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

[Flick]

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.

"constructive and coherent argument." - whoops apolcalype?

Take it you haven't been around here long Tommy? The guy is an 'eccentric'

Edited to less inflammatory insult

Edited May 31, 2007 by Flick

[It is different this time]

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

For me that's enough for the night, I suggest you find a good one & I'll check how good it is tomorrow. the rules are;

1998 doesn't count

Buying 2002 & selling 2006 has got nothing to do with this topic neither.

Just find a BTL property that is on the market today and it is profitable to BTL. You'll have to clearly put the figures, like I did, so everyone can see how profitable BTL. You never know if you convince me I might go out & buy 3 BTL instead of investing in bonds for measy 6.30%!

[b0rk]

I wouldn't dispute your figures, but surely the only thing you have proven is that BTL is financial suicide on that particular property?

I don't know the area at all, but could you make the figures work by buying this:

http://www.rightmove.co.uk/viewdetails-153...=1&tr_t=buy

or this:

http://www.rightmove.co.uk/viewdetails-152...=1&tr_t=buy

http://www.rightmove.co.uk/viewdetails-778...1&tr_t=rent

4 bedrooms within 1/2 a mile from the first property... £1100 pcm

http://www.rightmove.co.uk/viewdetails-137...2&tr_t=rent

3 beds within 1 mile from first property... £1100 pcm

http://www.rightmove.co.uk/viewdetails-153...2&tr_t=rent

3 beds semi within 1 mile from first property £850 pcm

And renting it out as 4 seperate rooms?

House shares seem to be letting (via rightmove) for 300 to 250 per month including council tax in that area.

So those two houses would just about break even at 250k depending on deposit and interest rate.

[Si1]

Don't think so. Tommy's reasoning is based on Leeds prices, quite low ones. It is possible to get 100k apartment in Leeds but there are much more expensive apartments too. Just add 50k to price and math will look different. Not mention more expensive cities...

BTW, maybe cheap properties can give reasonable return.

I live in Leeds and am not aware of areas where 100k propeties can be let for 550/mnth with only a little ikea furniture - I do not know everywhere so am all ears as to finding out where this may be. Maybe armley that I know of, these being 70-80k properties going for 400-odd per month unfurnished, not sure ikea furniture really being enough to persuade upwardly-mobile uber-tennants to ignore the washing lines strung across the streets and the semi-shaven scallies hanging in betting shops, and not sure what the voids will be like in what is perceived as a poorer area. Anyway, up the road in more desired areas (you can tell they're more desired because the rents are higher), rents are higher (550 - 600 unfurnished for 2 bedder spacious), but house rices are MUCH higher (140k if you're lucky for a 2 bed, decent space 160k+). I know that landlords here have a difficult time avoiding voids as I've talked with long-term BTLrs who describe how tennants can ake a lot of demands and get away with it due to this vey reason.

furthermore, low mortgages against base rates are exactly that - the risk in the market hasn't yet fed thru significantly into increasing mortgage rates (aka tougher lending criteria, or related at any rate). the very nature of a mortgage tracking AT the base rate is that it's a loss-leader, if the company is to make money then EITHER most people aren't clever enough to remortgage every so often (so won't be able to support the market at these prices, but well done to you for playing the system) OR, in the longer term, they'll get the money out of you in other ways, aka a money term not conisdered in Tommy's maths, again pointing to this not being a mechanism to support prices in the way stated.

But basically, I am not aware of any flats supporting those kinds of yields in Leeds. You can get 600 a month renting in the city centre for goodness sake part-furnished, it would take a bit more than £200 worth of crappy ikea furniture to persuade the happening young climbers of this metropolis to live in a relatively down area.

[DTMark]

This is a nominal graph of uk house prices. Forget that silly inflation adjusted thing on the front page.

That silly inflation adjusted thing is surely pretty important when looking at a long term investment especially if it's to become a pension.

In very basic terms: my understanding was that property price growth has historically tended to outpace inflation by up to around 2.5%.

However at certain times - depending on when you buy and sell (important if we're at a peak) you might only keep pace with inflation.

So, if history is a guide to the future, property isn't the asset class to be in for the long term since the returns are boring at best.

If you can buy when prices are low and sell at a peak, you can indeed make a killing.

However the fact that house price growth over 25 years tends to only just beat inflation would mean that the boom we've seen will need to be largely reversed back off again in order to meet that trend line. Hence, the boom and bust market.

Unless, of course, this is a new paradigm. You cannot extrapolate history into the future or assume that it will repeat without looking at factors such as globalisation and demographics which aren't exactly looking favourable to the UK.

I have to say I struggle to see any property on Rightmove which would yield anything like 6%, to be honest most of the stuff I see would have a negative yield so long term appreciation has to be the main goal, certainly if HPI continued apace, then we would eventually reach a point where BTL yields of say -10% are "normal".

Leaving the finance for a moment and moving to the risk:

I do suspect that - as previous posters have said - the overwhelming majority of BTL and the only factor which prevented the market tanking 18 months ago - is the rush of amateurs and new entrants who favour the low upkeep of newbuilds, but sadly haven't done their homework.

This thread has covered such folly, but I suspect that it is on a very much greater scale than suggested and that people do extrapolate the Daily Scum headlines "10% YOY" as applying to their investment generally and assume all is well. That would explain why people have bought and continue to buy new builds to let and this has kept the flat builders very busy.

I'd expect quite a lot of blame later on as people come to discover their discounted off plan new build flat bought for 220k is now actually only worth 140k. But then, it was only ever worth 140k anyway, about the same as a 2 bed terrace in the next street costs (Nottingham springs to mind). There are hundreds, possibly thousands of these (haven't counted all the pages and Right move stops at 100) flats to let within 20 miles of here and you can see evidence of oversupply first hand, static/falling rents and long void periods.

I also suspect to some extent people are incredibly naiive when it comes to property valuations and assume that the diligent agent/developer is asking market rate, and not simply inflating the price well above that it could possibly fetch so they over pay. After all in a boom market, how could it go wrong (the irrational exuberance argument common at a peak) and fail to check out how much a property is actually worth, egged on by Kirsty et al: "How much should we offer".... "How much money do you have" kind of thing. Amateur investors are amateur thanks to lack of experience - the experienced landlord will of course avoid these while the amateur will be visiting the developer to ask why they were "ripped off" when in reality an offer was made and accepted and the deal was done. Nobody was duped.

So now we come to headlines suggesting our recent BTL brigade might be thinking now is the time to sell up, and we know we have a huge oversupply of these flats.

Looking at Rightmove in an area I follow near here: go back 2 years, and two beds were struggling to sell at 160k and prices were dropping. Now those places are asking circa 190k but I've yet to see one register a sale above 170k. It's all sat there, chain free, and priced to perfection.

And as per 2005, nobody is biting. There are fewer mugs (other investors) to shift the baby to - in fact one of the local agents responsible for marketing on that estate asked "Where have all the investors gone?"

So the next few months will be telling: who will be the first to cut 20k off to get a sale? Who will be second, third... or will it sell? Personally I doubt it, because the yield those people got when they bought X years ago isn't there now. Not at those prices anyway.

On a final note: long term experienced landlords must have mixed feelings about the new bunch: on the one hand, they've helped drive up their equity, but on the other hand, they will be the ones to collapse it for everyone.

[Si1]

Finally one thing we have not discussed is that inflation is currently a bit high (this is the reason for the rate hikes). Now inflation is bad for savers. If you have a 5.5% saving account but inflation is at 4% you're making only 1.5%.

Inflation is however good for borrowers as it shrinks the debt you have (in real terms), it inflates rents (in nominal terms) and it makes your montly repayments of the mortgage more affordable.

inflation can be beneficial for borrowers OR savers depending primarily on its relationship to the prevailing interest rates of the time. To suggest arbitrarily one way or another is at best rationalisation and at worst foolishness. A bit like pretending that black wednesday never happened.

[Si1]

the bank could still make money even if it's lending below the base rate, all the bank has to do is make sure they pay less then the base rate (and less than the loans they are offering) to the depositors. Considering most current accounts pay less than 1% and most saving accounts less than 4.5% it is possible for a bank to make money even if they loan it to less than the base rate.

#

have you any idea the overheads involved in banking, you are descibing flexible savings products that cannot be relied upon to cover major mortgage balances, this is why major lenders regularly make major issues of corporate bonds to cover their mortgage borrowing. what you suggest is simplistic, very risky, and not actually practiced, so far as I am aware.

And then why would they bother lending it at less than the base rate when they can instead buy govt bonds (much less risky than lending out as mortgages) at zero risk?

[Si1]

Agreed, on average about a 10->15%.... however remember at the last peak some people got a bargain at the peak and saw almost no falls some people saw much larger falls, some people decided not to sell in the trough because they were in negative equity.

yes - some people barely noticed the last crash, and some people got absoultely wrecked by it - the average covered a range of individual outcomes

[laurejon]

Why Btl When You Can Get 6.30% Pa Risk Free?, Saving rate has gone up 33%

Because your savings are leveraged using BTL as an investment vehicle with a loan that is many many more times your deposit, and the tenants are paying the interest.

THATS WHY.........HOPE THAT ANSWERS YOUR QUESTION.

Go to the bank with your 100k deposit, borrow 400k, deposit 500k in a bank at 6.3%, then ask a stranger to pay the interest on your loan of 400k. I dont think that will happen, what do you reckon ?.

[laurejon]

If you put down £2.50p on a property with a 99.9999999999999999999999999% mortgage in 1999, let the property at a rate that covered your interest, your original investment of £2.50p would have grown by many thousands of percent.

In 1999 your investment purchased for 90k, would today be worth at least 280K. Not too shabby!!!!!!!.

If people cannot see that there was money to be made, and maybe still is in some parts, then I'm afraid you are a lost cause.

[Si1]

If you put down £2.50p on a property with a 99.9999999999999999999999999% mortgage in 1999, let the property at a rate that covered your interest, your original investment of £2.50p would have grown by many thousands of percent.

In 1999 your investment purchased for 90k, would today be worth at least 280K. Not too shabby!!!!!!!.

If people cannot see that there was money to be made, and maybe still is in some parts, then I'm afraid you are a lost cause.

are you saying that, providing inflation stays +ve (and hence long run property will, despite peaks and troughs, follow this trend), that thru leverage, property is a good buy at ANY price?

[DTMark]

If you put down £2.50p on a property with a 99.9999999999999999999999999% mortgage in 1999, let the property at a rate that covered your interest, your original investment of £2.50p would have grown by many thousands of percent.

In 1999 your investment purchased for 90k, would today be worth at least 280K. Not too shabby!!!!!!!.

If people cannot see that there was money to be made, and maybe still is in some parts, then I'm afraid you are a lost cause.

I don't deny there might still be places in the UK where you can get a viable yield. However the number of those is fading fast. Eventually, there is no money to be made in it. We may be at that turning point now.

What happens to house prices when there is no money to be made in it any more?

[laurejon]

House prices will Tank thats what will happen.

And those investors who bought up years ago for BTL (Pre 2000) will have enough equity to leverage huge loans to increase their portfolios even further buying up Repo's.

[DTMark]

are you saying that, providing inflation stays +ve (and hence long run property will, despite peaks and troughs, follow this trend), that thru leverage, property is a good buy at ANY price?

.. just to add to this: if "property is my pension" - surely, it does matter - in fact, quite critically - how much you pay and when you buy.

It also suggests, given the poor return versus inflation that you'd need to be quite highly leveraged, e.g. a portfolio, not just the one flat to get a decent pension.

Which increases the risk - a leveraged risk.

Return was the reason for stuff like pensions and the stock market - bit more risk, but then risk and reward are generally related, which seems to have been forgotten looking at the new asset class of property which only ever goes up - nominally. So far. Most of the time. Whether it will do so in the future or not remains to be seen, but I wonder how many people look at the summary sheet on their pension, look at what the effect of inflation might be on their money, and then go for property instead starry-eyed at the nominal figures and ignoring the basics.

[laurejon]

I don't think you'll find many disagreeing with you on what's happened since 1999, but this thread's more about now and what's next, surely?

Accepted if this thread is for now.

But I can already hear those that have been saying property is going to crash for the last 10 years saying "Told you so".

There is a time to buy, and there is a time to sell, and there is a time to stay put.

In my view everything is for sale at the right price. Property has not crashed simply because interest rates are very low. I heard on this site four years ago that sentiment will crash the market.

That is simply not the case, interest rates are the only tool that will crash todays market, and they are going up and up. If we get out of 2007 with rates of less than 7% I would be very very suprised. Rates of less than 7% would confirm to me that this government have the MPC's testicles firmly in their fists, ready to squeeze tightly should they not provide the rate the Chancellor is looking for. Inflation doesnt come into it, if it did we would be at rates of 9% today.

[Si1]

.. just to add to this: if "property is my pension" - surely, it does matter - in fact, quite critically - how much you pay and when you buy.

It also suggests, given the poor return versus inflation that you'd need to be quite highly leveraged, e.g. a portfolio, not just the one flat to get a decent pension.

Which increases the risk - a leveraged risk.

Return was the reason for stuff like pensions and the stock market - bit more risk, but then risk and reward are generally related, which seems to have been forgotten looking at the new asset class of property which only ever goes up - nominally. So far. Most of the time. Whether it will do so in the future or not remains to be seen, but I wonder how many people look at the summary sheet on their pension, look at what the effect of inflation might be on their money, and then go for property instead starry-eyed at the nominal figures and ignoring the basics.

I'd agree with that. Property has, over history, seen some spectacular winners, and some spectacular losers, and it's very much about timing. But also we mustn't forget the negative effects on the broader economy of a crash - the tighter credit criteria, the lower confidence. Would pre-2000 BTLrs REALLY leverage up into a falling market with tightening credit criteria and higher real borrowing costs occurring leading to their current property profits being reduced? I think it would take b*lls to do so, and some may, but I doubt most will want to bite. We're talking mass behaviour here. If Laurejon's prediction is right then of course a crash can't really happen as there wil always be buyers to bail it out, but this of course completely ignores the money supply and its inherent priced-in (and very reactive) risk premium - oh the money supply is the key....

[DTMark]

I don't disagree that rates are important and you can see the effect of rising rates first hand with the "spring bounce" that failed to really materialise (except in London).

However the viability of the market depends on new entrants. There has to be someone to sell the houses to.

Therefore, I suspect that we don't actually need BTL to sell up en-masse to cause panic. All that's needed is for them to sit back on the sidelines and wait a while.

The pages and pages of two bed terraces and flats will go nowhere and down will go the prices. We saw this in 2005.

However since all of the "fundamentals" of the deal are worse now than they were then - interest rates and yields - I wonder by how much prices will need to fall this time to hook a buyer.

And I wonder what the effect of obviously falling nominal prices is going to have not on the prospective new buyers, but the ones who keep hearing about this thing called a house price crash - the papers keep mentioning it - and have a BTL they're playing with at an amateur level.

[Si1]

Accepted if this thread is for now.

But I can already hear those that have been saying property is going to crash for the last 10 years saying "Told you so".

I agree -some bears are too confident in their predictions; I was wrong in the past about sentiment, fair call. I was warned by some that it all came down to the money supply and without this tightening the market won't budge. So granted I may be wrong a 2nd time now.

That is simply not the case, interest rates are the only tool that will crash todays market, and they are going up and up. If we get out of 2007 with rates of less than 7% I would be very very suprised. Rates of less than 7% would confirm to me that this government have the MPC's testicles firmly in their fists, ready to squeeze tightly should they not provide the rate the Chancellor is looking for. Inflation doesnt come into it, if it did we would be at rates of 9% today.

possibly, but there are REAL things happening irrespective of political motivations behind it, and if you are saying that for the REAL situation irs have been held too low, then there will be a negative reaction on the economy as it comes back into balance. the bigger the imbalance (and that is a debatable point) the bigger the correction.

edit: and if they should really be at 9% and are again held too low, then greater difficulties will be put off for another, later day. But then again if it's long term enough how much do we care? Enough to influence our preferences for long term investments.

Edited May 31, 2007 by Si1

[laurejon]

In 1990 if you mentioned houses/prices in a pub you would be banned for life.

People hated houses, hence they were so cheap. In fact, so cheap you could buy them cheaper than it would cost to build one including land costs.

And I can remember agents telling me "Property is finished, it will never ever come back".

Property is in fact like Oil, it will always be in demand. Its a scarce resource, it will see famine, but will always return to triple in value before crashing again.

I'm afraid its a cycle, like life, and death, its pretty much predictable, but difficult to pin down exactly when its going to happen.

As a footnote.

The properties that people talk about being 50k in the 90's were actually 100k before the crash. So today if we guess they are worth around 250k the rise bump to bump is only 150k.

Edited May 31, 2007 by laurejon

[laurejon]

125k I think you mean which is one hell of a loss, 50% in fact and during times of relative high inflation to boot. Which leads one to ask, what was the decline in real terms?

Speaking of the early 90s, the thing that motivates me the most with regards to the next HPC, is recalling a news item back then which reported on properties that were formerly valued in excess of £150k being sold off at auction to cash paying shrewdies at £40-50k a pop.

Great business if you can get it...

1995 I was working on a refurb project in The Boltons Chelsea. I can remember a five bedroom house in Fulham going under the hammer for 65K!!! Bought up by an India Property developer who knocked it into four flats and let them out with a good return on his money.

[nohpc]

My view on savings.

Pathetic vehicle for your money.

Only useful as a holding area while you think of something else to give you a better return.

Please, if you have a lot of money sitting away in a savings account go and see a financial advisor and invest it in a better way. You get such a pitifully low return in a savings account once you take tax and inflation into account.

[Si1]

My view on savings.

Pathetic vehicle for your money.

Only useful as a holding area while you think of something else to give you a better return.

Please, if you have a lot of money sitting away in a savings account go and see a financial advisor and invest it in a better way. You get such a pitifully low return in a savings account once you take tax and inflation into account.

well what if the economy's so over-bought thru credit that everything else is threatening negative returns ??

[laurejon]

I think in todays market it would be foolish to hold cash as it is performing below inflation in savings accounts.

However a degree of liquidity to cover rainy days is essential in todays climate.

Work on having ready available liquid assets (As much as you can get your hands on) in three years time, and guess where I will be suggesting you put it

And for those of you with Morals, hand your cash to a good charity, every else jump in for the next property boom.

[nohpc]

I think in todays market it would be foolish to hold cash as it is performing below inflation in savings accounts.

However a degree of liquidity to cover rainy days is essential in todays climate.

Work on having ready available liquid assets (As much as you can get your hands on) in three years time, and guess where I will be suggesting you put it

And for those of you with Morals, hand your cash to a good charity, every else jump in for the next property boom.

One point to add to this. If you have a fully flexible mortgage it is worth keeping all your money in it as long as you have no intention of selling as although the property is not a liquid asset the overpayment in your mortgage is and it is essentially the same as having an unlimited ISA allowance but instead of interest gains you make money by lowering your interest payments.

[laurejon]

Absolutely, Amortization is the killer on any loan.

Most fixed rates allow 10% overpayment without penalty, do some overtime, go to Butlins not Bermuda and get it paid off quick smart.