What Motivates A Btl?

[alex228]

I just can't get it... yields are low, house price boom is unlikely to last, yet BTLer seem to be still buying - check latest BTL mortgage figures. Something doesn't fit here.. or is it just me? can n1 explain?

[Guest The_Oldie]

The last bears turning?

[alex228]

are these people just plain stupid or they know something we don't?

[Fancypants]

are these people just plain stupid or they know something we don't?

They are in thrall to Mammon.

[Not 100% Sure]

are these people just plain stupid or they know something we don't?

Leverage. If I wanted to buy shares no bank would lend me five times my salary to do it, but if I wanted £100k flat I would only need £20k. On an IO mortgage this would cost £400 a month (assume 6%). If I can rent it for even £300 my net cost would be £1200 a year but IF house prices go up 3% my flat will be worth £103K total profit of £1.8K or on my initial investment of £20K a 9% return. This does make sense as long as house prices go up... but anyone who has tried spreadbetting will tell you how quickly your £2 bet can turn into a £50 loss if the market changes!!

IMO amateur BTL will cause any crash to be the worst ever. At the moment a number of landlords are sitting on vast paper profits but tax requirements, greed and the way property investment has been sold mean a large number have taken equity out of one property to fund additional properties. They then can't actually afford to sell the original propoerty due to CGT being more than their remaining equity so prices start dropping and they are forced to sit it out with any properties still in profit and can only afford to sell those that are at loss or break even.

We all know landlords are already subsidising rents how long can they do this when they no longer have the ability to MEW to cover this.

[Deny]

Greed greed greed greed greed

[Guest DissipatedYouthIsValuable]

I just can't get it... yields are low, house price boom is unlikely to last, yet BTLer seem to be still buying - check latest BTL mortgage figures. Something doesn't fit here.. or is it just me? can n1 explain?

It's natural selection.

[Leonard Hatred]

Pound signs in their ******ing eyes, and a desire to earn money while sat on their fat arses.

[eek]

Financial ignorance.

Same as dotcom in 1999. Same as Chinese stockmarket this year.

The idea that you can acquire riches beyond belief with no effort (or perceived risk) has always tempted people to leave their commonsense at home.

Ignorance is part. Recent history is another. Many people believe that what is true yesterday is going to hold true today so because their mate made £50,000 on the BTL flat they bought 3 years ago and sold last week their purchase last week will have the same result.

As for Not 100% Sure comment I agree 100%. Many people have finances that are built, at best, on sand. If and when the market changes the only solution they will have is to plough throwing pound after pound into their properties until they are repossessed one after another.

[AteMoose]

Boom and Bust, Fear and Greed, bubble and trough, economic cycles...

http://en.wikipedia.org/wiki/Business_cycle

Essentially people over buy and under buy, different sectors and markets boom and bust at different times....

Alternative interpretations of business cycles

[edit] Austrian School

The Austrian School of economics rejects the suggestion that the business cycle is an inherent feature of an unregulated economy and argues that it is caused by intervention in the money supply. Austrian School economists, following Ludwig von Mises, point to the role of the interest rate as the price of investment capital, guiding investment decisions. In an unregulated (free-market) economy, it is posited that the interest rate reflects the actual time preference of lenders and borrowers. Some follow Knut Wicksell to call this the "natural" interest rate.[1] Government control of the money supply through central banks and regulations allowing Fractional-reserve banking disturbs this equilibrium such that the interest rate no longer reflects the real supply of and demand for investment capital. Austrian School economists conclude that, if the interest rate is artificially low, then the demand for loans will be higher than the actual supply of willing lenders, and if the interest rate is artificially high, the opposite situation will occur. This misinformation leads investors to misallocate capital, borrowing and investing either too much or too little in long-term projects. Periodic recessions, then, are seen as necessary "corrections" following periods of fiat credit expansion, when unprofitable investments are liquidated, freeing capital for new investment.

The Austrian theory also predicts that the imposition of artificially low interest rates, and the resulting increase in the supply of fiat credit, generates (is) inflation, which obliges the central bank to increase the supply of credit yet further to maintain the artificially low interest rate, thus prolonging the "boom" and worsening the inevitable "correction." In Austrian theory, depressions and recessions are postive forces in-so-much that they are the market's natural mechanism of undoing the misallocation of resources present during the “boom” or inflationary phase. Austrian School economists point to the dot-com investment frenzy as a modern example of artificially abundant credit subsidizing unsustainable overinvestment.

In the Keynesian view, this Austrian theory assumes that the "natural" rate of interest is unique at any given time and cannot be affected by policy. To Keynesian economists, this rate is only unique if the economy is assumed to always be at full employment. If the economy is operating with less than full employment, i.e., with high unemployment above the NAIRU, then in theory monetary policy and fiscal policy can have a positive role to play rather than simply creating booms that necessarily collapse on themselves. It should be noted that, in the Austrian School, the natural interest rate is not affected by the employment rate and the absence of full employment is typically attributed to government interference in the labour markets, such as minimum wage laws, employment regulations, and taxes levied against employers, which prevent the employment market from fully clearing.

[edit] Marxist views

Michal Kalecki's [2] Marxian-influenced "political business cycle" theory blames the government: he argued that no democratic government under capitalism would allow the persistence of full employment, so that recessions would be caused by political decisions: persistent full employment would mean increasing workers' bargaining power to raise wages and to avoid doing unpaid labor, potentially hurting profitability. (He did not see this theory as applying under fascism, which would use direct force to destroy labor's power.) In recent years, proponents of the "electoral business cycle" theory have argued that incumbent politicians encourage prosperity before elections in order to ensure re-election -- and make the citizens pay for it with recessions afterwards.

Edited May 31, 2007 by moosetea

[StuB]

I just can't get it... yields are low, house price boom is unlikely to last, yet BTLer seem to be still buying - check latest BTL mortgage figures. Something doesn't fit here.. or is it just me? can n1 explain?

Is it possible that many took out mortgages and didn't declare them BTL? The banks were maybe loose in their lending and were happy regardless, now things are starting to tighten they are not so loose in lending? Also people whoo didn't declare their houses as BTL are getting hit with tax bills so honesty is now the best policy?

[Wait & See]

Pound signs in their ******ing eyes, and a desire to earn money while sat on their fat arses.

BTL monkey's really are the dross at the bottom, that read OK and Heat and think "We can be rich like Jade Goody, but have no brain. Have seen a few TV programmes about property that say easy money to be made in the BTL game. Better get down the bank and lie about our salary to get that BTL mortgage then or we could always go on Big Brother. Fame and Fortune here we come".

Sad f**ks

[CountryMove]

I just can't get it... yields are low, house price boom is unlikely to last, yet BTLer seem to be still buying - check latest BTL mortgage figures. Something doesn't fit here.. or is it just me? can n1 explain?

Fashion accessory/status symbol/keeping up with the Jones'/the oppotunity to use phrases "my tenants" and "my other property" loudly and often?

[enworb]

Sad f**ks

Unless there is a hpc, I expect most btl'ers to be happy, not sad.

[crashtastic]

I just can't get it... yields are low, house price boom is unlikely to last, yet BTLer seem to be still buying - check latest BTL mortgage figures. Something doesn't fit here.. or is it just me? can n1 explain?

I posted an article yesterday on here from the FT. Basically, the smart money is now selling up fast before the gravity principle kicks in too fully and drags house prices back to where they have historically floated. I suspect that the BTLs going in now are just the dumb and stupid that still think that houses prices will only ever go up.

Just imagine that HPI is like a very large train with the brakes now being applied big time. The train cannot stop straight away as it has a momentum. The johnny come latelys still wish to hop on board as 'trains only ever go forwards'.

[lets get it right]

A desire for security motivates a BTL - whether you call it greedy to want to secure yourself financially, I don't know. It seems to be dog-eat-dog world so who can blame someone for taking advantage of an opportunity to make money on a leveraged investment.

But ...

A saying I learnt at school is 'Nature abhors a vacuum'. This, of course, is to do with atmospheric pressure making it difficult to create a true vacuum.

I have often observed in my life that it applies to any opportunity that presents itself. People, generally, are desperate to earn more money, to 'get on', to try to achieve some security. Look at all the pyramid schemes and party-planning etc. There is an endless line of people exploited by others. Those in first, or at the top, make some money. The rest lose. And the more people do it, the more other people hear about it and do it too. How many women have run Cabouchon or Ann Summer's parties thinking it was going to be the answer to their prayers? Most do one party or two, buy some stuff for themselves, exploit their friends' good natures and then pack it in. The local organizer makes money because there is an endless line of desperate people willing to replace the ones that pack it in.

I see BTL in a similar vein. The people buying now are the last fools in. Sure the ones in earlier have made some money - on paper. But if we get a recession and lots of people are out of work, and lots of youngsters move back with their families etc - and rental demand falls - who knows, even people who bought a few years ago could get burnt. They certainly could around here as prices for flats are barely above prices paid at the previous top of the market in 2003.

[Warwick-Watcher]

Leverage. If I wanted to buy shares no bank would lend me five times my salary to do it, but if I wanted £100k flat I would only need £20k. On an IO mortgage this would cost £400 a month (assume 6%). If I can rent it for even £300 my net cost would be £1200 a year but IF house prices go up 3% my flat will be worth £103K total profit of £1.8K or on my initial investment of £20K a 9% return. This does make sense as long as house prices go up... but anyone who has tried spreadbetting will tell you how quickly your £2 bet can turn into a £50 loss if the market changes!!

IMO amateur BTL will cause any crash to be the worst ever. At the moment a number of landlords are sitting on vast paper profits but tax requirements, greed and the way property investment has been sold mean a large number have taken equity out of one property to fund additional properties. They then can't actually afford to sell the original propoerty due to CGT being more than their remaining equity so prices start dropping and they are forced to sit it out with any properties still in profit and can only afford to sell those that are at loss or break even.

We all know landlords are already subsidising rents how long can they do this when they no longer have the ability to MEW to cover this.

What is going to force them to sell now? If they don't sell then no CGT will be due in that year. They can wait 20 years until retirement then sell and pay the CGT (less allowances) due then. This is not going to be a quick crash. How many landlords even think about CGT ?

[mfp123]

Leverage. If I wanted to buy shares no bank would lend me five times my salary to do it, but if I wanted £100k flat I would only need £20k. On an IO mortgage this would cost £400 a month (assume 6%). If I can rent it for even £300 my net cost would be £1200 a year but IF house prices go up 3% my flat will be worth £103K total profit of £1.8K or on my initial investment of £20K a 9% return. This does make sense as long as house prices go up... but anyone who has tried spreadbetting will tell you how quickly your £2 bet can turn into a £50 loss if the market changes!!

IMO amateur BTL will cause any crash to be the worst ever. At the moment a number of landlords are sitting on vast paper profits but tax requirements, greed and the way property investment has been sold mean a large number have taken equity out of one property to fund additional properties. They then can't actually afford to sell the original propoerty due to CGT being more than their remaining equity so prices start dropping and they are forced to sit it out with any properties still in profit and can only afford to sell those that are at loss or break even.

We all know landlords are already subsidising rents how long can they do this when they no longer have the ability to MEW to cover this.

leverage is definitely a big plus point.

if you put down a 10% deposit on a £200,000 house youve invested £20,000

even if the house yields only 1% profit thats £2000.

a £2000 return on your initial investment of £20,000 gives you a healthy 10% yield, even if prices remain flat.

Edited May 31, 2007 by mfp123

[Orbital]

I just can't get it... yields are low, house price boom is unlikely to last, yet BTLer seem to be still buying - check latest BTL mortgage figures. Something doesn't fit here.. or is it just me? can n1 explain?

not every house in the UK is overpriced, sadly too many people on HPC believe the head line hype - not that they get caught up in spin or anything oh no!

Any home's under the hammer fans here? I had a few days off. OK yeah yeah maybe not everyone is comfortable with auctions but I saw a couple of FTBs getting into nice properties at great prices so its certainly not impossible. But the interesting one yesterday was a 14 bedroom house for 275k! The guy is now renting out the place at £80pw per room! But 14 bedrooms! For 275k!

tbh even with low yields buying property in the long term (eg over 25years) seems like a good deal. Yeah personally id be interested in seeing how things pan out because you could potentially make more if prices dipped. But if you do the math, its hard to see how over 25 years it will be a bad deal. Im also pro spreading my investments around, I will certainly be investing a little in property and by the time I retire in 2050 or so at least one investments should pay up! The key is to cash out on a high as you approach ya 60s. Buying now and buying in 5 years may or may not make a significant difference to that final pot... of course ideally you buy at the bottom and sell at the top, but realistically most people wont call either right. Doesnt mean theres no point in doing it....!!

Yeah I think an investor buying a premium new build flat is not going to make money fast, but then not every investor is buying that kind of property! And not every investor is after a quick buck!

Edited May 31, 2007 by Orbital

[Not 100% Sure]

Negative capital growth perhaps?

A loss making yield is currently justified by future capital growth - or so I keep hearing.

What will happen in their tiny minds when a loss making yield is combined with a falling capital value?

Their long term plans will go out the window - that's what.

What will force them to sell?? I eluded to this in my original post... if a BTLer is subsidising rent then I would suggest they manage this by MEW. No HPI equals no MEW. The majority of businesses go bust due to cashflow problem. I doubt many so called "long term" landlords have the cash to continue subsidising rents for long with no MEW. The trouble is they will be caught between a rock and a hard place as they also won't have the cash to pay CGT on any of their older properties that are in profit. IMO this means any crash we last longer as BTLers will try and ride it out until they are forced to sell by lack of cash.

One example;

I was in a hotel with another guy from worker a couple of weeks ago, and a salesman at the bar started to brag about his "property empire". He was drunk so we quizzed him and he answered questions that maybe normally he wouldn't. He had 7 properties in Sheffield and was on £30K a year. He had managed it by remorgaging each year. He was subsidising each by at least £20 a month (with no voids). £30K is about £1700 a month. How long realistically could he continue throwing a minimum of £140 away each month? This is without even considering unemployment, voids etc...

[winkie]

Some people think a BTL is the only way to get rich the lazy way, and you don't even have to use your own money to do it!

Everyone I know is making money, you must be mad not to take advantage to make free money, if you don't do it now you will regret it.

[scheming]

Some people think a BTL is the only way to get rich the lazy way, and you don't even have to use your own money to do it!

Everyone I know is making money, you must be mad not to take advantage to make free money, if you don't do it now you will regret it.

sure. This company even shows the rental compared to "estimated" repayments.:

http://www.tgresidential.com/Buy/Propertie...x?type=BuyToLet

some are almost double

[It is different this time]

I just can't get it... yields are low, house price boom is unlikely to last, yet BTLer seem to be still buying - check latest BTL mortgage figures. Something doesn't fit here.. or is it just me? can n1 explain?

How can one be left out when one's neighbour makes money out of BTL? don't bother checking the latest mortgage figures just check my last post, in Why BTL when you can get 6.30%, I have just proved how some muppets in Brighton are paying £250K for a 2 bed flat which has a rental value of only £800pm! . To be honest those amateurs are doing us a favour not only will they bring the crash sooner but also the crash will be louder than we can expect.

[Nick..]

There is frequently discussion here about BTLers not selling in a crash

Frankly who cares what they do, a crash is a crash and enables those priced out to jump on board and get some stability

Thankfully, its not going to take anywhere near all the BTLers selling up to crash the market

[winkie]

sure. This company even shows the rental compared to "estimated" repayments.:

http://www.tgresidential.com/Buy/Propertie...x?type=BuyToLet

some are almost double

But of course it is worth laying out a few pounds each month to cover the shortfall as it is only for the short term, soon rents will have to rise and then that will easily cover the mortgage.

The more people that can not afford to buy the more that will have to rent, so they will have to pay the going rental price. Property can fall but a BTLer is always in it for the long term and as we all know at the end of the day property only ever goes up.

Edited May 31, 2007 by winkie