Why Should I Not Btl

[alex228]

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I realise that rent may not always cover the mortgage payment but from my perspective if the mortgage was, say, £1000 p/m if I could get £800 p/m rent then I would be happy to contribute the £200 - at the end of the mortgage I will own 100% of an asset that I have actually paid for 20% of. Obviously it would be a bit more complicated as there will be time when I have to cover 100% of the rent but you get the general idea.

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you'd pay off not 20% of the final value but 20% of total payments. final value can be lower than today's and the house can be destroyed by a tornado for example

[Captain Duff]

[madasafrog]

you'd pay off not 20% of the final value but 20% of total payments. final value can be lower than today's and the house can be destroyed by a tornado for example

[carseller]

Hi - been reading this forum for a few weeks and have found it pretty interesting. In the discussions that I have read around the btl issue I haven't seen anyone address my reasons for potentially btl'ing and wanted to get your thoughts.

I having been thinking of buying a flat to rent out - not to make money on the rent but because at the end of the mortgage I would have an asset that someone else had, largely, paid for that I could either sell or continue to make income from.

I realise that rent may not always cover the mortgage payment but from my perspective if the mortgage was, say, £1000 p/m if I could get £800 p/m rent then I would be happy to contribute the £200 - at the end of the mortgage I will own 100% of an asset that I have actually paid for 20% of. Obviously it would be a bit more complicated as there will be time when I have to cover 100% of the rent but you get the general idea.

A short term HPC doesn't worry me as I see it as a 20 - 25 year investment - the main issues I see are that I lose my job and can't underwrite the rent, in which case I would be stuffed but I think that is a pretty small risk.

Thoughts?

I have some swamp land if you are interested.

[carseller]

okay - let me explain a bit more. Say I buy a flat for £150k, put down a 20k deposit and borrow £130k - the repayments on that at 7% would be £929.61 p/m for a repayment mortgage. So if I let that flat for, say, £700 p/m and cover the other £230 myself at the end of the 25 years I will have 100% of an asset that I have personally paid around 25% of (will be a bit more because there will be periods that it is empty so I have to cover the whole payment) but you get the idea. Even better - I get tax relief on the £230 p/m......

I can't see how I would lose

Use those 20K to buy a flat cash, in a country on the rise, with an outlook for rising real wages. Good luck in your search, you will find what you are looking for. That way you have an increasing cash flow from the first day. Plus an apartment you can sell at a huge profit in the future. What you are thinking of are just plain crazy.

Edited August 26, 2007 by carseller

[Guest Charlie The Tramp]

Well according to Helen Loveless in the Financial Mail on Sunday, buy-to-let is king of investments, it has beat Gold, the Stock Market, and Savings Account.

Forgot to add she also quoted Mel Bien of mortgage broker Savills Private Finance who said Buy-To-Let has a lot to offer but the situation is uncertain now. Yields have fallen and some clients are subsidising their mortgage payments. Those people who think they can make a quick buck out off buy-to-let should steer clear. It needs a long term approach and she would caution against investing only in property.

Now I can`t see the amateur BTLs who have bought from 2003 staying the long term, as soon as they see a large amount of equity the temptation will overwhelm them.

[Mr Yogi]

If you are conservative and take a £150k property it will be roughly worth £300k in ten years time. Ten years after that it will be worth £600k, and then five years after that about £900k. Thats assuming basic inflation taking place and prices doubling every ten years

Total bollock$!

Yes, historically, house prices have doubled on average every ten years.

But that assumes an average HPI of 7% pa.

And that assumes buying at an average point in the HPI cycle.

No-one suggests that we are at anything but a peak in the HPI cycle.

No-one is expecting anything like 7% HPI over the next decade

Property prices are unlikely to be any higher in ten years time even in nominal terms than they are today.

Anyone buying a house now needs their bumps felt!

[bateman]

If you are going to be BTL'er then you don't ever take a repayment mortgage on a BTL. If you dont understand why then your not ready to BTL.

hmm - I don't understand this, I would want to own the asset at the end of the mortgage. I suppose I am thinking of btl as a sort of savings account but it is a savings account that I and my tenant pay into for 25 years - at the end of that I own it.

I agree that there is risk with this but not a huge amount - the main disadvantage that I see is the lack of liquidity in property.

The reason that I am not looking to pay the mortgage on my house down are that I am on a 4.4% fixed rate for the next 2 years and that I do not want all my capital tied up in one huge investment. Maybe I need to think more about building a diverse portfolio of investments rather than just cash and (potentially) property?

[TeddyBear]

Your figures are far too optimistic still - here are some points in no particular order:

Looking at findaproperty there are a glut of one beds in Redhill for rent from £550 up. This one doesn't look anything special, typical rabbit hutch so looks more likely that you'd receive around £575 pcm mark.

Service charges of only £500 a year? You'd be very lucky to get away with this on a regular basis. Managed blocks often have horribly high charges. You'll be paying this just to give it a few basic sticks of furniture in year 1. Leasehold properties in blocks have a nasty tendency to attract very high service charges every few years when it comes to repairs to the roof, windows, common parts etc. Then there's probably a boiler in your property that will have to be changed a couple of times in 25 years.

I find it hard to believe that you own a property if you think maintenance can be so low.

You have to pay admin costs for various sorts of safety certificates.

How long is the lease? Remember that leasehold properties lose value as the lease reduces and it can be very expensive to renew them.

You appear to have completely missed out INCOME TAX. You only get relief on the interest (for now), so, apart from expenses you will be paying tax on the profit element of the BTL.

What if at some point in the next 25 years you will not be able to subsidise the mortgage - who knows what might happen in life, illness, unemployment, divorce etc.. Will you always have £1k - £2k to spare? If at any point you can't cover the shortfall you would be forced to sell and if it is at a time when prices are low, you may lose all the money you ever put in as a subsidy - and what if you were in negative equity? There would be a charge over your main home too unless you'd set up your BTL as a limited company.

Overall, your post is a very good reminder of why BTL doesn't add up at the moment for new purchases and is extremely risky.

As I said in previous post, why not educate yourself about investments, decide on your risk profile and spread the money about.

Edited August 26, 2007 by TeddyBear

[brendan]

You do need to think about building a portfolio of investments. But just looking at cash here is what might happen if you don't buy:

Start saving the £4100 a year that you say you have in 8 years you will have:

£41,671.35

Assuming you stick it in a Halifax saving account with a net rate of 5.3%

In probably one of the worst cases based on the percentage falls in the last crash assuming a crash starts in 2008 your 142.5k property that you bought in 2007 might now be worth just £65k but you have a mortgage of twice that on it. Will you really be able to look at your "investment" then and keep a long view?

At this point your tenant who has stuck with you for the last 8 years and given you help towards your investment realises he can afford to buy on his own and moves out. You are now finding it hard to rent your flat for the same money because renters are starting to buy again this leaves you servicing a huge debt with less help than you thought you would have in 2007 suddenly being a landlord doesn't seem so much fun.

25 years is a long time and this is just one of the possible scenarios you might face in 2016. Lets say this does happen and you do what I suggested you could buy the same flat for £65k who knows it might be even less and you would put a £41.5k deposit down you would have your 25k mortgage paid off in about another 8 years. So just by doing what I have said above you still get to own an asset if that's what you want but you do it in 16 years not 25 years and if you change your mind in the first 8 tough years of a crash you won't be holding on to a falling asset.

Of course this assumes house prices fall in a similar way they did last time which most people on this site think is a pretty strong possibility. The real question you have to ask yourself is:

What is an asset that is worth less than you bought it for called?

[madasafrog]

Total bollock$!

Yes, historically, house prices have doubled on average every ten years.

But that assumes an average HPI of 7% pa.

And that assumes buying at an average point in the HPI cycle.

No-one suggests that we are at anything but a peak in the HPI cycle.

No-one is expecting anything like 7% HPI over the next decade

Property prices are unlikely to be any higher in ten years time even in nominal terms than they are today.

Anyone buying a house now needs their bumps felt!

1971 Jan £5,774

1981 Jan £28,397

1991 Jan £70,908

2001 January £110,378

2006 January £198,054 (just 5 years)

Source 1

Source 2

Are the bumps you are refering to the ones on your head?

[roadtoruin]

hmm - I don't understand this, I would want to own the asset at the end of the mortgage. I suppose I am thinking of btl as a sort of savings account but it is a savings account that I and my tenant pay into for 25 years - at the end of that I own it.

I agree that there is risk with this but not a huge amount - the main disadvantage that I see is the lack of liquidity in property.

The reason that I am not looking to pay the mortgage on my house down are that I am on a 4.4% fixed rate for the next 2 years and that I do not want all my capital tied up in one huge investment. Maybe I need to think more about building a diverse portfolio of investments rather than just cash and (potentially) property?

Presumably you will inform the tenant about your cosy co-purchase relationship (you arrogant tw*t).

Can't believe other posters are engaging in giving you financial advice and a few good Troll-laughs along the way.

[madasafrog]

Presumably you will inform the tenant about your cosy co-purchase relationship (you arrogant tw*t).

The tenant would have to be pretty stupid not to realise that from the start.

[TeddyBear]

Presumably you will inform the tenant about your cosy co-purchase relationship (you arrogant tw*t).

Can't believe other posters are engaging in giving you financial advice and a few good Troll-laughs along the way.

The OP may be trolling but if random people come to the site and read the thread at least they see a reasoned explanation of why BTL doesn't add up, got to be useful - and don't forget random journos, it's clear that quite a few visit the site.

[LargelyIgnorant]

1971 Jan £5,774

1981 Jan £28,397

1991 Jan £70,908

2001 January £110,378

2006 January £198,054 (just 5 years)

Source 1

Source 2

Are the bumps you are refering to the ones on your head?

He was talking about the future, not the past.

This paper by a Federal Reserve economicst, with no VI, predicts falling UK house prices for a very long time: http://www.federalreserve.gov/pubs/ifdp/2005/847/ifdp847.pdf

What model are you using for your predictions of UK house prices? It appears to be something like this:

[crash2006]

What you forget was wages were growing there wasnt this close global economy at the time, and there was hardly any outsourcing going on, or the large transfer of wealth from country to country.

Property growth has come from asia, now the money is in property in asia not britain, rents can't go to high if it does then people want more money companies want to make profits, inorder to make profits they would need to increase your work load while reduce labour and keep wage inflation low. taking housing out of the cpi was the worse thing they could have done, for our economy as more and more people leave the country.

[madasafrog]

He was talking about the future, not the past.

This paper by a Federal Reserve economicst, with no VI, predicts falling UK house prices for a very long time: http://www.federalreserve.gov/pubs/ifdp/2005/847/ifdp847.pdf

What model are you using for your predictions of UK house prices? It appears to be something like this:

I would rather use factual data from over 35years during which there has been financial crisis yet the housing market stayed steady in the long term. I will got for that kind of model instead of one bloke who is not even in this country. These so called economist gurus remind me of mystic meg and her predictions of the lottery. If they are so good at predicting the future, why are they still working for a living. Shouldn't they be so rich from the fruits of their predictions?

Have a little search on the web for reports of house prices falling. See how many of them are from 2001 & 2002.

You may as well be basing your model on this lady

[LargelyIgnorant]

I would rather use factual data from over 35years during which there has been financial crisis yet the housing market stayed steady in the long term. I will got for that kind of model instead of one bloke who is not even in this country. These so called economist gurus remind me of mystic meg and her predictions of the lottery. If they are so good at predicting the future, why are they still working for a living. Shouldn't they be so rich from the fruits of their predictions?

Have a little search on the web for reports of house prices falling. See how many of them are from 2001 & 2002.

You may as well be basing your model on this lady

Peak oil, transfer of wealth to Asia & demographics - the next 35 years in the UK will be very different to the past 35 fat ones. Anyone who invests in UK property today with high LTV is fubared.

South America, India or China will be similar to the UK's past 35 growth/wealth years - your ruler prognosticator will apply more to them.

[TeddyBear]

Here's one reason not to take on risky investments and get stuck living in that BTL rabbit hutch when things go pear shaped

http://www.reuters.com/article/newsOne/idUSL2259151320070823

"Woman sets fire to ex-husband's p***s"