Why Btl When You Can Get 6.30% Pa Risk Free?

[Flick]

This screenshot is for Greater London.

Do you have the stats for the country as a whole?

[jonpo]

If a Bank borrows 1M and then lends (via fractional reserve banking) 10M holding 0.5M as reserve (via various iterations of depositing and lending to various customers as described on the wikipedia article) they have to pay BOE base rate on 1M and then some interests to the depositors holding the 10M (let's say 4% on average) and then they receive 5.5% from people taking out secured loans (only base rate).

So they pay 5.5% of 1M + 4% of 10.5M (55k + 420k = 475k)

And they receive 5.5% on 10M (550k)

So even if they lend out at base rate they can still make money (75k profit for having *borrowed* 1M, so this is leveraged!).

They could make money even if the lent money for a bit less than base rate.

The point is if the market is at 5.5% if they have 10M deposits they need not borrow any money they could put it in the bank (of England ) and make 1.5% (150K) off the whole 10M. RISK FREE

if they lend it they should demand some extra yield depending on the creditworthiness of the borrower. e.g 300bps for CCC credits like BTL speculators

Edited May 30, 2007 by jonpo

[Guest The_Oldie]

Do you have the stats for the country as a whole?

1989 Q3 to 1994 Q2 shows 18.19% for the UK.

[Flick]

Ahh, this is more like it. I wondered why the bulls had been so quiet of late. Really outdone yourselves tonight on this thread.

Anyway. Bypassing talk about housing for a moment; 6% a year is a bloody good return, especially with close to ZERO risk. Will sticking ten grand in something paying 6% make you rich? No of course not, if you want to get rich you work harder. But the talk I hear from certain posters on this board that saving money is pointless because it's all eroded by inflation is just bull. You ain't going to see a close to guaranteed >6% / year in anything else, barring certain high-yielding stocks. If you're going to knock something, give an alternate suggestion - don't just say it's a shit idea.

Investing in overpriced assets where the year on year growth is driven only by speculation is a sure-fire way to financial ruin.

As I said , I personally think it is a bloody poor return (and by historical standards I believe it is). Yes, it may be good *relatively* compared to other saving accounts, but in real terms you'd be lucky to increase your wealth by more than 1-2% a year with it, and life is really too short for that. That doesn't mean it's stupid to save, far from it.

FWIW most of my dough is in managed funds. A lot more risky I know, but the returns have been very good for the last couple of years.

BTW when refering to the bulls, was I included? I think I'm just a lot less bearish than most the others round here.

[Flick]

1989 Q3 to 1994 Q2 shows 18.19% for the UK.

Looks like buying in at 15% falls would have been near-perfect timing then. Thanks for the info.

[Guest The_Oldie]

Looks like buying in at 15% falls would have been near-perfect timing then. Thanks for the info.

Depends where you would have bought, in Greater London it would not have been so perfect. Besides, the bubble is much bigger this time.

[Nathan]

That screenshot (is for Greater London AND it) only stretches to 2001.

[It is different this time]

I have not used 1998 figures:

I do not know why you thought I was giving 1998 figures.

That's why I thought

This is because many BTLers remortgage their properties... A simple example is:

I bought a property for 40k in 1998 putting 5k down (35k mortgage).

The example you give is of a property you should NOT buy for BTL investment. You have to buy a property that will yield something positive and not negative. If you do not know how to choose properties then you should not get into the BTL business.

Sorry but you can't have your cake & eat it! you were telling us how it still is good to invest in BTL and I have just proven you wrong. There are many muppets out there investing in BTL example I have given and that's why it is different this time the crash will be louder! you can all deny as much as you like but figures I have provided don't lie.

[Flick]

Yep, forget all the graphs rubbish.

Ok, we'll forget the history.

Let's just say that the average house price has ALWAYS returned to 3.5 times the average wage after a boom period and last time it undershot this to less than 3.

Oops, ok then we'll remember it.

then the average house price in my area at least will go from around 180k now to around HALF that in 2012/2013. That's a full-on 50% drop in nominal terms!!!!

I really would like you to be right, but it's never, ever going to happen. I'll stick my neck on the line on that one. If that were to play out over 5 years with 4% inflation we'd be looking at a real correction of around 70+%.

I think you are uber-bear wet-dreaming. But I would be happy to be wrong.

[Tommy]

In the above example the yield is 6.6% before any voids, maintenance or management fees. There is no premium for the the extra risk (and hastle) involved over investing the money in a bond.

What you get is >10% including voids and service charges but not including maintenance and management fees (i said I assumed you were now using an agent). >10% is probably worth the hassle.

The yield could well be 6.6% depends how you calculate it, there are various ways you can do it.

The point about the yield is that it has to be above base rate to be a worthwhile investment and your 6.6% clearly is. (ok, if you included all the things you said are not included it might not be above rate). I would have to see your calculations I guess...

So the question is this - what kind of stupid person puts money into an investment that has a yield that is equal or less than something that is totally risk free?

Well, first of all if you get more than a saving account and you're prepared to go through the hassle to get this tiny bit more you're not stupid it's just a choice.

Secondly, the advantage is that rents will be increasing over time, so if you make >10% now, you probably will make more and more over time. Since house prices might not increase for a few years now and rents are instead likely to go up, this means that even your yield figure is going to improve over time. So, if you like rental yields figure, they are certainly going to improve in a stagnating or falling market.

Your yield would probably become lower if house prices were booming again, but the equity would be instead increasing. So sometimes low yield are not a bad thing if house prices are booming... On the other hand in a stagnating or falling market yields get better and better.

So we are now in the most difficult point: the peak of a housing boom:

- house prices have been increasing like crazy for many years thus bringing the yields down.

- rents have not increased due to the boom thus bringing the yields down.

- house prices are not increasing anymore so you do not see your equity growing.

- rents are low since they are just beginning to pick up now

This is the worst point. From now on yileds should get better (equity might not!).

[It is different this time]

The point I was making, which has so clearly escaped your somewhat limited understanding,...

My limited understanding? Stop throwing your toys out of the pram when clearly proven wrong.

I'm not expecting the armageddon crash that so many here are so certain of. I'd rather look at the facts and figures from an impartial perspective and not get sucked into the doom and gloom group think that so often gets passed off as knowledge.

That's okey then you are not expecting the armageddon crash we won't have one. Of course you'd rather look at the facts, but your facts, not the facts that some muppets out there subsidising their tenants up to £9K to invest in today's miracle market which will clearly collapse thanks to the muppets you choose to ignore.

[Tommy]

The point is if the market is at 5.5% if they have 10M deposits they need not borrow any money they could put it in the bank (of England ) and make 1.5% (150K) off the whole 10M. RISK FREE

if they lend it they should demand some extra yield depending on the creditworthiness of the borrower. e.g 300bps for CCC credits like BTL speculators

In my example, the 10M deposit is what they created with fractional reserve banking with the 1M they borrowed from the bank of england.

You did not understand this. Read my post again. (and maybe also the wikipedia article again).

[Tommy]

That's why I thought

(...cutting out of one of my example...)

that example was an example of a remortgaging chain that would cause problems with capital gain tax when selling the properties.

Sorry but you can't have your cake & eat it! you were telling us how it still is good to invest in BTL and I have just proven you wrong. There are many muppets out there investing in BTL example I have given and that's why it is different this time the crash will be louder! you can all deny as much as you like but figures I have provided don't lie.

You have not proven me wrong. All you have done is find a property that should never be bought for BTL and then proved that this particular property was not a sound investment. I have on the other hand showed you that another property was a sound investment. So there are properties that are good investments and properties that are not. BTL can still be profitable, but you need to chose your properties.

[Tommy]

So to sum up what's been agreed so far on this thread...

BTL was once a good investment and it can be again, once house prices fall enough for rental yields to rise.

True.

However, as things stand at present, the only people considering getting into BTL are complete morons, is that correct?

False.

You can still find a good property that gives a decent profit. You then need to make sure that you at least break even even if interest rates keep climbing so that you are not forced to sell when prices are going down and lose your equity. Then you need to be prepared to make the investment as a long term investment. If prices stagnate or keep rising below RPI then it can work out well even as a short term investment. However if prices start falling then it can only work out well as a long term investment. Also while house prices are falling rents are usually increasing, so as a long term investment it could turn out to be not too bad. Remember that the equity you have only counts when you actually sell the house. If house prices fall by 20% but you sell when they pick up again to the same leve it's as if prices never went down and stagnated for the whole period (and if you wait more they'll actually go up).

So, my final comment is that I think house prices will rise below RPI-X for a number of years but I don not thnk they will fall in nominal terms so...

I might actually want to wait to see what direction the market is about to take, but I would not call morons people who do a BTL investment now especially if they can do their calculations right.

[Tommy]

That's akin to saying that betting on the nags can be profitable so long as you pick the right horse. Oh, if only it were that simple, we'd all be rich beyond our imaginations...

No!

You can do most of your calculations before buying:

- price of the property

- how much properties like that one rent for in that area

- service charges (if any)

- etc...

Some things are left to "fate" like interest rates etc.. (although you can do a fixed rate mortgage), but the data to choose your property right is almost all there.

So it's not at all like betting on horses. The element of luck is not that important. Maths and experience becomes more important.

[Flick]

So to sum up what's been agreed so far on this thread...

BTL was once a good investment and it can be again, once house prices fall enough for rental yields to rise. However, as things stand at present, the only people considering getting into BTL are complete morons, is that correct?

No. thats not correct at all. I don't think we have agreed much tonight. My personal view is that it is a bad time to get into BTL, but that some properties may work ok, and that those than hang in will be just great in the long term.

I must say, I do find it rather amusing how certain posters get all uppity whenever someone dares to compare BTL with other forms of investment e.g. cash savings, gold, etc.

What are they so scared of I ask myself?

You speak in riddles as ever. Care to clarify?

[It is different this time]

You have not proven me wrong. All you have done is find a property that should never be bought for BTL and then proved that this particular property was not a sound investment. I have on the other hand showed you that another property was a sound investment. So there are properties that are good investments and properties that are not. BTL can still be profitable, but you need to chose your properties.

Sorry where is the sound investment? We are talking about today's BTL market not what was bought in 2002 & sold in 2006 with a profit. I have found 1 property because I had time to look into 1, I am sure it wouldn't be difficult to find many more disastrous BTL example if needed.

[Flick]

Thanks for being so candid and taking the time to highlight the cons as well as the pros of property investing...

OK, with the exception of a select few, the vast majority are morons IMO that are no better than 99% of those who reckon they can derive a living from betting on the horses (re: above).

Funny that, a lot of bookies do indeed derive a living from betting on horses. Its the mug punter thing.

I'm sure you could stretch an analogy to the landlord/tenant relationship.

[Tommy]

Well house prices here are around 9 times the average local wage at the moment so it's more bubbly than areas where it's 6 to 7.

Yeah ok, so you can a little bit more with you risky BTL portfolio, but if things go wrong you can't liquidate your assets really quickly (except auction) so there has to be a lot more risk here. Bonds might only give 6.3% but even a portfolio of carefully picked funds would outperform your BTL portfolio so why not do this and get 10% plus (after tax) which is relatively easy.

diversification is the key...

you should have some money in a saving account, some money in stocks, some in BTL, some hedge funds, etc...

If you can get >10% guaranteed with no risks after tax then do it, you would be crazy to do BTL now. However, you'll see that that >10% is not guaranteed and risk free. So some people have experience and trust in the BTL and think of it as less riskly thatn your carefully picked funds. I for example would be very scared to pick a fund. Funds do go down and it's not in my control. However, when I buy I property I have more control. So I see the risk as smaller. True house prices can fall. All you need to do is make sure that you are prepared to (and in a position to be able to) keep the property in the long term.

[Flick]

Sorry where is the sound investment? We are talking about today's BTL market not what was bought in 2002 & sold in 2006 with a profit. I have found 1 property because I had time to look into 1, I am sure it wouldn't be difficult to find many more disastrous BTL example if needed.

Of course it wouldn't. But if you were a LL would you go out looking for a disastrous property? Its hardly an arguament is it?

[Tommy]

Sorry where is the sound investment? We are talking about today's BTL market not what was bought in 2002 & sold in 2006 with a profit. I have found 1 property because I had time to look into 1, I am sure it wouldn't be difficult to find many more disastrous BTL example if needed.

yeah and for each one you find I can find a good one.

As long as you can still find at least 1 good one that you can buy, then it can still be profitable. The fact that some or most properties are bad, does not mean much.

[hankdd]

I feel sorry for the people that supply BTL landlords clothes, t#aty expensive stripey shirt ( two buttons open collar slightly raised, sleeves rolled to expose Rolex) tucked into the tightest jeans since Ray Crebbs of Dallas. T#ats.

But pity the poor tailors when the white teethed, pig shit thick show 20 couples round at the same time X5 driving t#ats go bankrupt.

[Nathan]

Yeah, erm, piecing everything together here, Tommy seems to be saying..

hey, make sure you think long and hard about how you might want to invest. It's a jungle out there and you really need to do your sums. You could get bitten but if you do your sums correctly then you might not. I'm trying to convince myself that i've done my sums correctly, the best thing i can do to console myself is make out that it's simply a matter of an individuals choice to make the decision to take on a load of extra hassle via BTL just to maybe get a better return than a savings account, its a "matter of choice".

yeah, a bad choice

but keep convincing yourself

Next time i need a really long winded way of saying "f*ck me, there's quite a bit of risk with btl lark over savings, (just to maybe get a slightly better return)" then i'll re-read this thread.

[Tommy]

A mug punter will tell you exactly the same thing I'm afraid, everyone reckons they can beat the odds when in reality, very few actually do and everyone has their reasons of course for why it didn't quite turn out the way they had anticipated...

Thanks for being so candid and taking the time to highlight the cons as well as the pros of property investing btw...

OK, with the exception of a select few, the vast majority are morons IMO that are no better than 99% of those who reckon they can derive a living from betting on the horses (re: above).

it's not beating the odds when you can do most of the maths before hand and you also factor in reasonable risks like boe base rate at 6.5% and 3 months void and whatever.

Then of course interest rates could reach 15%, very unlikely now, but then again you can buy government bonds and the governments decides not to pay it back when it expires. Very unlikely but not completely impossible.

I think you're not making any point here. You're trying to prove me wrong without constructing any constructive and coherent argument.

[Flick]

Yes, it was somewhat coded and it doesn't surprise me one bit that you just happen to be the one to pick up on it...

Well as it was clearly me that 'got uppity' about comparing a savings account with btl, it was quite clear, hardly the enigma code.

Why not speak your mind?

Edited May 31, 2007 by Flick