South East BTL math looks awful?
Discussion
Conscious there have been quite a few BTL posts lately but I have doing some numbers on properties in Surrey to consider as an investment proposition, it really is a struggle to get excited with the kind of numbers i come up with....
Firstly, looking at Zoopla data it looks like yields are pretty anemic, even in the "sticks" i.e. Surrey. Take some bigger commuter towns e.g. Woking, Surbiton, Kingston etc. Best case yields are coming in at 5.0% for say a 1 bed flat in Woking, and that yield typically gets worse as the room # increases. Houses of course even lower yield. Typical 4 bed house in Surbiton is 3-4% yield.
So if we run with the best case, e.g. the 5.0% yield 1 bed flat, in Woking, which seems to average at the £220k mark (another benefit of a 1 bed for a BTL, lower stamp duty to worry about with the 8% stamp duty on >£250k).
Assume a 25% deposit (£55k), your typical 5 year fix interest only mortgage is coming in at £350/month mark (with capital repayment on a 25 year term that goes to £750 a month, but lets stick with interest-only for the sake of this example).
Assume £2k a year in ground rent and either service charge (if a newish build), or maintenance.
Assume you get the 5.0% yield tenant which will be more like 4.5% after estate agent mgmt fees i.e. £1,000
Monthly cashflow pre-tax ergo ~£500 per month on an interest only mortgage. ROI on that initial £63.5k (£55k+£8.5k stamp duty) is 9.4% pre-tax, which will be more like a 5-6% return once we factor in a 40%+ marginal tax rate.
And this is before we even get to the risk of higher interest rates (unlikely but a consideration 5 years out surely). Each 1% increase in base rate is £140/month, so it would take a 3-3.5% base rate high to wipe out any profit in this scheme (not even considering what that would do to the value of the £220k flat).
In summary, its seems like a hell of a lot of bother for a 5-6% return, that could very quickly be undone with any more political instability/recession. This example doesnt of course factor any associated purchase fees or lost rent through empty properties.
Am i missing something or how on earth does anybody make money on BTLs in the South East? Get them for 25%+ below market price?
Firstly, looking at Zoopla data it looks like yields are pretty anemic, even in the "sticks" i.e. Surrey. Take some bigger commuter towns e.g. Woking, Surbiton, Kingston etc. Best case yields are coming in at 5.0% for say a 1 bed flat in Woking, and that yield typically gets worse as the room # increases. Houses of course even lower yield. Typical 4 bed house in Surbiton is 3-4% yield.
So if we run with the best case, e.g. the 5.0% yield 1 bed flat, in Woking, which seems to average at the £220k mark (another benefit of a 1 bed for a BTL, lower stamp duty to worry about with the 8% stamp duty on >£250k).
Assume a 25% deposit (£55k), your typical 5 year fix interest only mortgage is coming in at £350/month mark (with capital repayment on a 25 year term that goes to £750 a month, but lets stick with interest-only for the sake of this example).
Assume £2k a year in ground rent and either service charge (if a newish build), or maintenance.
Assume you get the 5.0% yield tenant which will be more like 4.5% after estate agent mgmt fees i.e. £1,000
Monthly cashflow pre-tax ergo ~£500 per month on an interest only mortgage. ROI on that initial £63.5k (£55k+£8.5k stamp duty) is 9.4% pre-tax, which will be more like a 5-6% return once we factor in a 40%+ marginal tax rate.
And this is before we even get to the risk of higher interest rates (unlikely but a consideration 5 years out surely). Each 1% increase in base rate is £140/month, so it would take a 3-3.5% base rate high to wipe out any profit in this scheme (not even considering what that would do to the value of the £220k flat).
In summary, its seems like a hell of a lot of bother for a 5-6% return, that could very quickly be undone with any more political instability/recession. This example doesnt of course factor any associated purchase fees or lost rent through empty properties.
Am i missing something or how on earth does anybody make money on BTLs in the South East? Get them for 25%+ below market price?
Edited by R33FAL on Monday 8th April 21:50
Plus the fact you now pay tax on earnings and not the profit. Games up for higher rate tax payers.
Need to be held in a low tax rate payers name, your wife if you have one?. She can then claim the tax relief on the mortgage at 20% and only 20% income tax to pay on the profit....
Or hold in a Ltd company, but then you have Corp tax on profits and tax come resell etc
Need to be held in a low tax rate payers name, your wife if you have one?. She can then claim the tax relief on the mortgage at 20% and only 20% income tax to pay on the profit....
Or hold in a Ltd company, but then you have Corp tax on profits and tax come resell etc
R33FAL said:
Am i missing something or how on earth does anybody make money on BTLs in the South East? Get them for 25%+ below market price?
House prices double every seven years. Fiona said so.Edited by R33FAL on Monday 8th April 21:50
https://www.lovemoney.com/news/143/house-prices-do...
I've got two BTL's the small one bedroom one is still quite sensible in terms of returns but the much nicer 2 bedroom one has never made much sense (it's a flat I lived in for years)
poor returns and a very awkward tenant when a few things went wrong have made me decide to kick him out and sell it. May even do the same with the one bed flat if the tenant was to decide to move on.
poor returns and a very awkward tenant when a few things went wrong have made me decide to kick him out and sell it. May even do the same with the one bed flat if the tenant was to decide to move on.
Audemars said:
For a newbie it might not work.
For existing landlords the numbers work because we are consistently carrying over losses that exceed the rental income.
In short we take all the 10% ROI and benefit from doubling of values every 10 to 20 yrs.
I'm not convinced this is sustainable going forward. The key metric that people usually overlook is income to house price ratios. These are currently at an all time high, given that income is hardly going up at all, who is going to be buying houses in 10 to 20 years if house prices have doubled?For existing landlords the numbers work because we are consistently carrying over losses that exceed the rental income.
In short we take all the 10% ROI and benefit from doubling of values every 10 to 20 yrs.
Capital growth was the only thing that made me briefly doubt my decision to sell my BTL, but I just can't see how house prices can keep going up at the rate they historically have done.
XJ75 said:
but I just can't see how house prices can keep going up at the rate they historically have done.
You need to be clear when you say "historically". The last 30 years is an enormous anomaly when viewed over several centuries. Property over the very long term has broadly tracked earnings.Audemars said:
Why do prices have to be in relation to Joe public?
Who is to say that buying will not purely be for Mr Rich Jonny Foreigner or for investors only? Who is to say that future of living accomodation is not 95% rental only?
It seems like cars have gone that way via PCP.
Prices are in relation to Joe Public because they (currently) tend to buy the vast majority of housing stock. Jonny Foreigner money is quite volatile especially at the higher end (which is where most of it tends to go). For investors the numbers need to add up - I can't see how they do if base rates revert to their long term average.Who is to say that buying will not purely be for Mr Rich Jonny Foreigner or for investors only? Who is to say that future of living accomodation is not 95% rental only?
It seems like cars have gone that way via PCP.
XJ75 said:
I have a BTL in Woking town centre and I'm selling it because the numbers no longer make it worthwhile. With the new tax changes, the monthly net profit is just pocket money.
I think BTL is still viable elsewhere in the UK, but as you have identified, not in the south east.
On face value its an attractive place given how much £££ the council is throwing at Woking's "rough around the edges" reputation. Believe they are investing £0.5bn on the town centre. It will be interesting to see how easy it will be for the town to assimilate another new residential tower (which looks massive).I think BTL is still viable elsewhere in the UK, but as you have identified, not in the south east.
selmahoose said:
If I were starting up in London I'd be looking to build/renovate to let. Probably the renovate route. Looking for abandoned commercial premises. Big skill in the sourcing needed.
I have been looking at that a bit as well. Given the increasingly empty high streets we have, it seems going from a B1(c) light industrial use to residential might be an idea. One company in particular in Woking is currently trying to flog 40 1 bed apartments for £200-250k a pop in a building that still looks like an office block from the outside. Triple7 said:
Plus the fact you now pay tax on earnings and not the profit.
Where did you get that idea from?You ALWAYS pay tax on rental profits - not on Gross Rental Income.
The change that you are probably referring to is the restriction that is now in place on the offset of finance charges against rental income. This has obviously had an impact on those landlords where finance costs are one of their major property expenses. However, all other property related expenses are still allowed to be offset against the gross rental income.
R33FAL said:
On face value its an attractive place given how much £££ the council is throwing at Woking's "rough around the edges" reputation. Believe they are investing £0.5bn on the town centre. It will be interesting to see how easy it will be for the town to assimilate another new residential tower (which looks massive).
The problem is the high street is dying. Debenhams is Woking's biggest retailer and they have just gone bust. The biggest thing it has going for it is the rail link.The council have approved 2,000 new flats to be built in the town centre in the next 8 years. I just think there will end up being a surplus of flats and I don't fancy competing in that environment.
XJ75 said:
R33FAL said:
The problem is the high street is dying. Debenhams is Woking's biggest retailer and they have just gone bust. The biggest thing it has going for it is the rail link.
The council have approved 2,000 new flats to be built in the town centre in the next 8 years. I just think there will end up being a surplus of flats and I don't fancy competing in that environment.
Nearby West Byfleet is also suffering - the pressure on the High Street shops is exacerbated by the inability to find someone that will take on the building of the ~250 apartments - I can understand why as there will be massive oversupply.The council have approved 2,000 new flats to be built in the town centre in the next 8 years. I just think there will end up being a surplus of flats and I don't fancy competing in that environment.
http://wbnf.org/2019/03/11/sheer-house-complex-mar...
Derek Chevalier said:
Nearby West Byfleet is also suffering - the pressure on the High Street shops is exacerbated by the inability to find someone that will take on the building of the ~250 apartments - I can understand why as there will be massive oversupply.
http://wbnf.org/2019/03/11/sheer-house-complex-mar...
I live just outside West Byfleet and it's a pretty depressing place these days.http://wbnf.org/2019/03/11/sheer-house-complex-mar...
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