Is it worth buying another property ?

[SimonV8ster]

Having talked to a bloke down the pub a few times he tells me about some of the property he has bought and rented out. Now he was clearly lucky at hitting the market at the right time before the last big boom so it paid off handsomely.

Its got me thinking about buying another property but not sure its worth it.

With buy to let mortgages it looks like you need at least 20-25% deposit and at around 5% interest (at the moment) the rent would only just cover the payments.

I have enough equity in my house to get the deposit together but after I have paid interest on that would it be worth it ?

Is there anybody who has done this/looked into doing this who could share their experiences ?

[groak]

1) If you were paying a 75% mortgage at 9.5% would the rent still cover the repayments?

2) How much rent can the dwelling generate in a year at full occupancy? Now take 60% of that figure. Now subtract the mortgage cost from that. What's left? Because that's what you'll make pre-tax.

[ringram]

I always wondered roughly what percentage of max possible rent ended up as profit after insurance, maintenance, fee's etc
Seems a sketchy prospect then even at the best of times.

[Cogcog]

I think that ship has sailed?

[Fatman2]

It surely depends on what sort of timescales you're looking at, whether you're after a quick buck and what sort of return you can achieve given a potential increase in interest rate.

I'm looking at a similar proposal but am looking long term i.e. 10+ years. My current home is in a prime letting location and has been since I moved here over 10 years ago. Thus I have no major worries that it will stand empty for any significant length of time.

Ultimately I would deem it to be worthwhile if someone else is going to pay off my mortgage and whatever (small) profit covers maintenance/rate increases etc. It ain't going to make me rich but will help cover uni fees and other incidentals when my children grow up.

[Wings]

Depends on the condition of the property, buying price, market price and rental market, also depends on one’s age, other investments portfolio, and whether one is looking for investment income, if one is capable of self managent/repairs etc. etc.

I have been a landlord for over 16 years, paying then £30k for a 3 bed terrace property, that is possibly costing £150k now, with not the same percentage increase in the market rental values.

For every person down the pub telling you the story they want to portray, then there are another 3 or 4 landlords who will tell you an opposite story.

BTLs must be a long term investment, those recently investing in rental properties, are finding after mortgage payments, repairs, management fees etc. etc, their rental payments are not covering the same, therefore their only chance of a financial gain in the property, is if the market value of the property increases.

[14-7]

I own four properties at the moment and am not looking at buying another till at least 2012/13.

The property market is changing and given stuff like the link below if you are only just able to stretch to buy another property I wouldn't.

http://uk.finance.yahoo.com/news/Typical-house-pri...

[anonymous-user]

if I could just afford to buy a property for rent with a 75% mortgage, I'd save up a bit longer and buy when I only needed to borrow 50% (either by having more deposit and/or a lower purchase price) and I would hunt high and low for a property with 9% yield

If I didn't find one, I would keep looking until I did

[groak]

JPJPJP said:

if I could just afford to buy a property for rent with a 75% mortgage, I'd save up a bit longer and buy when I only needed to borrow 50% (either by having more deposit and/or a lower purchase price) and I would hunt high and low for a property with 9% yield

If I didn't find one, I would keep looking until I did

Is that 9% net of everything from mortgage to repairs to voids to income tax? Or is that 'chicken soup' yield of dividing cost by potential gross rent at full occupancy?

Assuming the former, (ie net) is that enough right now to keep pace with REAL inflation?

Ps: Don't mind me...I just paid 136.9p per litre for diesel today and my ass is still stinging....

[Fittster]

groak said:

JPJPJP said:

if I could just afford to buy a property for rent with a 75% mortgage, I'd save up a bit longer and buy when I only needed to borrow 50% (either by having more deposit and/or a lower purchase price) and I would hunt high and low for a property with 9% yield

If I didn't find one, I would keep looking until I did

Is that 9% net of everything from mortgage to repairs to voids to income tax? Or is that 'chicken soup' yield of dividing cost by potential gross rent at full occupancy?

Assuming the former, (ie net) is that enough right now to keep pace with REAL inflation?

Ps: Don't mind me...I just paid 136.9p per litre for diesel today and my ass is still stinging....

Isn't inflation a good thing with regarding to buying properties, the value of the debt you taken on is eroded?

[groak]

Fittster said:

groak said:

JPJPJP said:

if I could just afford to buy a property for rent with a 75% mortgage, I'd save up a bit longer and buy when I only needed to borrow 50% (either by having more deposit and/or a lower purchase price) and I would hunt high and low for a property with 9% yield

If I didn't find one, I would keep looking until I did

Is that 9% net of everything from mortgage to repairs to voids to income tax? Or is that 'chicken soup' yield of dividing cost by potential gross rent at full occupancy?

Assuming the former, (ie net) is that enough right now to keep pace with REAL inflation?

Ps: Don't mind me...I just paid 136.9p per litre for diesel today and my ass is still stinging....

Isn't inflation a good thing with regarding to buying properties, the value of the debt you taken on is eroded?

Well yes but wage inflation has to keep pace to allow affordability. The slight concern is that property has price-inflated beyond affordability, particularly in SE England, and so it may take a long period of wage inflation until properties are again affordable, never mind rising in price because they're EASILY affordable. Not much sign of wage inflation, is there?

[anonymous-user]

9% headline yield (gross annual rent / purchsae price) and 50% loan to value are the first boxes that need to be ticked for me to look further.

[SimonV8ster]

Think I'll waste my money on cars instead !! Thanks for all the info guys

[groak]

JPJPJP said:

9% headline yield (gross annual rent / purchsae price) and 50% loan to value are the first boxes that need to be ticked for me to look further.

So that's 9% gross before costs and using an assumption of uninterrupted full occupancy? I take it the point is to hope for capital gain in the future. What charge rate do you use to calculate the mortgage cost? And do you build in the opportunity cost of the (50%)deposit ?

Edited by groak on Wednesday 12th January 11:08

[fid]

groak said:

Well yes but wage inflation has to keep pace to allow affordability. The slight concern is that property has price-inflated beyond affordability, particularly in SE England, and so it may take a long period of wage inflation until properties are again affordable, never mind rising in price because they're EASILY affordable. Not much sign of wage inflation, is there?

I was trying to explain exactly this to colleagues this evening. It's inexplicably difficult to convince some people of the effects of interest rate increases on property affordability, and the potential long-term stagnation of property prices if interest rates are kept low. I see absolutely no reason for an increase in prices in the general market for the next few years. So I wouldn't say it's worth buying another property unless you're happy to lose out in the short to medium term, but there's little point in that when other income-generating investments are available.

[anonymous-user]

groak said:

JPJPJP said:

9% headline yield (gross annual rent / purchsae price) and 50% loan to value are the first boxes that need to be ticked for me to look further.

So that's 9% gross before costs and using an assumption of uninterrupted full occupancy? I take it the point is to hope for capital gain in the future. What charge rate do you use to calculate the mortgage cost? And do you build in the opportunity cost of the (50%)deposit ?

Edited by groak on Wednesday 12th January 11:08

Yes, 9% gross before costs and working on uninterrupted full occupancy, no payment delinquency by tenants etc. I don't work on the basis if needing a capital gain as I don't intend to sell - this is legacy investing for me. Mortgage costs are calculated on the best 5yr fixed rate repayment mortgage available to me at the time and the deposit is considered as sunk. I haven't done and don't plan to do equity release. Rent received in excess of costs is used to overpay the capital element of the mortgage, the aim being that the property clears its attached debt as soon as it can.

Essentially my calculation is based on the fact that the tenant(s) will, over the course of time, buy the other half of the house and that the yield as a function of the money spent to get is then attractive. I insure the mortgage debt so that were I to die, the portfolio would be debt free.

Academic at the moment as I haven't seen anything that ticks enough boxes to buy since late 2004 - but I keep looking. I think I mentioned in an earlier post that I wouldn't buy something that I wouldn't live in, or that I wouldn't be happy for my children / parents to live in.

I would never advocate that this is the best investment or even anywhere approaching good. I am not qualified to make such recommendations, but it works for me.

[Boshly]

groak said:

JPJPJP said:

9% headline yield (gross annual rent / purchsae price) and 50% loan to value are the first boxes that need to be ticked for me to look further.

So that's 9% gross before costs and using an assumption of uninterrupted full occupancy? I take it the point is to hope for capital gain in the future. What charge rate do you use to calculate the mortgage cost? And do you build in the opportunity cost of the (50%)deposit ?

Edited by groak on Wednesday 12th January 11:08

But 9% yield on a 50% loan gives ample payback assuming realistic voids of say 15% (if bought sensibly). A 15 year repayment loan and no serious maintenance or void issues and you (your tenants) have paid for the property (yes you've had nil interest on your deposit and I have ignored opportunity costs as this is what this is). Can't see your money doubling in 15 years anywhere else at the moment? Only thing I haven't taken on board is tax on income but should be there or there abouts?

Oh and any appreciation in property value (and chances are there will be some higher than inflation) is a bonus.

Depends so so much on the property and the potential tenants; and is definitely hard work!!

[groak]

Boshly said:

groak said:

JPJPJP said:

9% headline yield (gross annual rent / purchsae price) and 50% loan to value are the first boxes that need to be ticked for me to look further.

So that's 9% gross before costs and using an assumption of uninterrupted full occupancy? I take it the point is to hope for capital gain in the future. What charge rate do you use to calculate the mortgage cost? And do you build in the opportunity cost of the (50%)deposit ?

Edited by groak on Wednesday 12th January 11:08

But 9% yield on a 50% loan gives ample payback assuming realistic voids of say 15% (if bought sensibly). A 15 year repayment loan and no serious maintenance or void issues and you (your tenants) have paid for the property (yes you've had nil interest on your deposit and I have ignored opportunity costs as this is what this is). Can't see your money doubling in 15 years anywhere else at the moment? Only thing I haven't taken on board is tax on income but should be there or there abouts?



Oh and any appreciation in property value (and chances are there will be some higher than inflation) is a bonus.

Depends so so much on the property and the potential tenants; and is definitely hard work!!

Try doing the math. Property = £100k. Rent = £9kpa. 15% void? (-£1350) leaves £7650. £50k 15 year repayment loan at what, average 5% (very optimistic) ? (-4800) leaves £2850. Life insurance cover DTA on 50k/15yrs ? Dunno. £500pa? leaves £2350. BI £350? leaves £2000. Repairs renovations refurbishments etc £765) leaves £1235. Accountancy £235? leaves £1000. Management costs (petrol etc including personal time rated at £10ph assuming the owner is a low earner)? lets kid ourselves on. An hour a week + costs. £750pa (and yes, a letting agent wouldn't charge much more, but that's not how some people think)leaves £250. Opportunity cost of deposit of £50k at a very miserable 2%pa, £1000 leaves -£750. So the top of the head unavoidable costs without the ones I've forgotten or any contingencies at all leaves this with an annual net loss.

Really you'd have to pray that prices went up, wouldn't you? Especially as there is a price/rent correlation. Imagine if you expanded it and had 100 of them? Or a 1000? It's bonkers, that's what it is. Though it's probably not that uncommon. And THAT'S using 5% as the average interest rate. Try 10!!

Edited by groak on Thursday 13th January 14:38

[anonymous-user]

groak said:

Boshly said:

groak said:

JPJPJP said:

9% headline yield (gross annual rent / purchsae price) and 50% loan to value are the first boxes that need to be ticked for me to look further.

So that's 9% gross before costs and using an assumption of uninterrupted full occupancy? I take it the point is to hope for capital gain in the future. What charge rate do you use to calculate the mortgage cost? And do you build in the opportunity cost of the (50%)deposit ?

Edited by groak on Wednesday 12th January 11:08

But 9% yield on a 50% loan gives ample payback assuming realistic voids of say 15% (if bought sensibly). A 15 year repayment loan and no serious maintenance or void issues and you (your tenants) have paid for the property (yes you've had nil interest on your deposit and I have ignored opportunity costs as this is what this is). Can't see your money doubling in 15 years anywhere else at the moment? Only thing I haven't taken on board is tax on income but should be there or there abouts?




Oh and any appreciation in property value (and chances are there will be some higher than inflation) is a bonus.

Depends so so much on the property and the potential tenants; and is definitely hard work!!

Try doing the math. Property = £100k. Rent = £9kpa. 15% void? (-£1350) leaves £7650. £50k 15 year repayment loan at what, average 5% (very optimistic) ? (-4800) leaves £2850. Life insurance cover DTA on 50k/15yrs ? Dunno. £500pa? leaves £2350. BI £350? leaves £2000. Repairs renovations refurbishments etc £765) leaves £1235. Accountancy £235? leaves £1000. Management costs (petrol etc including personal time rated at £10ph assuming the owner is a low earner)? lets kid ourselves on. An hour a week + costs. £750pa (and yes, a letting agent wouldn't charge much more, but that's not how some people think)leaves £250. Opportunity cost of deposit of £50k at a very miserable 2%pa, £1000 leaves -£750. So the top of the head unavoidable costs without the ones I've forgotten or any contingencies at all leaves this with an annual net loss.

Really you'd have to pray that prices went up, wouldn't you? Especially as there is a price/rent correlation. Imagine if you expanded it and had 100 of them? Or a 1000? It's bonkers, that's what it is. Though it's probably not that uncommon. And THAT'S using 5% as the average interest rate. Try 10!!

Edited by groak on Thursday 13th January 14:38

Some of your maths is right, some is a bit out based on my own circumstances but, in general terms you are right in that there isn't a massive amount of profit to be had from an individual house in cash terms. I can illustrate with a real example of a house I have in York - this is about the mid point of my portfolio in performance terms

Purchase price £87,500 Q4 2001
Gross rent £650 (its been empty for a total of 4 months since Jan 2002)

Less
Agent fees £62.40
Mortgage £311.90
Insurance £11.91
Life insurance £7.81
Gas cover etc. £21.02

Normal monthly 'profit' = £234.96

Of which £100 is made as an overpayment on the mortgage leaving £134.96 (£1,619.52 for the year) to cover repairs etc. and (potentially) profit.

In yield terms, I put in £46k to start with (after stamp duty, fees etc) so currently the gross yield is 8.9% and the gross yield on my £46k is 16.95%. If I had no voids, repairs but still made the overpayment, the £1619.52 represents a 3.5% pre tax return on my £46k.

The attraction in it is that the tenants will have added the remaining £41,500 of the purchase price in due course, meaning that I bought a £87,500 house that is also then a £7,800 gross income stream for not far off £46k (the 16.95%). Not far off index linked in terms of rent too.

Yes, the house is worth more than that now, but I don't account for that in my assessments (in case it tempts me to remortgage!)

Edited by anonymous-user on Thursday 13th January 16:06

[groak]

JPJPJP said:

groak said:

Boshly said:

groak said:

JPJPJP said:

9% headline yield (gross annual rent / purchsae price) and 50% loan to value are the first boxes that need to be ticked for me to look further.

So that's 9% gross before costs and using an assumption of uninterrupted full occupancy? I take it the point is to hope for capital gain in the future. What charge rate do you use to calculate the mortgage cost? And do you build in the opportunity cost of the (50%)deposit ?

Edited by groak on Wednesday 12th January 11:08

But 9% yield on a 50% loan gives ample payback assuming realistic voids of say 15% (if bought sensibly). A 15 year repayment loan and no serious maintenance or void issues and you (your tenants) have paid for the property (yes you've had nil interest on your deposit and I have ignored opportunity costs as this is what this is). Can't see your money doubling in 15 years anywhere else at the moment? Only thing I haven't taken on board is tax on income but should be there or there abouts?




Oh and any appreciation in property value (and chances are there will be some higher than inflation) is a bonus.

Depends so so much on the property and the potential tenants; and is definitely hard work!!

Try doing the math. Property = £100k. Rent = £9kpa. 15% void? (-£1350) leaves £7650. £50k 15 year repayment loan at what, average 5% (very optimistic) ? (-4800) leaves £2850. Life insurance cover DTA on 50k/15yrs ? Dunno. £500pa? leaves £2350. BI £350? leaves £2000. Repairs renovations refurbishments etc £765) leaves £1235. Accountancy £235? leaves £1000. Management costs (petrol etc including personal time rated at £10ph assuming the owner is a low earner)? lets kid ourselves on. An hour a week + costs. £750pa (and yes, a letting agent wouldn't charge much more, but that's not how some people think)leaves £250. Opportunity cost of deposit of £50k at a very miserable 2%pa, £1000 leaves -£750. So the top of the head unavoidable costs without the ones I've forgotten or any contingencies at all leaves this with an annual net loss.

Really you'd have to pray that prices went up, wouldn't you? Especially as there is a price/rent correlation. Imagine if you expanded it and had 100 of them? Or a 1000? It's bonkers, that's what it is. Though it's probably not that uncommon. And THAT'S using 5% as the average interest rate. Try 10!!

Edited by groak on Thursday 13th January 14:38

Some of your maths is right, some is a bit out based on my own circumstances but, in general terms you are right in that there isn't a massive amount of profit to be had from an individual house in cash terms. I can illustrate with a real example of a house I have in York - this is about the mid point of my portfolio in performance terms

Purchase price £87,500 Q4 2001
Gross rent £650 (its been empty for a total of 4 months since Jan 2002)

Less
Agent fees £62.40
Mortgage £311.90
Insurance £11.91
Life insurance £7.81
Gas cover etc. £21.02

Normal monthly 'profit' = £234.96

Of which £100 is made as an overpayment on the mortgage leaving £134.96 (£1,619.52 for the year) to cover repairs etc. and (potentially) profit.

In yield terms, I put in £46k to start with (after stamp duty, fees etc) so currently the gross yield is 8.9% and the gross yield on my £46k is 16.95%. If I had no voids, repairs but still made the overpayment, the £1619.52 represents a 3.5% pre tax return on my £46k.

The attraction in it is that the tenants will have added the remaining £41,500 of the purchase price in due course, meaning that I bought a £87,500 house that is also then a £7,800 gross income stream for not far off £46k (the 16.95%). Not far off index linked in terms of rent too.

Yes, the house is worth more than that now, but I don't account for that in my assessments (in case it tempts me to remortgage!)

Edited by JPJPJP on Thursday 13th January 16:06

So with the most basic refurb/repair costs and a few of the other essentials like p.o.l, landlord registration, accountancy etc and a 2% opportunity cost on £46k it makes a minus.

The problem is most definitely with this 9% 'yield' calc involving cost price and rent at full occupancy. Just doesn't work.

It's therefore left with capital gain possibilities. And that's dangerous too, because the usual 'chicken soup' CG calculation doesn't take the effect of inflation into account.

If capital gain's the aim, isn't there the likelihood of far greater reward by investing in a strong property fund?