BTL - how does it make money?
Discussion
LooneyTunes said:
You genuinely think that the cheap parts of Newcastle, Glasgow, etc don’t have rents/yields distorted by council money?
Private sector yields and rent levels have nothing to do with LHA rates, other than providing data to the ratesetters inc. rent officers. If rent levels could be affected by altering LHA rates don't you think local and national authorities would use them to do that rather than using nonsense like rent freezes and rent controls?
Property PRICES are the biggest single factor impacting on rent levels, followed by other cost variations, usually increases. Other than people who specialise in DSS letting no-one gives a toss about LHA rates, and their number is shrinking as market rents separate further from LHA rates with no sign of the gap being closed as it last was 3 or 4 years ago.
There's a nationwide panic and crisis currently about the unaffordability of rents in the cheaper parts of cities. If LHA rates were reduced do you think that would solve or even have any impact on the problem?
Edited by Portia5 on Sunday 16th April 00:53
Portia5 said:
Private sector yields and rent levels have nothing to do with LHA rates, other than providing data to the ratesetters inc. rent officers.
If rent levels could be affected by altering LHA rates don't you think local and national authorities would use them to do that rather than using nonsense like rent freezes and rent controls?
Property PRICES are the biggest single factor impacting on rent levels, followed by other cost variations, usually increases. Other than people who specialise in DSS letting no-one gives a toss about LHA rates, and their number is shrinking as market rents separate further from LHA rates with no sign of the gap being closed as it last was 3 or 4 years ago.
There's a nationwide panic and crisis currently about the unaffordability of rents in the cheaper parts of cities. If LHA rates were reduced do you think that would solve or even have any impact on the problem?
I’m sorry, but in overlooking the area differences introduced by BRMAs and the rent floor effectively introduced by the 30th percentile approach I think your argument is quite flawed. A distribution chart of rents vs property prices would not be linear and you seem to be conflating two different markets. If rent levels could be affected by altering LHA rates don't you think local and national authorities would use them to do that rather than using nonsense like rent freezes and rent controls?
Property PRICES are the biggest single factor impacting on rent levels, followed by other cost variations, usually increases. Other than people who specialise in DSS letting no-one gives a toss about LHA rates, and their number is shrinking as market rents separate further from LHA rates with no sign of the gap being closed as it last was 3 or 4 years ago.
There's a nationwide panic and crisis currently about the unaffordability of rents in the cheaper parts of cities. If LHA rates were reduced do you think that would solve or even have any impact on the problem?
When you look at the low grade auction fodder that comes to market, the sorts of properties that are only realistically going to be let to LA tenants and hence benefiting from the floor that the LHA rent levels introduce, the price of these appears to be generally determined by landlords bidding against each other, dropping out of the action when the property fails to deliver against their yield hurdles.
Given the unattractiveness of these properties as true private rentals, I’m still very much of the view that if LAs caused the rent floor for certain of these these to be lower (linked to EPCs) you would see the rents achieved for those properties specifically impacted fall or the properties sold at prices commensurate with a lower rent floor.
It could also be argued to be an entirely fair approach: it is the tenant who is responsible for bills yet the landlord who makes any investment in energy efficiency. Right now, there exists little incentive for LLs to make capital investment to reduce tenant bills. An EPC-linked LHA rent would change this.
I agree that when you step away from the areas that are almost exclusively LA supported the picture is different, but that’s not where the concentrations of abnormally high yields are found.
It’s largely academic for me but, due the the signals coming out about changes to EPC regime (revising some of the things that came out of the consultation), I wouldn’t bet against this sort of change happening in the future.
Anyway, for comedy value, this EPC shows how messed up the system is:
The property in question is already at 73 points yet the EPC report proposes an expensive, invasive, improvement with a payoff time (at current rates) of 100-150 years to give a one point improvement instead of a cheaper improvement with much shorter payback period.
I have to wonder why any landlord with an LHA tenant would accept a reduced rent because of a poor EPC rating when a phone call to a Green Deal operator could see the installation of anything/everything (including stuff like complete internal wall insulation, full CH systems or HHR radiators etc) required to raise that EPC rating at zero cost to that landlord ?
All tenants in receipt of benefits plus a range of other vulnerable categories are entitled to that. So why wouldn't landlords do it (as they have been doing for about twenty years)?
Also, about twenty years ago a major change began to what had become DSS ghettos over the previous twenty years. A tidal wave of (mostly) young (mostly) Polish people arrived in the UK. And very quickly became the tenants of choice for operators previously limited to local underclass to fill their often substandard properties. The positive impact these (mostly) decent and hard-working and rarely benefit-dependent people has had, means that it has become increasingly difficult for DSS tenants of the worst sort to obtain private tenancies and so 'DSS ghettos' are now almost entirely confined to social housing.
Plus, of course, there have been and are still ongoing, regulatory changes shaping the acceptable condition of private tenancies which has meant rising standards which in turn has attracted better tenants paying ever increasing rents which are wholly beyond the LHA allowances to 'compete' with.
Anyone who cares to look can see that LHA rates in areas where property is expensive are higher than in areas where properties are cheaper. But there are no areas where LHA rates are higher than 'average market rents'. And the correlation of price and rent level isn't coincidental. The more expensive a btl is to buy the higher the rent will have to be.
Funnily enough, in many cases the old inner city 'DSS ghettos' haven't really improved their status, they've returned to a status they once had before they declined. Commonly understood as 'gentrification' it often really only is an area returning to a previous status it once held.
The picture of landlords buying substandard properties at auction to subsequently let based on yield calculations of inflated LHA rates is an outdated cartoon. The substandard property is only of value if perceived (and often required by law) improvement can alter that value beyond its costs. And there is no such thing (other than individual property exceptions) as an area with 'abnormally' high yields. Some areas have higher yields than others. And all areas have varying yields depending on individual property circumstances.
Why anyone involved in BTL would NOT want a high yield puzzles me. And it also answers the OP. How does BTL make money? By generating a decent income relative to costs. Or is that too obvious?
All tenants in receipt of benefits plus a range of other vulnerable categories are entitled to that. So why wouldn't landlords do it (as they have been doing for about twenty years)?
Also, about twenty years ago a major change began to what had become DSS ghettos over the previous twenty years. A tidal wave of (mostly) young (mostly) Polish people arrived in the UK. And very quickly became the tenants of choice for operators previously limited to local underclass to fill their often substandard properties. The positive impact these (mostly) decent and hard-working and rarely benefit-dependent people has had, means that it has become increasingly difficult for DSS tenants of the worst sort to obtain private tenancies and so 'DSS ghettos' are now almost entirely confined to social housing.
Plus, of course, there have been and are still ongoing, regulatory changes shaping the acceptable condition of private tenancies which has meant rising standards which in turn has attracted better tenants paying ever increasing rents which are wholly beyond the LHA allowances to 'compete' with.
Anyone who cares to look can see that LHA rates in areas where property is expensive are higher than in areas where properties are cheaper. But there are no areas where LHA rates are higher than 'average market rents'. And the correlation of price and rent level isn't coincidental. The more expensive a btl is to buy the higher the rent will have to be.
Funnily enough, in many cases the old inner city 'DSS ghettos' haven't really improved their status, they've returned to a status they once had before they declined. Commonly understood as 'gentrification' it often really only is an area returning to a previous status it once held.
The picture of landlords buying substandard properties at auction to subsequently let based on yield calculations of inflated LHA rates is an outdated cartoon. The substandard property is only of value if perceived (and often required by law) improvement can alter that value beyond its costs. And there is no such thing (other than individual property exceptions) as an area with 'abnormally' high yields. Some areas have higher yields than others. And all areas have varying yields depending on individual property circumstances.
Why anyone involved in BTL would NOT want a high yield puzzles me. And it also answers the OP. How does BTL make money? By generating a decent income relative to costs. Or is that too obvious?
Edited by Portia5 on Sunday 16th April 11:44
You seem to be missing the point somewhat: it was not suggested the properties were sub-standard (I.e. to a point at which the letting would not be legal), just potentially less efficient (which is different) and/or less desirable (which is also different) and hence cheaper to acquire.
It’s a basic principle of economics that where a price floor exists, consumers end up paying more than the market equilibrium price. An effective price floor is exactly what the LHA rate, when arrived at using a broad spread of (increasingly higher EPC and more desirable) properties, introduces when it comes to less desirable properties (often with lower current and potential EPC). I’m not sure why it’s hard to acknowledge that LHA support is often an important element when it comes high yield generation.
Your apparent suggestion that landlords don’t have regard to yields when buying at auction is also counterintuitive. I don’t know any landlords who don’t have views on acceptable yields. Understanding potential return is usually a pretty fundamental part of any investment decision.
Anyway, as said previously, it’s not a part of the market that I play is so largely academic and I’m sure others will form their own views (probably somewhere in between ours).
It’s a basic principle of economics that where a price floor exists, consumers end up paying more than the market equilibrium price. An effective price floor is exactly what the LHA rate, when arrived at using a broad spread of (increasingly higher EPC and more desirable) properties, introduces when it comes to less desirable properties (often with lower current and potential EPC). I’m not sure why it’s hard to acknowledge that LHA support is often an important element when it comes high yield generation.
Your apparent suggestion that landlords don’t have regard to yields when buying at auction is also counterintuitive. I don’t know any landlords who don’t have views on acceptable yields. Understanding potential return is usually a pretty fundamental part of any investment decision.
Anyway, as said previously, it’s not a part of the market that I play is so largely academic and I’m sure others will form their own views (probably somewhere in between ours).
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