Monday, August 21, 2006

At last!

thinking of BTL? do the sums first

An enlighteningly honest and sensible article. About time we came across a journo with some sense. This could represent the start of a change in attitude of the media, which could be a significant thing.

Posted by inbreda @ 09:56 AM (2784 views)
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11 thoughts on “At last!

  • This seems a good solid article. The worry is the strain the potential collapse in the market will have on the global banking system.

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  • Quote: “This is when you divide the price you pay for the investment by the income flow from it. In the case of rental property, you take the purchase price and divide it by the rent. For example, if a property costs £100,000 and you can get £10,000 a year in rent, the yield is 10%.”

    Hmm, would you trust someone who doesn’t know how to calculate yield? By the author’s method, yields are now 20%+ 🙂

    Having said that, finally good to see someone actually pointing out how bad an investment BTL is without wiggling out of it at the end of the piece.

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  • OK, he missed a detail from the maths.. it’s for Guardian readers, remember….;)

    – But otherwise this is one of the best bits of reportage we’ve seen this year – I liked the last paragraph in particular – a very sound wrap-up.

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  • OK, just for me (a Guardian reader!) 😉

    How should Yield be calculated?

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  • J. B. M. C

    “How should Yield be calculated?”

    By it’s current price. I.e. if someone bought that £100k house for £10k in 1980, the yield would be 100%. By ignoring the current price you are ignoring the bigger picture, and missed oportunities.

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  • J.B.M.C. – I was being somewhat flippant, but Jason raised a good point. Those who bought BTLs in 1995 will be seeing very nice returns on their investments at present thank you very much. Still, if we are at a market peak one should, ceteris paribus, still sell regardless of current yield. (I remember a conversation with a friend of a friend in 1996 who had 5 and was aiming for 12…I’m sure he is in a very good position now.)

    What I was pointing out was that percentage yield is 100*rent/cost, whilst the author of the article slipped and stated that it was cost/rent, which is the price earnings ratio. The two methods only yield the same numerical result when the price earnings ratio is 10, which is the example he chose.

    Other than this though, it is one of the sanest bits of writing on the topic of housing I have seen in the mainstream media for some time. Was initially worried he was trying to wriggle out of things towards the end, but given the final paragraph, it appears his heart was never really in destroying his fundamentally sound position.

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  • bidin'matime says:

    Yeah, me too – I even forgot I was reading an article and not a comment from one of our eloquent contributors.

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  • Soldoutrenting says:

    BTL currently provides only potential CG, that my fellow pragmatists, looks increasingly unlikely, soon enough the exodus of greedy and completely novice investors will result in a stampede that will make the 90’s crash look like childsplay.

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  • JBMC – to answer your question directly:

    Take the gross annual rent that you can reasonably expect to get from the property, and divide it by the current market value of the property. Multiply that figure by 100 to get a percentage.

    That is your nominal ‘yield’ that the vested interests like to focus on. It is not the net amount you will end up with. (before paying any mortgage costs)

    To assess the likely range of income you will finally net from the property after void periods, routine maintenance, periodic refurbishment, management costs, insurance, accountancy, legal costs and agents fees are taken into account, multiply your nominal yield figure first by 0.6 and then by 0.5 to get the high and low ends of the likely income spectrum as a percentage.

    To turn these figures into actual numbers, multiply by the property value and divide by 100

    There is a high chance that your long term income from the property will fall between these two figures – this is the money you will have left to pay any mortgage.

    To take a worked example close to where I live:

    Value of property – £180,000, Monthly rent £650

    So annual rent is 12 x 650 = £7800
    Divide by property value and multiply by 100 = 4.33% (nominal yield)
    Multiply by 0.5 and 0.6 to get likely income spectrum 2.17% – 2.60%
    Convert to cash values – £3900 – £4680 pa

    If you took out an 85% mortgage on the property, and managed to borrow the money at 5%, your mortgage interest bill would be £7650, leaving an annual deficit of £2970 to £3750 for you to find from somewhere, and no income from your deposit of £27,000.

    – And people still think this a good thing to be doing!

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  • Thanks Tom (and everyone else who commented). After reading your post I can’t believe that the BTL market is still attracting new investors. I am definetly gonna hold off on buying my first place for a few more months.

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  • J.B.M.C.

    “After reading your [Uncle Tom’s] post I can’t believe that the BTL market is still attracting new investors. ”

    Nor can anyone else on this forum…absolutely mind boggling…but try discussing figures with a new BTLer or home owner. You will run straight into a brick wall of platitudes and illogic 9 times out of 10. I tend to keep my opinions to myself these days.

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