BTL - how does it make money?
Discussion
Consigliere said:
My situation is slightly different, bought a flat to live in in 2006, yup right before the big crash. Not a problem as i needed somewhere to live but it was in a poverty stricken area hence it was something i could afford at the time. Several years later, job opportunity meant i moved to another city - too far to commute so went to sell up, valuations came in which would have left me in serious negative equity, so instead i rented it out.
One thing i didn't realise was when i bought it was there was less than 80 years remaining on the lease - i did realise but didnt know what this meant when selling in the future. Thus as the lease shortens the value of the property hasnt grown as a freehold property or a long lease property would.
The area hasnt improved over the years and at a guess i would be lucky to get 20% increase in what i paid in 2006 - and a lot less potential buyers due to cash only (would be very hard to get a mortgage based on the remaining lease).
With inflation going up, utilities, new NI increase, ive decided to take a look at my finances again and see where i can tighten the belt so to speak.
I am an accidental landlord, it wasnt a strategy just limited options at any given time
That sounds like a very similar scenario to what Im in, I bought my 1 bed flat in Dec 2005, I moved 50 miles away in 2014 and rented it out since.One thing i didn't realise was when i bought it was there was less than 80 years remaining on the lease - i did realise but didnt know what this meant when selling in the future. Thus as the lease shortens the value of the property hasnt grown as a freehold property or a long lease property would.
The area hasnt improved over the years and at a guess i would be lucky to get 20% increase in what i paid in 2006 - and a lot less potential buyers due to cash only (would be very hard to get a mortgage based on the remaining lease).
With inflation going up, utilities, new NI increase, ive decided to take a look at my finances again and see where i can tighten the belt so to speak.
I am an accidental landlord, it wasnt a strategy just limited options at any given time
Edited by Consigliere on Wednesday 2nd February 11:28
I am currently trying to negotiate with the Property management company to a collective lease extension with the 7 other flats in the building.
superlightr said:
98elise said:
I'd happily sell any of my BTL's to my tenants (I'm not emotionally attached to them) but only at a fair market value. If Labour want to make that easier for tenants I have no issues, but not making me personally fund it.
it would have to be above market value as if you as the LL wanted to re-invest you would be hit by the 2nd home tax in re-purchasing plus solicitors fees and also the time and effort to find another property.98elise said:
I wouldn't have reinvested in similar BTL. Yields in the south east are small, which is magnified by increased house prices. When I started out 6-7% was easily achieved. Now it would be 4-5%. I would be looking to holiday let's or student accommodation.
I looked at these; holiday lets aren't big in my neck of the woods but seemed quite a lot of work/risk for the return. Student lets has seen a huge amount of investment & I'd be concerned at the future risk of oversupply into what might well become a dwindling market.RaquelWashington said:
Firstly, the property's value may appreciate over time, which could provide a significant return on investment if the property is eventually sold. Additionally, as the mortgage is paid off over time, the rental income may eventually exceed the mortgage payments, resulting in a profit. It's also worth noting that rental income can fluctuate based on market
It's very unusual for rent to provide enough income to pay down the mortgage. The majority of BTL mortgages are interest only and average yields are about 5%. BTW mortgages are more expensive than residential mortgages, and you can't fully offset them as an expense. On top of that you have insurance repairs etc.
Anything left over is profit, and that of course is taxed. What you have left is unlikely to make a dent in the outstanding capital.
Certainly during my entire time renting properties in the south east, it was always easy to rent places at way below the cost of financing the same property. The only way my landlords would have made money from their properties was by riding the wave of rampant house price inflation. That is not a sensible business model. Very similar returns were also available in the stock market with the added benefit of a much higher degree of diversification plus bugger all actual work, unlike being a responsible landlord and the pain of dealing with agents. I think the most daft example I saw was a mate who was renting a 3 or 4 bed country house in East Sussex for about £600 a month, when the property would have sold for perhaps £300k and base rates were around 6% in the late 1990s. The rent was a third of what it needed to be to make any sense.
That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
ATG said:
Certainly during my entire time renting properties in the south east, it was always easy to rent places at way below the cost of financing the same property. The only way my landlords would have made money from their properties was by riding the wave of rampant house price inflation. That is not a sensible business model. Very similar returns were also available in the stock market with the added benefit of a much higher degree of diversification plus bugger all actual work, unlike being a responsible landlord and the pain of dealing with agents. I think the most daft example I saw was a mate who was renting a 3 or 4 bed country house in East Sussex for about £600 a month, when the property would have sold for perhaps £300k and base rates were around 6% in the late 1990s. The rent was a third of what it needed to be to make any sense.
That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
Lots of good points, though I don't really buy the stock market returns comparison.That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
The magic with BTL is that you can use leverage which supercharges your capital returns vs stock market where you (usually) can't.
So buy a 100k property and put 25k down. Property price increases 10% to £110,000. You've made £10k on top of your intial £25k investment (or a 40% return).
Put 25k into stock market. Stock market rises 10% so your portfolio is now worth £27,500. You've made £2.5k on your intial £25k investment (or 10%) return.
(appreciate this doesn't include stamp duty and txn costs etc which are higher for btl vs stocks)
22s said:
Lots of good points, though I don't really buy the stock market returns comparison.
The magic with BTL is that you can use leverage which supercharges your capital returns vs stock market where you (usually) can't.
So buy a 100k property and put 25k down. Property price increases 10% to £110,000. You've made £10k on top of your intial £25k investment (or a 40% return).
Put 25k into stock market. Stock market rises 10% so your portfolio is now worth £27,500. You've made £2.5k on your intial £25k investment (or 10%) return.
(appreciate this doesn't include stamp duty and txn costs etc which are higher for btl vs stocks)
Interest on the 75k? Purchase costs? Refurb/fit out, cleaning? Maintenance? Agents fees and maintenance markup? How long is the 75k, presumably interest only, loan going to run for? How many stop/start cycles in that period - as in, unoccupied periods, and then costs to get it ready to rent out? The magic with BTL is that you can use leverage which supercharges your capital returns vs stock market where you (usually) can't.
So buy a 100k property and put 25k down. Property price increases 10% to £110,000. You've made £10k on top of your intial £25k investment (or a 40% return).
Put 25k into stock market. Stock market rises 10% so your portfolio is now worth £27,500. You've made £2.5k on your intial £25k investment (or 10%) return.
(appreciate this doesn't include stamp duty and txn costs etc which are higher for btl vs stocks)
or would the plan be buy a 100k property with 25k down, IO, and let it sit empty whilst it goes up 10k?
My mate bought a 100k flat mid 2000's and sold it pretty much for what he paid for it, maybe made 10k on it all in, 14 years later. Flats don't seem to go up as much as houses. Can't be many 100k houses left, how much meat left on those bones?
Edit not meaning to sound aggressive just wrote that in a hurry - sorry - but as much as the idea of BTL appeals to me on some levels, i've never been able to make the numbers work. The idea of IO mortgages doesn't appeal either, so i'd be a cash buyer, or capital repayment. Maybe thats where it falls down. My sister is thinking of renting a single property, and she hasn't bothered to do the numbers. I'm trying to advise her to put a plan together and see if its really worthwhile.
Edited by bmwmike on Thursday 30th March 12:11
22s said:
ATG said:
Certainly during my entire time renting properties in the south east, it was always easy to rent places at way below the cost of financing the same property. The only way my landlords would have made money from their properties was by riding the wave of rampant house price inflation. That is not a sensible business model. Very similar returns were also available in the stock market with the added benefit of a much higher degree of diversification plus bugger all actual work, unlike being a responsible landlord and the pain of dealing with agents. I think the most daft example I saw was a mate who was renting a 3 or 4 bed country house in East Sussex for about £600 a month, when the property would have sold for perhaps £300k and base rates were around 6% in the late 1990s. The rent was a third of what it needed to be to make any sense.
That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
Lots of good points, though I don't really buy the stock market returns comparison.That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
The magic with BTL is that you can use leverage which supercharges your capital returns vs stock market where you (usually) can't.
So buy a 100k property and put 25k down. Property price increases 10% to £110,000. You've made £10k on top of your intial £25k investment (or a 40% return).
Put 25k into stock market. Stock market rises 10% so your portfolio is now worth £27,500. You've made £2.5k on your intial £25k investment (or 10%) return.
(appreciate this doesn't include stamp duty and txn costs etc which are higher for btl vs stocks)
22s said:
ATG said:
Certainly during my entire time renting properties in the south east, it was always easy to rent places at way below the cost of financing the same property. The only way my landlords would have made money from their properties was by riding the wave of rampant house price inflation. That is not a sensible business model. Very similar returns were also available in the stock market with the added benefit of a much higher degree of diversification plus bugger all actual work, unlike being a responsible landlord and the pain of dealing with agents. I think the most daft example I saw was a mate who was renting a 3 or 4 bed country house in East Sussex for about £600 a month, when the property would have sold for perhaps £300k and base rates were around 6% in the late 1990s. The rent was a third of what it needed to be to make any sense.
That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
Lots of good points, though I don't really buy the stock market returns comparison.That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
The magic with BTL is that you can use leverage which supercharges your capital returns vs stock market where you (usually) can't.
So buy a 100k property and put 25k down. Property price increases 10% to £110,000. You've made £10k on top of your intial £25k investment (or a 40% return).
Put 25k into stock market. Stock market rises 10% so your portfolio is now worth £27,500. You've made £2.5k on your intial £25k investment (or 10%) return.
(appreciate this doesn't include stamp duty and txn costs etc which are higher for btl vs stocks)
bmwmike said:
Maintenance? Agents fees and maintenance markup?
Don’t think you can underestimate this in the current market, very easy to wipe out a big chunk of gross return with unlucky/inopportune repairs and maintenance, and my experience is that agents and trades are being far more aggressive in screwing landlords wherever and whenever possible. (A 10-year-old serviced-every-year combi boiler condemned today, that’s a lot of rent gone…).NomduJour said:
bmwmike said:
Maintenance? Agents fees and maintenance markup?
Don’t think you can underestimate this in the current market, very easy to wipe out a big chunk of gross return with unlucky/inopportune repairs and maintenance, and my experience is that agents and trades are being far more aggressive in screwing landlords wherever and whenever possible. (A 10-year-old serviced-every-year combi boiler condemned today, that’s a lot of rent gone…).I always ask for quotes and sometimes investigate, the record being £350 for “safety works” which turned out to be the removal of a nail. Another was to adjust glazing which turned out to be a double glazing rubber seal that needed a flat blade screwdriver to push back in (£268) with both repairs carried out in 2 minutes for both jobs.
KEEP AN EYE ON YOUR AGENT, rennet tenant agency fees were banned and they have to make it bat.
tescorank said:
Yes some of these agents demand up to 25% “handling fee” from contractors and ten charge the landlord another 10% for overseeing the work. Obviously to have your own contractor changes this, and I do know of a local agent who also owns their own plumbing company.
I always ask for quotes and sometimes investigate, the record being £350 for “safety works” which turned out to be the removal of a nail. Another was to adjust glazing which turned out to be a double glazing rubber seal that needed a flat blade screwdriver to push back in (£268) with both repairs carried out in 2 minutes for both jobs.
KEEP AN EYE ON YOUR AGENT, rennet tenant agency fees were banned and they have to make it bat.
yet some dont....I always ask for quotes and sometimes investigate, the record being £350 for “safety works” which turned out to be the removal of a nail. Another was to adjust glazing which turned out to be a double glazing rubber seal that needed a flat blade screwdriver to push back in (£268) with both repairs carried out in 2 minutes for both jobs.
KEEP AN EYE ON YOUR AGENT, rennet tenant agency fees were banned and they have to make it bat.
bmwmike said:
My mate bought a 100k flat mid 2000's and sold it pretty much for what he paid for it, maybe made 10k on it all in, 14 years later. Flats don't seem to go up as much as houses. Can't be many 100k houses left, how much meat left on those bones?
I bought and sold about two flats in central London between 2008 and 2019, different times obviously.Edited by bmwmike on Thursday 30th March 12:11
In short, each of them made over 55% ROI (including transaction costs). Without transaction costs, I think one of them made around 60%, I have full annualized returns recorded somewhere.
Location is the key really for total returns (income + cap rates).
22s said:
ATG said:
Certainly during my entire time renting properties in the south east, it was always easy to rent places at way below the cost of financing the same property. The only way my landlords would have made money from their properties was by riding the wave of rampant house price inflation. That is not a sensible business model. Very similar returns were also available in the stock market with the added benefit of a much higher degree of diversification plus bugger all actual work, unlike being a responsible landlord and the pain of dealing with agents. I think the most daft example I saw was a mate who was renting a 3 or 4 bed country house in East Sussex for about £600 a month, when the property would have sold for perhaps £300k and base rates were around 6% in the late 1990s. The rent was a third of what it needed to be to make any sense.
That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
Lots of good points, though I don't really buy the stock market returns comparison.That's clearly not to say that BTL doesn't make sense. If the rent covers the finance/opportunity cost, bingo! And there are segments of the market where that definitely works, as Groat repeatedly showed. So if you want to be a BTL landlord, pick the right properties, and off you go. But if you inherit a property, or move in with someone and therefore end up with a spare property, there's absolutely no reason to suppose you'll be able to make money from renting it out. If you want to be a landlord, it might be very much better to sell the spare property in order to buy other ones, usually dilapidated as they tend to be under-valued, that will BTL efficiently once renovated.
The magic with BTL is that you can use leverage which supercharges your capital returns vs stock market where you (usually) can't.
So buy a 100k property and put 25k down. Property price increases 10% to £110,000. You've made £10k on top of your intial £25k investment (or a 40% return).
Put 25k into stock market. Stock market rises 10% so your portfolio is now worth £27,500. You've made £2.5k on your intial £25k investment (or 10%) return.
(appreciate this doesn't include stamp duty and txn costs etc which are higher for btl vs stocks)
Not sure if this helps at all.
Across 5 properties in West Yorkshire I make a return after all expenses of 4% against the overall current value of the properties, disregarding selling fees and CGT.
if I look at how much I paid for them against current rent it’s 5%.
The rents are all a bit below market value. So if a tenant leaves, it costs me in letting fees and how ever long the void is. But the rent does then increase to market value.
I am ok with that level of return, bearing in mind it increases most years.
I don’t think it works very easily now buying with a mortgage as rates are so much higher.
Across 5 properties in West Yorkshire I make a return after all expenses of 4% against the overall current value of the properties, disregarding selling fees and CGT.
if I look at how much I paid for them against current rent it’s 5%.
The rents are all a bit below market value. So if a tenant leaves, it costs me in letting fees and how ever long the void is. But the rent does then increase to market value.
I am ok with that level of return, bearing in mind it increases most years.
I don’t think it works very easily now buying with a mortgage as rates are so much higher.
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