Friday, October 26, 2007

The truth about the new Buy-to-Lose brigagde…

A third of buy to let investors struggle to make rent equal payments

Heritable Bank is warning that one in ten property investors cannot meet their mortgage payments from rent alone. A further third of today's property investors say they can only just cover their mortgage commitments from the rental income they receive. With the buoyant housing market of recent years, 43 per cent of respondents rely most on property price growth, compared to just 15 per cent who focus most on rental income.**** So in essence, 10% of BTL's are paying out for an investment that is falling in value ..... what smart cookies.

Posted by uncle chris @ 02:01 PM (1164 views)
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10 thoughts on “The truth about the new Buy-to-Lose brigagde…

  • converted lurker says:

    yep, it makes for interesting reading once you analyse the facts, it’s not that one in ten don’t make the payments, it’s the fact that 1 in 3 just manage to break even not accounting for; voids, depreciation, renewals, damage etc., all this in a falling market…shame… =;¬)

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  • David Smith's Sub Prime. . . says:

    Mmmmm I think this is actually getting quite serious. And the problem is in all probability only just warming up…

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  • Little Professor says:

    “43 per cent of respondents rely most on property price growth”

    So, when property prices stop growing and start falling, guess what 43% of respondents will do?

    (I’ll give you a clue: SELL!!! SELL!!! SELL!!!)

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  • Ill_handle _it says:

    Perhaps the boe will print some more phunny money to soften the blow ? Rents will have to increase just to try to prevent the inevitable sale of their property’s. It’s kinda sad but I’m enjoying this !

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  • So these landlords are really stuck between a rock and a hard place. Their rental income doesn’t cover the outgoings and the value of the property is decreasing. They could put their flats on the market, but who would buy them? To have a chance of selling their properties the landlords would have to drop their prices big-time, but that may leave them with negative equity.

    …. what to do? …what to do?…

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  • ‘rely on capital growth’….well that only applies if they sell……also if it is tennanted they have to get tennant permission….they also cannot sell unless they
    inform inland revenue…as they are supposed to declare the income from renting.

    Solicitors have to inform revenue on completion.

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  • Am I wrong, or is relying on market growth not a recent phenomenon, and therefore completely stupid? I wouldn’t dream of letting a property if I was not completely covering the mortgage payments with rent – isn’t this the way it’s always worked, or am I imagining things?

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  • The media keep pointing to our housing shortage as the ‘saviour’ to prevent the ‘catastrophy’ of a US style crash. It’s the nearly half of BTL investors refered to that invalidate their case. As has happened in bubbles across time, investors will sell when they don’t get a ROI let alone a negative ROI. When they can’t sell, because buyers have lost confidence or can’t afford to buy, they will drop prices. Panic will ensue amounst BTL investors and the market will be flooded with over supply. Ooops! If investors are getting desperate to sell prices will have to come down considerably to be attractive and a crash is inevitable. What could prevent this outcome? If BTL investors keep their nerve and can ride it out without trying to sell or if buyers are attracted by lower prices before the prices have tumbled too far. Investors have rarely held their nerve at the climax of bubbles and the speed of a crash will determine how far it goes. If prices start to tumble buyers will stay out until the dust has clearly settled. Bring it on!

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  • Some BTL are not interest only purchasers. The ones I know have bought property because in 20 years, when it is paid off, it constitutes their retirement money. Two flats = decent retirement. So they are not only using tenants money but also put the money that they would be saving into these properties. Propping up the payments on two flats which are 100 down each a month on the rental is doable.
    So there is a big difference between the interest only BTLs and the repayment BTLs. The repayments BTLs are concerned only with rent. Rent is unlikely to drop so even if they have bought at a high price then so what, they will have got 5 years off their payment schedule as compensation.
    Forced sales are going to be at the margin. Maybe its stupid to buy now, but that doesn’t equal clever to sell now. I am specifically talking about London not the surplus flat cities.

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  • Not sure about that – it only reaffirms the BTL argument that “it is clever to get a tenant to pay your mortgage for you”.

    Really it is all relative to IRs. i.e. if you can get 20% interest by sticking your money in the bank, then a tenant would have to pay a huge proprtion relative to the price of the property – but then if interest rates were 20% house prices would be low (due to the famous ‘affordability’).

    If at any time the tenants are paying the same as the mortgage they may as well buy, so really it makes sense for rent not to cover mortgage.

    It also makes sense to buy a BTL with a mortgage, as inflation will wear away the mortgage (effectively compounding the return – thus making financially sensible)

    So I guess the intelligent thing to do as a BTL landlord is to buy a cheap property which is cheap because interest rates are high. The high interest rates (inflation) wears away your mortgage, but because you bought the house at a low price it is still affordable. (high house prices is fine with low interest rates, much as high interest rates are fine so long as the house price is low).

    When interest rates fall, your mortgage becomes easier to pay, and the house price goes up.

    Of course buying a BTL now is sheer idiocy. rates are low, prices are high. The next step is interest rates high, house price low.

    Not the part of the cycle you want to participate in!!

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