now has a gross yeild of 4.5% and the other 4.2%.

One also MEWed for a new car and the deposit for her new place in the process. Still I think she just has her head above water financially at the moment. An IR rise could change that very quickly though.

[cupidstunt]

I've heard similar. Now everyone is convinced a crash is impossible, why not leverage to the hilt and fill your boots. Classic disaster scenario.

ditto

If they get repossessed and the sale price of the BTL house doesn't cover their mortgage, will the lender come after the other house?

Billy Shears

Yep - From Landord to DSS tennant in one easy move!

[Tester]

TTRTR is absolutely correct.

I keep harping on about this but until those tax rules are changed BTL wins.

Lobby your MP to get the rules changed.

[Time to raise the rents.]

I think you credit the general population with too much knowledge on tax law. I think most people do this because there mate has done it - eventually it might get back to a tax lawyer along the line. Though I may be wrong.

But surely this is wide open to fraud, can I not get someone to "value" my subsiding, ex-council flat in the Gorbals at £500k? After all there seems to be little or no regulation of estate agents.

I disagree. Anyone contemplating this move would ask the questions to understand the impact. Once they realise they can extract a large tax deductible loan out of their existing place, the deal is pretty much sealed.

People are smarter than you give them credit for and the internet makes finding out the answers that much easier.

I should also add that there are two further tax inventives to let your existing place out. One is that you are CGT free for three years after you move out. Only then does a CGT calculation start.

The other is that you are allowed what is called "lettings relief" against any taxable CG when you sell. Lettings relief is 40k for a single person & 80k for a couple.

So a couple, letting their existing place, can extract the cash they need & claim the interest against the rent, then have no CGT to worry about for many many years. Once they sell, the CGT is likely to be so small that they'll be laughing at anyone who didn't know or do this.

Knowledge is a powerful thing.

Edited May 9, 2006 by Time to raise the rents.

[Guest horace]

The tax issue is summed up here>>>

http://www.taxationweb.co.uk/articles/article.php?id=125

h.

[Guest Guy_Montag]

I disagree. Anyone contemplating this move would ask the questions to understand the impact. Once they realise they can extract a large tax deductible loan out of their existing place, the deal is pretty much sealed.

People are smarter than you give them credit for and the internet makes finding out the answers that much easier.

I should also add that there are two further tax inventives to let your existing place out. One is that you are CGT free for three years after you move out. Only then does a CGT calculation start.

The other is that you are allowed what is called "lettings relief" against any taxable CG when you sell. Lettings relief is 40k for a single person & 80k for a couple.

So a couple, letting their existing place, can extract the cash they need & claim the interest against the rent, then have no CGT to worry about for many many years. Once they sell, the CGT is likely to be so small that they'll be laughing at anyone who didn't know or do this.

Knowledge is a powerful thing.

:angry:

[BillyShears]

Quoting myself, but who cares.....

These rules add fuel to the HP fire IMO by making more places available to tenants & less available to buyers. But why would I object to that? I am after all a bull on this forum!

Yes, but if there are more places available to tenants then competition keeps rents down. And if rents are kept down, then BTL does not make long term financial sense. However, the people quoted in this thread are not attempting to make a decent return on the rented property, but are trying to tread financial water until they can sell the house for what they believe its worth. Hence they are probably going to accept a lower yield than a professional landlord will because they are not expecting a profit. And they may even be prepared to accept negative cashflow, for example if they cannot afford to service mortgages on both houses if there's a void, putting potential tenants into a stronger bargaining position. If enough houses enter this sales/BTL hyperspace, it's possible that professional landlords will get squeezed considerably.

Billy Shears

[Time to raise the rents.]

Yes, but if there are more places available to tenants then competition keeps rents down. And if rents are kept down, then BTL does not make long term financial sense. However, the people quoted in this thread are not attempting to make a decent return on the rented property, but are trying to tread financial water until they can sell the house for what they believe its worth. Hence they are probably going to accept a lower yield than a professional landlord will because they are not expecting a profit. And they may even be prepared to accept negative cashflow, for example if they cannot afford to service mortgages on both houses if there's a void, putting potential tenants into a stronger bargaining position. If enough houses enter this sales/BTL hyperspace, it's possible that professional landlords will get squeezed considerably.

Billy Shears

Yes a fair point, but IMO it just goes further to debunk the bear myth that a good yield is a required part of a BTL deal.

A person first letting their 400k place that they bought for 100k & remortgaged may just need to cover a mortgage of 300k which would mean a lower yield is acceptable to them.

They may be very happy that their tenant is paying the mortgage and they're moving for free! They may also reason that HPI will pay them their return on the portion of their equity not getting a return from the rent (say for arguments sake that 100% of the rent goes to the expenses, leaving 100k giving no cash return).

Why buy it at the shops when you can make it at home for free??????

Their acceptance of a low yield makes my places worth more. Why would I be concerned about that? It's a given rule of economics that an asset will be valued highest by those that can put it to best use. If best use is simply being able to move house (as opposed to looking fr the best yield), so be it.

And you lot keep saying it's no different this time. The number of differences are alarming!

[Tester]

Again, I concur with TTRTR.

If there is a large fall in house prices the BTL landlords, including me, would get in there before the First Time Buyers.

What are you going to do to stop me buying your future home?

To stop BTL the tax incentives must be stopped.

[Guest Guy_Montag]

So apart from removing tax breaks, what else would mess up you BTLers & open the market up to us FTBers?

[binkybonka]

But surely this is wide open to fraud, can I not get someone to "value" my subsiding, ex-council flat in the Gorbals at £500k? After all there seems to be little or no regulation of estate agents.

Sure, but you will find valuers and surveyors have a little more to lose and so produce relistic valuations

[right_freds_dead]

I know 4 people who have done this (all have more than 300k in mortgages)- so, have they been very financially astute or not?

about as astute as putting 300k on red.

they have no idea and its a gamble through and through.

banker wins either way.

[MarkG]

If there is a large fall in house prices the BTL landlords, including me, would get in there before the First Time Buyers.

If there is a large fall in house prices, the amateur BTLs will be bankrupt. And why will a professional landlord be buying houses that are dropping in value by 10% a year?

[frugalista]

In the last week, I've heard two people I know arranging to buy new houses, but keep the old one on as a BTL. More people are muttering about it. Absolutely no fear of HPC amongst the people I know. No idea where they're getting the cash either.

This is a very bearish sign IMO.

They are hanging on to the old property because they know or suspect it will be hard to sell (for a good reason -- the price).

A good way to judge whether to hang on to an existing asset e.g. a rental property is to ask oneself "would I buy it at the price I could sell it at". i.e. if you were looking for a BTL, would you buy your current property at the price you are selling it for, and think that was a good deal? If the answer is no, you should sell.

I suspect the answer is no in many cases.

At some point people are going to get fed up with tenants moaning on the phone, void periods, management fees etc. and get shot at a loss. Either that, or it will bankrupt them. Result: loads of underpriced property floods the market.

Remember:

Home ownership demand = genuine requirement for shelter + speculative demand

If this trend is not an example of speculative demand, I dunno what is.

frugalista

[Time to raise the rents.]

This is a very bearish sign IMO.

They are hanging on to the old property because they know or suspect it will be hard to sell (for a good reason -- the price).

A good way to judge whether to hang on to an existing asset e.g. a rental property is to ask oneself "would I buy it at the price I could sell it at". i.e. if you were looking for a BTL, would you buy your current property at the price you are selling it for, and think that was a good deal? If the answer is no, you should sell.

I suspect the answer is no in many cases.

At some point people are going to get fed up with tenants moaning on the phone, void periods, management fees etc. and get shot at a loss. Either that, or it will bankrupt them. Result: loads of underpriced property floods the market.

Remember:

Home ownership demand = genuine requirement for shelter + speculative demand

If this trend is not an example of speculative demand, I dunno what is.

frugalista

Very bearish? Yet in the same post it's a sign of speculative demand!!!

Double speak if ever I heard it.

So apart from removing tax breaks, what else would mess up you BTLers & open the market up to us FTBers?

I have a few ideas, but I'll be keeping them to myself for a while.

[BillyShears]

Again, I concur with TTRTR.

If there is a large fall in house prices the BTL landlords, including me, would get in there before the First Time Buyers.

What are you going to do to stop me buying your future home?

To stop BTL the tax incentives must be stopped.

In a rising market rental yields can be small and the investment can make good financial sense as capital gains can make up for a shortfall in rental yield. In a falling market, for an investment to make good financial sense, the rental yields have to be (compared to current yields) very large to make up for capital losses. A person buying a house to live in is affected only by the actual price, and hence can buy into a falling market before the bottom. As an example, this is the kid of target house that I could imagine myself buying:

http://www.rightmove.co.uk/viewdetails-696...pa_n=1&tr_t=buy

I could make an offer at asking price today if I wanted to and pay off the mortgage in about 10 years. But while semis have sold in that street for 130K, the last one to sell was 100K. I haven't yet checked out why that is (it might be the house for sale in that street with half a garden and an electrical substation taking up the other half ), but I'm watching prices to see what happens. BTW, that house has been on the market a long time and has had its price reduced twice. I suspect that there is something wrong with it, or the market in my postcode area is even worse than it appears.

If put up for rent, that house would probably achieve a rent of £550pcm. (That's on long term prices, not the shocking lower than typical prices in the property section of Monday's Leicester Mercury which would probably put it at £500). Assuming a 7.5% gross yield to make it a decent investment in a static market, £550pcm means a "worthwhile" price of £88000. If the price dropped to £100K, I'd definitely start discussions with my family concerning buying it.

But I think to really predict what would happen, we need to think about different types of BTL. The sheeple BTL would be put off by stories of falling prices and sob stories, and wouldn't reenter the market until it's too late while going up again.

The really canny BTL would be watching for the bottom of the market, so it would be possible to beat them to houses while they held on to their wealth waiting for the best time to buy.

That only leaves a proportion of BTLs who would be likely to jump in on a falling market while yields are still not high enough to justify the investment and the market is still falling. How many of these are there? Enough that all the houses will be sown up just before FTBs can buy them? I doubt it.

Billy Shears

Edited May 10, 2006 by BillyShears