BTL - Why would you ever buy for cash?
Discussion
Just a question, perhaps I'm missing something (I'm also not in this situation at all but was wondering)
When you see all the articles in the newspapers, and on the internet, you always see yield %ages thrown around all over the place. These yields are always calculated, imho, in a stupid way, because they're all assuming you bought the flat/house for cash.
e.g. If we're looking at a £100000 house, which is rentable for £500/month.
According to these articles the yield would be 500*12/100000 = 6%, on top of that, you have to remove tax, which, if you were at 40%, would be on the full amount (because you have no mortgage interest to offset) which brings it down to 3.6% yield.
However, if you were to mortgage it, it would look something like
rent-mortgage-(tax-taxoninterest)/deposit = 12*(500-185*-(126**))/25000 = 2268/25000 = 9.1% yield
When you see all the articles in the newspapers, and on the internet, you always see yield %ages thrown around all over the place. These yields are always calculated, imho, in a stupid way, because they're all assuming you bought the flat/house for cash.
e.g. If we're looking at a £100000 house, which is rentable for £500/month.
According to these articles the yield would be 500*12/100000 = 6%, on top of that, you have to remove tax, which, if you were at 40%, would be on the full amount (because you have no mortgage interest to offset) which brings it down to 3.6% yield.
However, if you were to mortgage it, it would look something like
rent-mortgage-(tax-taxoninterest)/deposit = 12*(500-185*-(126**))/25000 = 2268/25000 = 9.1% yield
- 3 year fixed looked up briefly on moneysupermarket
- I know the BTL tax rules are changing in april to increase the amount of tax paid
I can't comment on your figures, but your basic idea is about right - its called gearing and is widely practiced.
However because the finance arrangements etc are so individual, and often unknown, figures are always quote on a gross yield basis (or net initial yield, which takes account on stamp duty and professional fees) as it allows everyone to compare apples with apples when looking at investment types
However because the finance arrangements etc are so individual, and often unknown, figures are always quote on a gross yield basis (or net initial yield, which takes account on stamp duty and professional fees) as it allows everyone to compare apples with apples when looking at investment types
Salgar said:
Is there anything wrong with my logic here? The only downside I see is being exposed to interest rates, but it seems like a risk worth taking (at least at the moment).
The missing element may be risk, which increases with leverage. If you have a 75% LTV then a 25% fall in valuation wipes out all of your invested capital. If you own the property outright then the same 25% fall "only" wipes out 25% of your capital. Of course the inverse is true for gains.When you are leveraged :
- the interest payments reduce your returns
- your exposure to valuation changes is magnified
Simplistically - the return is higher because you've taken on more (valuation) risk.
The other fundamentals gross yield don't factor in are cost & voids:
- % void which varies widely but can be approximated if you categorise the target market (eg students, expats etc)
- service charges & similar if it's a flat
- agency fees for search and/or management
- your own time
the last one hardly ever gets a mention. But any business plan should put a cost against your time to run it. If I put my company's normal hourly charge out rate into my spreadsheets on BTL, it usually paints an entirely different picture. Most people just assume profit = income which is very short sighted.
- % void which varies widely but can be approximated if you categorise the target market (eg students, expats etc)
- service charges & similar if it's a flat
- agency fees for search and/or management
- your own time
the last one hardly ever gets a mention. But any business plan should put a cost against your time to run it. If I put my company's normal hourly charge out rate into my spreadsheets on BTL, it usually paints an entirely different picture. Most people just assume profit = income which is very short sighted.
For various reasons people end up owning a house that they then decide to rent out. Effectively they own it having paid cash.
I may be through inheritance or buying for parents etc.
I happen to agree it may probably be better as an investor to borrow to buy but there are a large number that own outright and then rent out. It is therefore a model for some people to consider. But what if you choose to invest idle cash at 2% in property instead.
Also consider that not every landlord is a 40% tax payer.
Early retirees....only property income...couples jointly owning their rentals and splitting income.
Whilst I appreciate your own time has a value, that value may be very low to some people, so working on a rental or playing with investment spreadsheets may take time but they may prefer to do something than nothing, so to speak.
The profile of landlords is so much more varied than the one reported by the press.
I may be through inheritance or buying for parents etc.
I happen to agree it may probably be better as an investor to borrow to buy but there are a large number that own outright and then rent out. It is therefore a model for some people to consider. But what if you choose to invest idle cash at 2% in property instead.
Also consider that not every landlord is a 40% tax payer.
Early retirees....only property income...couples jointly owning their rentals and splitting income.
Whilst I appreciate your own time has a value, that value may be very low to some people, so working on a rental or playing with investment spreadsheets may take time but they may prefer to do something than nothing, so to speak.
The profile of landlords is so much more varied than the one reported by the press.
Behemoth said:
<snip>
the last one hardly ever gets a mention. But any business plan should put a cost against your time to run it. If I put my company's normal hourly charge out rate into my spreadsheets on BTL, it usually paints an entirely different picture. Most people just assume profit = income which is very short sighted.
which is BTL has such a poor reputation everywhere but the PH bubble ... thanks to the amateur propertry tycoons who can;t construct a proper cost model therefore assume that reciepts above the mortage etc are profit nevver mind their poor grip on wear and tear and quiet enjoyment ... and this is before getting on the over hair gelled, pointed brown shoes with blue suits idiots of letting agents ... the last one hardly ever gets a mention. But any business plan should put a cost against your time to run it. If I put my company's normal hourly charge out rate into my spreadsheets on BTL, it usually paints an entirely different picture. Most people just assume profit = income which is very short sighted.
Surely it depends on why you want to BTL and where you're buying.
The advantage of a mortgage is it allows you to leverage your deposit and therefore control an asset that is hopefully rising over time. Providing that the rental yields are sufficient to cover the liabilities (interest, tax, voids, fees, maintenance, etc) then. If you can control the asset for 20% deposit and it increases in value by 20% then you've doubled your investment (minus taxes, and less foregone interest) over that period of time. This would be particularly attractive in, for example, London where property prices continue to rise at stupid rates.
On the other hand, if you wanted to create a passive income stream, then you are more likely interested in maximising yield which may give you a different question. At the extreme of this example is where landlords move into buying very large and very cheap properties where there's a lot of need for single room housing and do HMOs.
So from my perspective, it really depends upon what your financial objective is as to whether using a mortgage (and how much LTV) is optimal.
As an aside, I've noticed quite a few people moving into BTL to AirBNB. They run the risk of much greater voids but if you get the right property in the right location you can make substantial yields with minimal voids. Studio and small flats in city centres are perfect for this.
The advantage of a mortgage is it allows you to leverage your deposit and therefore control an asset that is hopefully rising over time. Providing that the rental yields are sufficient to cover the liabilities (interest, tax, voids, fees, maintenance, etc) then. If you can control the asset for 20% deposit and it increases in value by 20% then you've doubled your investment (minus taxes, and less foregone interest) over that period of time. This would be particularly attractive in, for example, London where property prices continue to rise at stupid rates.
On the other hand, if you wanted to create a passive income stream, then you are more likely interested in maximising yield which may give you a different question. At the extreme of this example is where landlords move into buying very large and very cheap properties where there's a lot of need for single room housing and do HMOs.
So from my perspective, it really depends upon what your financial objective is as to whether using a mortgage (and how much LTV) is optimal.
As an aside, I've noticed quite a few people moving into BTL to AirBNB. They run the risk of much greater voids but if you get the right property in the right location you can make substantial yields with minimal voids. Studio and small flats in city centres are perfect for this.
MadProfessor said:
As an aside, I've noticed quite a few people moving into BTL to AirBNB. They run the risk of much greater voids but if you get the right property in the right location you can make substantial yields with minimal voids. Studio and small flats in city centres are perfect for this.
Have you also noticed these people calculating the huge extra time cost for dealing with checkin, checkout and laundry? Plus much higher wear & tear? Plus breaking of various lease clauses? Not to mention allowing neighbours peaceful enjoyment & the 90 day rule in London. Yield is such a crude measure 
Salgar said:
The only downside I see is being exposed to interest rates, but it seems like a risk worth taking (at least at the moment).
Don't make the mistake of thinking that houses are an investment with a miraculous "price never goes down" characteristic. A lot of people got their fingers burnt in 2008.If you borrow £200k to buy a £250k house and the market collapses by, say, 50% you then have a house worth £125k but you still owe the bank £200k. What's your next move?
Ozzie Osmond said:
Salgar said:
The only downside I see is being exposed to interest rates, but it seems like a risk worth taking (at least at the moment).
Don't make the mistake of thinking that houses are an investment with a miraculous "price never goes down" characteristic. A lot of people got their fingers burnt in 2008.If you borrow £200k to buy a £250k house and the market collapses by, say, 50% you then have a house worth £125k but you still owe the bank £200k. What's your next move?
Salgar said:
Just a question, perhaps I'm missing something (I'm also not in this situation at all but was wondering)
When you see all the articles in the newspapers, and on the internet, you always see yield %ages thrown around all over the place. These yields are always calculated, imho, in a stupid way, because they're all assuming you bought the flat/house for cash.
e.g. If we're looking at a £100000 house, which is rentable for £500/month.
According to these articles the yield would be 500*12/100000 = 6%, on top of that, you have to remove tax, which, if you were at 40%, would be on the full amount (because you have no mortgage interest to offset) which brings it down to 3.6% yield.
However, if you were to mortgage it, it would look something like
rent-mortgage-(tax-taxoninterest)/deposit = 12*(500-185*-(126**))/25000 = 2268/25000 = 9.1% yield
Yield is generally used to describe the % against the value of the property. Its universal so easy to compare properties of different value to see which one is better value.When you see all the articles in the newspapers, and on the internet, you always see yield %ages thrown around all over the place. These yields are always calculated, imho, in a stupid way, because they're all assuming you bought the flat/house for cash.
e.g. If we're looking at a £100000 house, which is rentable for £500/month.
According to these articles the yield would be 500*12/100000 = 6%, on top of that, you have to remove tax, which, if you were at 40%, would be on the full amount (because you have no mortgage interest to offset) which brings it down to 3.6% yield.
However, if you were to mortgage it, it would look something like
rent-mortgage-(tax-taxoninterest)/deposit = 12*(500-185*-(126**))/25000 = 2268/25000 = 9.1% yield
- 3 year fixed looked up briefly on moneysupermarket
- I know the BTL tax rules are changing in april to increase the amount of tax paid
What you are taliking about is return on investment (ROI) which is measuring your personal return based on your cash invested, and the loan you personally have. Its the way you work out what you are making as a profit, but its useless when looking at other property.
I make 6-7% yield on all my properties, but the ROI is between 7 and 14% depending on how they are financed. If I were to buy another property I would be discussing the potential yield with agents, not the ROI.
If you had a mortgage the following could happen
No tenant means you need to pay mortgage yourself which can be off putting
You have a debt that you may not want
Rates could increase
You have hassle of buying surveys, insurance and so on. Cash buyers don't need that
You may not be in as good buying position eg repossessions, auctions etc
Who would you sell to?ma cash buyer needing no survey that can complete ASAP or a mortgage customer that needs a survey and for it to value up
Mortgages have fees associated with them
The lender can dictate who you rent to etc
That's like everything in life , risk and reward. Why buy shares, why not spread bet on a leveraged bet.
If house prices come down then you would wish you paid cash
No tenant means you need to pay mortgage yourself which can be off putting
You have a debt that you may not want
Rates could increase
You have hassle of buying surveys, insurance and so on. Cash buyers don't need that
You may not be in as good buying position eg repossessions, auctions etc
Who would you sell to?ma cash buyer needing no survey that can complete ASAP or a mortgage customer that needs a survey and for it to value up
Mortgages have fees associated with them
The lender can dictate who you rent to etc
That's like everything in life , risk and reward. Why buy shares, why not spread bet on a leveraged bet.
If house prices come down then you would wish you paid cash
jonah35 said:
If you had a mortgage the following could happen
No tenant means you need to pay mortgage yourself which can be off putting
You have a debt that you may not want
Rates could increase
You have hassle of buying surveys, insurance and so on. Cash buyers don't need that
You may not be in as good buying position eg repossessions, auctions etc
Who would you sell to?ma cash buyer needing no survey that can complete ASAP or a mortgage customer that needs a survey and for it to value up
Mortgages have fees associated with them
The lender can dictate who you rent to etc
That's like everything in life , risk and reward. Why buy shares, why not spread bet on a leveraged bet.
If house prices come down then you would wish you paid cash
However if you have the cash you could purchase with cash and refinance with mortgage at a later date. Thereby getting all of the advantages of being a cash buyer (quick purchase, discounts, etc) but later leveraging. No tenant means you need to pay mortgage yourself which can be off putting
You have a debt that you may not want
Rates could increase
You have hassle of buying surveys, insurance and so on. Cash buyers don't need that
You may not be in as good buying position eg repossessions, auctions etc
Who would you sell to?ma cash buyer needing no survey that can complete ASAP or a mortgage customer that needs a survey and for it to value up
Mortgages have fees associated with them
The lender can dictate who you rent to etc
That's like everything in life , risk and reward. Why buy shares, why not spread bet on a leveraged bet.
If house prices come down then you would wish you paid cash
Ozzie Osmond said:
Don't make the mistake of thinking that houses are an investment with a miraculous "price never goes down" characteristic. A lot of people got their fingers burnt in 2008.
If you borrow £200k to buy a £250k house and the market collapses by, say, 50% you then have a house worth £125k but you still owe the bank £200k. What's your next move?
Rents don't tend to fall with house prices, so ride the wave. Interest rates is the real danger.If you borrow £200k to buy a £250k house and the market collapses by, say, 50% you then have a house worth £125k but you still owe the bank £200k. What's your next move?
^^ This.
The sums all seem fine and dandy just now, when you can enjoy a BTL mortgage rate of 2%, but when (not if) the mortgage rates go back up to 6% and above, these sums will suddenly look very different; and it's the cash buyers who will still be smiling while all the geared up landlords are crapping their pants.
This will be when the property bubble finally bursts, when the rates start rocketing back up in 3, 5 or maybe 10 years time. All the folk with 20% deposits and mortgages that are only just covered by the rent will start making a loss AND will be being taxed fully on their entire rental income. This will cause a mass sell off of BTL and the whole market will see a big correction.
Then the cash buyers will gear up and hoover up all the cheap properties.
That's my prediction anyway. It's the same cycle that's happened over the last 50 or so years.
The sums all seem fine and dandy just now, when you can enjoy a BTL mortgage rate of 2%, but when (not if) the mortgage rates go back up to 6% and above, these sums will suddenly look very different; and it's the cash buyers who will still be smiling while all the geared up landlords are crapping their pants.
This will be when the property bubble finally bursts, when the rates start rocketing back up in 3, 5 or maybe 10 years time. All the folk with 20% deposits and mortgages that are only just covered by the rent will start making a loss AND will be being taxed fully on their entire rental income. This will cause a mass sell off of BTL and the whole market will see a big correction.
Then the cash buyers will gear up and hoover up all the cheap properties.
That's my prediction anyway. It's the same cycle that's happened over the last 50 or so years.
July 2008
"The latest UK house price data as released by Rightmove shows that the UK housing market crash continues to accelerate by registering a fall of 1.8% for July 08. The rate of descent on an annualised basis now extends to -11%. The housing market is in full panic selling mode, as property owners slashing prices are met with silence from potential home buyers."
"The latest UK house price data as released by Rightmove shows that the UK housing market crash continues to accelerate by registering a fall of 1.8% for July 08. The rate of descent on an annualised basis now extends to -11%. The housing market is in full panic selling mode, as property owners slashing prices are met with silence from potential home buyers."
We paid cash for a new build flat that we are renting. This way, we have no money worries if/WHEN the housing market changes. It's now giving us a good return. Otherwise, if the money was sitting in the bank it would a) not give us a very good return at all and b) tempt us into dipping into the pot for fast cars/bikes/house improvements etc hahaha.
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