Anonymous 1 needed this 'Off the Record'

In my town you can buy a two bedroom flat for around 120,000 GDP, and rental return would be 6500 per annum. Not a great rate of return, but if you get a property that does not need too much renovation and maintenance adn you can manage it yourself probably as they say OK as part of a balanced portfolio. What I think is good about buy to let is that you have a fair amount of control, which is not true of pension funds or shares, or even bank interest rates. Of course it does depend on market conditions, but you can still have some input to achieve a good result.

If you are buying with cash then a 2% return is a good deal but a BTL mortgage is a different matter. With many people 90% of disposable income goes in rent. These same people may save a few pounds with the same people, who lend it back to you as mortgage.
This is in effect, slavery whereby somebody is working with no reward for anyone other than the landlord, ie they are assured a life of poverty and labour with no forseeable escape. Been there, done that and I can assure you that nothing is more depressing.
This is a matter for your conscience, if you want to sleep at night then try something else but if you couldn't care less then go ahead.

I am a 40 year old looking to retire at 50. For me, property is a significant part of my plan. Let me explain: I plan to buy three 3 bedroom houses valued at £200k each. They will each rent for £850 per month. I plan a deposit of £50k each. This means that if I contribute an additional £450 per month to each property the mortgage will be paid off in ten years giving me an income of £2,550 per month before tax ( at current rates).

Assuming I saved the £1,350 per month ie £450 x 3, I would achieve a total savings of £162k in 10 years - far less than the value of the three houses ( £600k in today's terms). Also, assuming 5% return on the £162k equates to only c£8k per annum.

Property can still work but you need to:
(a) have an appropriate deposit
(b) supplement the monthly mortgage
(c) ensure you are committed to a period of time

PS if someone has any better suggesting / comments I would be interested in hearing them

Anonymous 2 needed this 'Off the Record'

I understand that housing benefit will be severely cut back especially for the under 35s

http://england.shelter.o...y_the_spending_review#0

Isn't this likely to drive rents down?

The housing benefit cuts will tend to drive private rents down but the lack of a public sector alternative will force renters to pay whatever is asked or be homeless. Some will become homeless and others will be forced to share or move down market. Others will be able to cut other such as Sky subscriptions or visits to the pub. Sellers of down market luxuries are in for a hard time.

Hi all, thanks for your comments. I appreciate the risks and costs outlined above - my numbers were not intended to be that detailled so as to highlight the purchase costs, etc. Let me explain:

£200k house less £50k deposit = £150k mortgage. At 5%, and over 10 years it would cost £1,590 per month. Rent will be £900 leaving me to find a further £690 per house (the £450 above came from a different set of assumptions where my deposit was greater. Sorry for the confusion but the principal remains). This means I need £2,070 per month to fund 3 houses over 10 years.

If I saved £2,070 per month for 120 months I would have £248,400 which forgetting any complex interest calculations would give me a gross income of £12,240 per annum based on an optimistic 5%

In comparison, the property would give me £32,400 gross based on current rental figures.

My question to you is: can I get a better (same risk level) return on £150k outside property? If so, where?

Thanks.

Colm

Your proposition is way too simplistic.

1. You are ignoring the opportunity cost of the £150,000 deposits over the 10 years you are paying down the mortgages
2. You are ignoring the opportunity cost of the interest charges on your mortgages over the 10 years you are paying these
3. You are not takng account of the transaction costs
4. You are not taking account of the costs of managing rental properties - insurance, repairs, annual safety checks etc
5. You are not taking account of the income tax you will pay on profits
6. You are assuming that rental values will continue to be as high as they currently are - I do not believe they will
7. You are ignoring the likelihood of void periods when you collect no rent - they will most likely happen
8. You are assuming that property values will not fall - I think they will

Your comparison of savings vs property purchase/rental is skewed towards the property solution because of items 1 to 7 above and you are not taking into account the risk to your capital.

Colm

Further to by earlier post, I agree with Jim Watts and have now done the maths:

Assumptions:
1. Initial investment £150k
2. Initial costs £5K
3. Mortgage repayment £1630pm (5.5% / 10 year term)
4. Letting Fees 8% of rental
5. Cost of maintenance (over 10 years this could include 3 kitchens and 3 bathrooms, 6 interior and exterior redecorations, carpets for whole house x6), insurance, void periods, defaulting tenants and miscellaneous other expenses - say £85pm
6. Assumed rate of monthly interest - 0.33%pm (approx 4.3%pa)

The total value of the fund after 10 years is £668,951 (including £155,607 gross interest)

Thanks for your responses. They are appreciated. There are risks as with all investments - for completness, my proposal is coupled with a portfolio that includes three other properties ( two have the equivelant of no mortgage) and a pension. Interestingly, i have decided to rent my main home (where i live) for lots of reasons (maintenance, flexible location, location affordability, etc).

Based on Jims comments and Michael's sums, the fund value at the end of the period is still significantly more than a 5% return from alternative investments - even if property values stay static (and it wont be static for 10 years). It also gives me an income when I am 50 and something I can leave to my kids when I die!

My generation is lucky in many respects as we have accumulated some wealth in our homes. Property will continue to be unaffordable for future generations and hence renting will become an accepted norm (we don't need to own our homes and may not want to if they are not growing like they previously have). The properties I am interested represent much better value than flats - which are priced the same. Even if they droped by 20% they still represent a good investment. I am also not in a rush to buy - I will keep challenging prices until I get what I need - I envisage this to be an 18 month process.

The challenge i have is that I cannot find anyone who can be specific about what the alternative is. We have talked about property above - show me a fund which offers the same as property (difficult isnt it as not many people have that kind of crystal ball - or rather the time to investigate the options). Therefore, for people like me with cash and a solid income (and a desire to understand what I am buying) property will always be the way to go as a long term investment.....

I think my approach is logical but..... I remain open to persuasion....

This info might help:

http://www.buytoletlandlordsolutions.com/index.php/letting-services/let-to-buy-properties