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Are BTL better than Pensions


Nick

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HOLA441
....here is a better take on the real yield, closer to 6%:

http://news.scotsman.com/scotland.cfm?id=988672004

From the article: "In the same period, yields in London have fallen from 7.01 per cent to 5.93 per cent."

Okay,

forget 3.4% if you think it's so biased. How's about ARLA - the Association of Residential Letting Agents : surely you can't argue with them? (HMMM, wonder whether they have vested interests: what? Make letting sound more attracyive? Apart form their ENTIRE membership what possiblle vested interest could these guys have? - go figure).

Still, I'm cool: I'll play by your rules:

All figures are Per Annum

Region_______________GrsYld%___ VoidDays__ NetYld%

Prime Central London ___4.80 ______ 35 ______ 4.34

Rest of London ________ 5.30 ______ 36 ______ 4.77

Rest of South East _____ 5.20 ______ 29 ______ 4.79

South West ___________ 5.10 ______ 28 ______ 4.72

Midlands _____________ 5.80 ______ 27 ______ 5.37

North West ___________ 6.60 ______ 27 ______ 6.11

North East ____________ 6.10 ______ 28 ______ 5.63

Scotland/Wales/NI _____ 6.00 ______ 33 ______ 5.46

All Regions ___________ 5.30 ______ 31 ______ 4.86

ARLA, Review & Index of Returns on Residential Investment. SECOND QUARTER 2004

Average, according to those with vested intererests. Shall we split the diff? 3.4% - 4.5% = ~4%

For an average pension pot oof 23K (FSA figures) leveraged to the max allowed 46K, that's £1,840 per annum rental yield

ie £276 pa difference : THAT'S A WHOLE £5.30 A WEEK MORE IN YOUR RETIREMENT FOLKS. BFD! :D

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1
HOLA442

I'm not trying to say anything particulary clever just that anyone paying off a repayment mortgage with rent money should realise that they pay tax on the monies used to pay off capital.

If you have 25 properties and are paying off an average of £5,000 a year (towards the end of the mortgages.

You will get a tax bill of £50,000 a year on money you have never seen.

Not a problem if your margins are good but if your one of these people who want to subsidise their properties you could be in trouble

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HOLA443

as normal, and pleasently so everyone has gone off at a tangent.

firstly, if mr brown is suggesting you invest your pension into property then that should speek volumes by itself.

SECONDLY, AND I APPOLOGISE FOR SHOUTING, BUT THE DEMOGRAPHICS DO NOT ADD UP. WHO DO YOU THINK IS GOING TO BE RENTING YOUR PROPERTIES, AND MORE IMPORTANT WHO DO YOU THINK IS GOING TO BE BUYING THEM FROM YOU.

IN 20 TO 30 YEARS, THE POPULATION OF THIS COUNTRY AND EUROPE AS A WHOLE WILL BE IN MARKED DECLINE.

WE DO NOT KNOW WHAT INTEREST RATES WILL BE IN 20 YEARS. WE DO NOT KNOW WHAT THE COST OF A HOUSE WILLE BE, OR WHERE THE STOCK MARKET WILL BE, BUT THE ONE THING WE DO KNOW IS THE DEMPGRAPHIC SITUATION. AND THAT IS NOT GOOD. THIS COUNRTY LIKE THE REST OF THE WESTERN WORLD IS HOPLESSLY OVER AGED. AND THAT SPELLS REAL DISASTER. EVERYONE IN GOVENMENT KNOWS IT AND SO DO THE FINANCIAL AUTHORITIES.

stopped shouting. i also like the guy who said that when everyone said equitable life was a safe bet, and was let down, then standard life and was let down. well just for your info, i think you will find the papers telling you that property is a sure fire bet. somthing in that i think.

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HOLA444

Just a further note

I like property.

Its the only investment I have ever made a good return on.

I am still holding some.

but overstating its virtues has dragged in a lot of unfortunate mugs who are going to get stuffed in the next few years.

To suggest that after paying the inital deposit there is no cost to the landlord and that the tenant will buy the place for you is plain reckless.

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HOLA445
Sledgehead........You're normally a balanced poster, ..... but I feel compelled to correct the error in your post:
"Residential yields (rent as a proportion of capital value) are at record lows of 3.4 percent in the U.K...."

Talk about the other side of the vested interest coin!

Lehman's have probably found some new build flat's on the Thames and found they're letting at 3.4%.

http://news.scotsman.com/scotland.cfm?id=988672004

From your scotsman article: "BUY-TO-LET landlords in Scotland are achieving the best returns in the UK on their investment, according to a new report. "

Me distorting information! WE DON'T ALL LIVE IN SCOTLAND YERKNOW!

Again, this from ARLA, The Association of Letting Agents (a soc whose membership have a vested interest in inflated rental yields)

Region_______________GrsYld%___ VoidDays__ NetYld%

Prime Central London ___4.80 ______ 35 ______ 4.34

Rest of London ________ 5.30 ______ 36 ______ 4.77

Rest of South East _____ 5.20 ______ 29 ______ 4.79

South West ___________ 5.10 ______ 28 ______ 4.72

Midlands _____________ 5.80 ______ 27 ______ 5.37

North West ___________ 6.60 ______ 27 ______ 6.11

North East ____________ 6.10 ______ 28 ______ 5.63

Scotland/Wales/NI _____ 6.00 ______ 33 ______ 5.46

All Regions ___________ 5.30 ______ 31 ______ 4.86

ARLA, Review & Index of Returns on Residential Investment. SECOND QUARTER 2004

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HOLA446
Shall we split the diff? 3.4% - 4.5% = ~4%

No, I don't want to split it, but thanks anyway. I'm getting 6.1% & my tenants save on similar properties I see in agents windows. So I'll offer another explanation (especially addressing why even ARLA don't know the real yield).

In Australia, landlords by law have to send their tenants deposit into what I believe is called "The Rental Bond Board". The RBB returns the money when the landlord and tenant are in agreement at the end of a tenancy.

One of the very good functions of the RBB is that they also know the rent of each tenanted property. So they're also able to provide stats that can be relied up by the market.

Unfortunately the UK is lacking in this regard and nobody is taking stats from private landlords.

So what I strongly suspect is happening, is that the people who have found their places difficult to rent, or more management intensive than they realised, or foreign investors buying from outside the country etc have used agents. While a lot of the best and easiest to rent places have been self-managed by the landlords.

So I believe RICS is the best current solution to the yield argument because they have the benefit of discussing rents with agents, but also constantly surveying BTL properties both when bought and when re-mortgaged. Each time, they have to provide a rent figure for the bank. So on some they know the rent (the re-mortgaged ones) and on others (the purchases) the numbers are included as estimate. About the closest thing I think there is to anything reliable in the UK just now.

BTW. New legislation is in going through the Lords now, due to be made law in August next year, that calls for landlords in the UK to either deposit their tenants money with a govt approved organisation or to insure the money. This will create a situation where finally, reliable stats can come out. Don't be suprised if when it happens, the yield was higher than you thought.

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HOLA447

ill say it again.

can you bulls please explain why it is a good idea to invest long term into an asset,that requires an increasing population growth to sustain ,and increase that asset. when it is a know fact that the population over the long term is declining.

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HOLA448
To suggest that after paying the inital deposit there is no cost to the landlord and that the tenant will buy the place for you is plain reckless.

I agree to a certain extent that it's very important to speak truthfully. And I agree that the tenant is effectively buying the place for you. But I also believe that it's much more complicated than that.

Your comments stating 80% tax was clearly wrong. I think you should let everyone know that.

You are right to say that money paid into a mortgage from rental income is money that has a tax liability on it though. I earned 80K in rental profits last year and paid 16% tax on it after taking into account the allowances allowed against property income and the allowances allowed on individuals. So even 40% is a very strong statement to make.

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HOLA449
I accept there are risks in property investments. But I'm certain that the govt has capped the borrowing allowed at 50% because they know there is very little chance on that gearing for the bank to ever want to repossess. Therefore the pension owner will always have the chance to sell at the right time (rather than being forced by a bank).

Who know's whether they'll sell at the right time or not though, that is another question.

There are BIG risks in buying, double geared, into a single property at a time that may (or may not) prove to have been just after the top of a bubble.

TTRTR, you are PROBABLY right that banks won't repossess this property - but this is NOT the only risk.

If I told you I'm betting my entire pension on BT shares you'd presumably think I was insane... why would betting everything on the future of 22 Acacia Avenue, Bocastle, be any smarter?

I don't wish to trivialise the disaster that struck Bocastle but these things do happen... and I doubt anyone can correctly forecast whether any 'act of God' will strike their property in the next 25 years. If it does, the rent is gone, the mortgage hasn't and you spend the next three years arguing with insurance companies about whether they have to pay out or not.

Just for 'a bit of fun' - since 30/11/84 (nearly 20 years, the longest data I have easily to hand) an ungeared exposure to BT shares has made a total return of 787% while the Halifax Property index has made 371% (a double geared exposure would have made 742%). That is, even given the latest boom the 'average property' still hasn't matched BT's returns.

You could argue I haven't added rental income to the equation - but I haven't added mortgage interest, maintenance costs, solicitors fees, agent's fees, void periods etc either. And I would suggest that most of the property return has come in the last few years (when I insist there was a bubble and you insist there was a ONE-OFF adjustment to a new paradigm).

Now I picked BT largely at random (as a major UK company that anyone COULD have decided to buy 20 years ago without being a stockmarket wizard) but the FTSE All Share index (of 'the equity market' in general) made 734%.

You COULD have sold BT in the tech boom for a 5500% profit.

The moral of the tale is that only a risk-loving nut-job would punt their pension (double geared) on the future of one residential property. More realistically, a sophisticated investor (with a BIG pension pot - so not too many people then) might punt a much smaller proportion of his pension on residential property.

Only desperate bulls hold out much hope for Sipps to 'rescue' the market.

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HOLA4410

Looks like a few got out of bed on the wrong side today....

and I doubt anyone can correctly forecast whether any 'act of God' will strike their property in the next 25 years. If it does, the rent is gone, the mortgage hasn't and you spend the next three years arguing with insurance companies about whether they have to pay out or not.

I was starting to think before I read this that you'd forgotten about insurance. And don't worry so much, the banks have a lot of muscle with insurance companies, lost rent in a disaster is insured (as a condition of the mortgage) and the bank won't give up on restoring the property either.

We can't predict the future, that's why we have insurance.

Your choice of BT was probably about as random as my typing. BT along with other phone networks have spent the last 20 years going through and emerging market of their own.

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HOLA4411

Thanks TTRTR,

My knowledge of the BTL market letting me down again.

Strange that nobody mentions how much they have to pay to insure against losing their rents etc when calculating their rental yields etc (is this because it is all tied up in the interest rate they pay or is one of those numbers they'd rather forget?).

While the rent might be covered it is not at all clear that the insurers will pay out the capital value on an 'act of God', which is perhaps slightly more important - even if the bank agrees to help you spend ages arguing with them.

I would say the BIG risk though (I know you don't agree) is double gearing your entire pension fund into a 30% overvalued market and then banking on historic 7% average nominal returns going forward (i.e. your pension is knackered unless we are in a new paradigm).

You don't seem to have addressed the other (I would say more important issues) - ignore BT, a FTSE All Share tracker fund would have pretty much matched a double geared exposure to property, despite the recent boom.

And what about my 'moral of the tale', is that just not worthy of comment?

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HOLA4412
...maybes i have lost touch with finances in the real world....STILL, I'VE ONLY GOT PROPERTY TO THANK FOR THAT.

.... YOU SAID IT : any clues what that is called? Here's a clue : B_BBL_ TH_NKING

SLEDGEY.........

What has a highly profitable business (my rentals) got to do with bubble thinking? ie even if the alleged bubble burst i would still have this income.

regards BBB. ;)

ps: TTRTR.......feel free to comment mate , they normally hunt in packs, perhaps its time we fought back as a pair occasionally .......LOL. ....you've obvously got more patience, to deal with unfounded spin , than i have.

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HOLA4413
Only desperate bulls hold out much hope for Sipps to 'rescue' the market.

Time we opened a dedicated thread on this.. .... come to think of it, maybe it's time for more categorisation...this thread seems to have engaged minds / attention so here would be a good point to direct you to an new off topic thread I'm creating here:

CATEGORISATION

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HOLA4414
The moral of the tale is that only a risk-loving nut-job would punt their pension (double geared) on the future of one residential property. More realistically, a sophisticated investor (with a BIG pension pot - so not too many people then) might punt a much smaller proportion of his pension on residential property.

I didn't miss it, I ignored it as it's obviously an opinion as opposed to an attempt to prove something.

a FTSE All Share tracker fund would have pretty much matched a double geared exposure to property, despite the recent boom.

That is probably correct. But tell me, since property has become a more popular and viable investment (since the 1988), why shouldn't a person feel they want to add it to their pension portfolio?

It seems to me a good idea, but I hope they don't buy for the sake of buying, I hope they select carefully.

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HOLA4415

BBB

as you will have surmised this site is rather confused.

it does seem to be dominated by people who wish there to be a crash. and therefore lots of self validation. the reason they wish there to be a crash is because they missed out heavily on making money out of the boom. and if it crashes they can join the next boom at the beginning.

there are others like myself who actually try to get opinions out of people to try and judge which way the market might go.

there are otheres like yourself who have made money out of this boom.

and then there are the nutters.

the joy ,of couse ,is that we can all insult each other with impunity.(as long as webmaster doesnt take offence).

the real question though, is how are we all going to make money now, considering the precarious nature of the market.

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HOLA4416
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HOLA4417

HEDI..........

i will stick to how i've always made money, through descent yielding rentals. think of any successful business, do they ever go on about what their nett assets are? vey rarely. nett profit is the true measure of a succesful business.

regards BBB.

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HOLA4418

HEDI

Just seen your added post there. yes i agree, no one takes any heed of what you can do with property in reality.they much prefer theory and history lessons. thats why i havent re-buffed some of the arguments on here. if they choose to be negative, and spin every thing round as such,thats their loss, not mine. why bust a gut trying to change them? its their perspectives that need changing, not their views. theres only themselves who could do that.

regards BBB.

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HOLA4419

Sorry to drag this back up old bean, but I don't like being accused of bias when all I'm doing i squoting disclosed sources:

Sledgehead,...Did you wake up on the wrong side this morning? You're normally a balanced poster......but I feel compelled to correct the error in your post:

You say my source is biased and by implication I am:

Talk about the other side of the vested interest coin!

May I suggest you remove the plank from your own eye before you try taking the splinter from mine:

Your quote:

From the article: "In the same period, yields in London have fallen from 7.01 per cent to 5.93 per cent."

Your source:

http://news.scotsman.com/scotland.cfm?id=988672004

... and what's their source? From this article:

"...according to specialist buy-to-let broker Landlord Mortgages. "

The words biased hypocrite springs to mind

________________________________________________________________

All figures are Per Annum

Region_______________GrsYld%___ VoidDays__ NetYld%

Prime Central London ___4.80 ______ 35 ______ 4.34

Rest of London ________ 5.30 ______ 36 ______ 4.77

Rest of South East _____ 5.20 ______ 29 ______ 4.79

South West ___________ 5.10 ______ 28 ______ 4.72

Midlands _____________ 5.80 ______ 27 ______ 5.37

North West ___________ 6.60 ______ 27 ______ 6.11

North East ____________ 6.10 ______ 28 ______ 5.63

Scotland/Wales/NI _____ 6.00 ______ 33 ______ 5.46

All Regions ___________ 5.30 ______ 31 ______ 4.86

ARLA, Review & Index of Returns on Residential Investment. SECOND QUARTER 2004

CAVEAT : Please be aware that ARLA, the Association of Residential Letting Agent has a membership with vested interests in residential letting.

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19
HOLA4420

TTTR

The reason you are paying 16% tax on the money you pay your lender is that most of the money you pay is interest which is an expense and not subject to tax.

Example 1st year of mortgage:-

Interest £7,500

Repayment £ 500

Total paid to lender £8,000

Tax due £500 x 40% £200

Last year of mortgage

Interest £ 400

Repayment £ 7,600

Total paid to lender £8,000

Tax due £7,600 x 40% 3,040

But hang on where does the money to pay your tax come from you have already paid tax on it at 40%

That’s where I get my effective rate of 80% from

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HOLA4421
think of any successful business, do they ever go on about what their nett assets are?  vey rarely.

Wrong: investment companies, property developers, oil companies, mining and extraction companies all bang on about capital appreciation & funds under management / land banks / oil reserves / mineral reserves. It is these things that affect the stock price of companies within these sectors.

I am beginning to see why you don't like investing in companies...

nett profit is the true measure of a succesful business.

1 ) History is littered with bankrupt but profitable businesses.

2 ) What good is a profitable business if its return on capital employed is below acceptable levels?

You're showing yourself up mate.

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HOLA4422
History is littered with bankrupt but profitable businesses. Your showing yourself up mate.

SLEDGEY............

I'm intrigued how a landlord (after all ,it is BTL we're talking about) could be profitable but bankrupt. please bear in mind my original quote to HEDI (ie i was speaking about my business's nett profit, nothing to do with nett assets)

this arrogance of yours is getting a trifle trying. i personally think your lack of understanding about the BTL world is starting to show in your posting, and more so in your personal comments.

i look forward to your reply.

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HOLA4423

Agreed Sledgehead,

In commercial property investment, one of the key aspects in assessing the covenant strength of the tenant is their net asset base.

In the case of properties let to weaker tenants where a deposit is held, the lease often incorporates a provision whereby it is only released when the tenant can demonstrate net assets of five times the annual rent for three consecutive years.

BBB - you are quite right in your assertion that 'cashflow is king', but remember a business or individual trading in a position where liabilities exceed net assets is effectively insolvent.

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HOLA4424
But tell me, since property has become a more popular and viable investment (since the 1988), why shouldn't a person feel they want to add it to their pension portfolio?

It seems to me a good idea, but I hope they don't buy for the sake of buying, I hope they select carefully.

HI again TTRTR,

Always good to debate with you.

The two obvious answers to this are:

1) Most people, by the age of retirement, already have a pretty hefty exposure to the residential property market (through the house they live in - and probably now own outright).

Realistically this probably dwarfs the value of their other investments (shares etc), except, perhaps, their pension pot.

Their 'wealth' is massively reliant on the value of their property.

To make their pension ALSO massively reliant on residential property goes against the basic principles of smart investing (diversification etc).

Any financial adviser who recommended such a strategy could expect to end up in deep doo-doo with the FSA (and possibly facing major compensation claims in the future).

2) Within their pension pot the amount they NEED to devote to a BTL property is very high for all but the wealthy few. If an average house is currently 'worth' £160k then you would need to devote £80k of your pension pot to this investment. Now assume you don't want more than 10% of your pension in residential property (to limit the risk of price crashes, falling rents, void periods etc) then you need a pension pot of £800k. This is not many people.

Perhaps you might argue the average BTL is not the average house - it is at the cheaper end of the market, but the principle is much the same (if the average is only £80k you still need £400k in your pension pot BEFORE you buy the property).

While they might WANT to consider adding residential property to their pension, it is not an especially wise decision for most people (especially not as a bubble starts to unwind).

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HOLA4425

History is littered with bankrupt but profitable businesses. Your showing yourself up mate.

SLEDGEY............

I'm intrigued how a landlord (after all ,it is BTL we're talking about) could be profitable but bankrupt. please bear in mind my original quote to HEDI (ie i was speaking about my business's nett profit, nothing to do with nett assets)

this arrogance of yours is getting a trifle trying. i personally think your lack of understanding about the BTL world is starting to show in your posting, and more so in your personal comments.

i look forward to your reply.

You were making generalisations about business not me. I repeat:

History is littered with bankrupt but profitable businesses.

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