SMF - Just Installed!

Is it worth it

Started by jmarsh20, September 25, 2015, 09:20:29 AM

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jmarsh20

I recently purchased my first buy to let before all this was announced with the tax changes etc.

It wasn't an off the cuff decision I had been planning this for the best part of four years, saving up for the deposit, researching etc.

And now it is ready to rent I am doubting if its a good idea and whether I should just sell it in the hope to make a little money.

What do you experienced guys think? Is buy to let still a good investment and is it worth it?

Thanks, Joe.

boboff

Mate, it depends.

On you.

How much could you make?

Do you need the money? Stress, hassle, ??

What are YOUR goals in life.

You could but the profit of less than £20k in a Santander 123 account and get 3% on it.

What are your anticipated yields on the place?

I suppose if you want an answer, I would say over 9% gross return after known expenses go for it, less than that, say 4 - 5% sell it.


Hippogriff

What kind of mortgage have you chosen?

If interest only, then that will be a millstone around your neck for the duration.

If repayment, then the dent to your finances will decrease over time.

Instead of expanding as rapidly as I would like to - in an ideal world - I am busy paying down some of the debt. I think I am lucky as only a couple of my properties have mortgages, the others are unencumbered, but I relish the idea of paying down the debt anyway, so I hope to be better prepared for if this comes to pass (no guarantees, right?).

I've still gone out and just bought a £55,000 house to try and do up and sell on - very Homes Under The Hammer (my first attempt) - so it doesn't mean we need to retreat into our holes and live in fear. However, starting-out right now? I'd not be advising anyone to be on interest-only mortgages - but I've got to be honest and admit I never advised that anyway.

I also say having 1 property is not the best idea either... all the hassle and none of the rewards that come with scale.

jmarsh20

Its on interest only £262/month
Rent £600/month
Purchase Price £115,000
Spent on doing up £5,000 approx.
Original Market Value £125,000

Want to do it to eventually replace my income with buying more buy to let. I have enjoyed everything so far, tenant finding is getting a little tedious but suppose it goes with the territory.

Yields wise I have done so many calcs and it comes out around 6%.... I think!!!

jmarsh20

If fact how the hell do I work out the yield as this has always thrown me just done a calc on interweb and its saying 15.14% yield.

jmarsh20

If anyone can work it out here are the figures:
Purchase Price £115,000
Mortgage £86,250
Deposit £28,750
Mortgage Int only £262/month 3.64% interest

Hippogriff

Why does yield matter?

Will a high yield make you feel good and a low yield make you feel bad? Why would you want to feel bad?

If we give you a yield figure, what will you do with it? What does it matter? Please bear with me 'cos I'm not being facetious, but many Landlords I know seem to focus on yield... I ask them "why?" and they can't really tell me properly... sure, you can get a good %age figure from doing a simple sum - and it really is simple. Then, what does that tell you? Does it tell you how much you'll spend in maintenance activities or how those voids (if any) will affect you? No. It tells you nothing.

What matters is the absolute number of £s you have left over when all your expenses (including taxation) have been spent. You can use that to give you a kind of net yield, I suppose, but it'll probably make you cry. People - when talking about yields - are mostly talking about gross yields which are not very much use.

Your gross yield..? Just over 6%.  ;D

Your net yield..? With interest of £262 per month and, let's say, £100 on insurance and an assumed total of £500 on other costs through the year... about 2%.  :'(

Better get the money back into an ISA!

boboff

Yep, just income less interest your yield is 3.338%.

That is shit.

Sell it, forget it.

Sorry.

theangrylandlord

#8
I'm bored..waiting for my pizza to cook in the oven and I saw this..
I might get e-spat on by the others for the following but am fearlessly wading in as I might actually learn something....and I've been told a good rant is therapeutic ...

Am not so sure that yield is the right thing to look at when determining whether to buy or sell a property...
Firstly I could not agree with Hippo more in that nobody has ever been able to explain WTF a Gross Yield calculation is supposed to tell me...it has no bearing on how much money was invested (unless of course you paid all in cash) and no bearing on how much money you get in your hand.
Honestly it is without doubt the single most stupidest indicator of financial stability of a property investment.

If an agent selling a property tells me "it has a great gross yield - of over 9%" my first thought is "this guy is a fkwit", my second thought is "remember, don't listen to fkwits"

So then the next step closer to some form of reality is the "Net Yield" which at least purports to account for known costs but still takes no account of risk and still doesn't account for the fact you leveraged the investment. Its not your money that you invested it's the banks.  Sure if the value of the property falls then you are wholesomely reamed but that should be factored into the risk element not the base calc.

So BobOff is right the Net Yield (only taking into the mortgage costs) is 3.38% if you take into other things such as insurance, gas certs, [agent fees], boiler cover etc then on a net yield you re down to a miserly 2.3% (I've guessed a lot). The conclusion that could be arrived at is you are better sticking your deposit in the bank (or an ISA actually).... But wait a minute ....you didn't invest 115,000 of your own money you only invested £33750.

What you really should be doing is a Rate of Return calculation this is the only correct way of determining whether your money should be in a bank earning interest or in a property.  You have to assume zero capital growth in the value of the property (come to that later) for an apples to apples comparison.

Your rate of return on your property is (estimated) 9.6% now that's a lot better than 3% in an ISA?
Sure but what about the risk?
There are soooooo many I things that wIll work against you and virtually nothing for you...
The value of the property falls
The tenant doesn't pay/you have to evict
The interest goes up
The roof needs fixing
It's very very easy to be at 0% rate of return on a year (even negative when you only have one property)

So then you take your 9.6% rate of return and risk it... (There are models that can do this but basically you are in flip a coin territory) I use 50% - scientific huh? But I am super risk averse and have limited my portfolio expansion because of it.
(Really you should build a spreadsheet (that might be beyond you though if you cannot calculate a yield) which even considers refinancing costs when your mortgage rate ends) and tells you how high BoE rate has to be, assuming your mortgage is linked to that, for you to be totally screwed). BTW: 3.64% on an interest only ? Yowsers!! did you shop around or use your local high street bank??
So you are now at 4.8% before tax
The next question that most folks have no idea about is whether that is good or not and that is where you really need to ask yourself what is the opportunity cost hurdle...if you can stick your deposit into an ISA then deduct tax from your rental property income and determine the resulting RoR (there is no income tax in the ISA) and so ask yourself is all the sh!t that you have to go throug worth the difference in the RoR and the ISA rate.  If you have a better investment opportunity is what you should be thinking.

Note banks never take yields into account when they determine whether to lend you money.  They ask if the interest rate goes up can this monkey generate 125% of the new mortgage payment as rent so he can cover his other costs.  If they don't use a yield then that should tell you something even if this post tells you nothing else.

Bottom line...stop talking about yields they are meaningless.

Also check your mortgage terms ...most likely the interest only product will allow you to pay of 10% of the outstanding per year...USE THAT FEATURE or you will burn in financial hell at the end of your little landlord escapade...

Ah Pizza done....hope there's a beer in the fridge...

Best of luck



jmarsh20

Bob off,
Are you serious? Sell it? Is it just not worth it?

Angry landlord
So what does all that mean?

I really don't know what to do at the moment.

Thanks, Joe

Hippogriff

Ah, but we told you your yield... you really (really) wanted to know that. Surely the way forward now is crystal-clear?

boboff

Angry. Hope the pizza was good.

You could be right, yield is only ever directional, and we are all really trying to just justify our own way of seeing if things makes sense to us. My minimum return has always been, if I get a 100% repayment mortgage over 20 years, will the rent cover this.

It's not scientific, but to my risk adverse mind, if the place washes it's face gross, the worst thing is a void, and every month someone pays the rent the are paying me to repay the debt.....

This amount varies obviously depending on property costs, and interest rates, and rent.

All numbers can be said to be meaningless, choice are objective, and we all make our own.

I think what you, I and hippo would all agree on, is that this proposal is not something that would attract our money right????

Yeild, smield, choices, ISA's, all true, but we wouldn't......

"On that basis, I'm out"

So OP to answer your question, yes I would sell it, but the choice is yours. Believe it or not, if you come out of this with some money you WILL be able to do better with a different rental.

Or you could keep it, do ok, and then sell it for double what you paid for  it 5 years time, and come back and tell me I'm a prick, which of course you would have every right to.

jmarsh20

Hmmmm I dunno what to think now.

I always knew the yield wuss a subjective calculation. And I always thought it was around 6%ish. But then all these other website with calculators had such a range for different scenarios. Yield on capital, yield on purchase price.

What made me buy it was the fact the mortgage was 262/month and the rent was 600/month. That seemed to me like a good return or as good as it got around here.


theangrylandlord

#13
JMARSH20

First take a step back and think that this is perhaps one of the biggest investment decisions you will make and you are asking basically three random people you have never met...for all you know I could be a fourteen year old school boy, with zits and be making all this up... :o

Get a grip man.... >:(
If you've been planning this for four years what on earth has happened in the past four days? 

Your last post is again rambling on about yields....stop this.

If you didn't understand my first post then I do worry for you, but the fact you are basing your investment on advice from a website blog is more concerning...nevertheless....

Look at what BobOff said how he looks at things, its simple and works for him... Does the rent cover a 100% repayment mortgage?  Seems to me it probably does. So maybe this works....

You look at my method and say well if get 9.6% RoR I am bullish and won't risk it by 50% so that could also work.

Look personally I don't think this a basket case of an investment based solely on the numbers it could work but you haven't given anyone enough information to tell you what to do....what type of property is it? What are the rentals like in the area? Will you need to rely on DSS tenants? Is it in London or the SE and then what is your view on futrue house prices, future interest rates (you haven't even said how long your fixed rate goes on for) NO ONE CAN TELL YOU WHAT TO DO if they are not standing in your shoes.

I'm sorry but the magic answer you seek shall not be provided on this website.

Personally, I would not invest but not because the numbers don't stack up, .......this bit might twist your noodle.  For me the investment isn't big enough.  Some risks are linked to the size of the investment e.g. If interest rates go up then so do your payments but a small investment will have a small increase and a large investment a large increase.  However there are risks that are not linked e.g. The cost of a new washing machine which is the same if you have a small investment or a large investment....if the investment is too small it will take much longer to buy a new washing machine, if the investment if bigger you can buy a new washing machine in a months income. 

But then that's me and for sure BobOff will see it differently and Hippo differently again.  I'm fortunate to live in an area where I can make larger investments and I have a job and a portfolio but if you live in [random town in the north selected here] Liverpool then  this might not make sense as those investment properties don't exist...

So as you can see each to his own.

My parents did all this before me and their way of investing (very successful) was simple, "can I afford the mortgage payments?" ....they always got a repayment mortgage --- which is much in line with BobOff's view.  But my mum could spot a bargain at a thousand paces which probably had more to do with their success and they had other income to fall back on when the rental wasn't being paid.

How about if you boil it down to that rule of thumb...?
Now tootle off and find out how much a repayment mortgage would have cost you....AND NEVER MENTION YIELD AGAIN.  :-X

Best of luck (whatever you decide to do)

Hippogriff

Quote from: jmarsh20 on September 27, 2015, 08:31:59 AMWhat made me buy it was the fact the mortgage was 262/month and the rent was 600/month. That seemed to me like a good return or as good as it got around here.

Yo, yo, yo...

Mortgage of £262 with rent of £600 doesn't sound bad. For example... I have a property where the mortgage payment is £371 and the rental is £590. But the difference is that mine is a 20 year repayment mortgage. I prefer mine to yours... that's about all I can say. It's a personal approach at the end of the day, it truly is. I like mine because I'm +£200 or so each month... and the mortgage is currently in the first year of a 5 year fix, so the £371 is static but the rent will go up modestly each year... £10 per month or £20 per month. In time the rent will far outstrip the mortgage and in the end I'll have a) the rent, b) no mortgage payment and c) the value of the asset (currently a meagre £130,000)... come 2020 (if George's plan comes to fruition) I'll be decreasing my tax liability by repayments, whereas yours will be static. That's why I'm in this game... not to do interest-only.

Let's move on, 'cos it's time to groove on...

jmarsh20

Ok thanks for all your comments.

Just to clarify a few things for closure or further comment.

The things that have changed for me are just that these new tax changes were only announced about a day after I completed on the house.

What I was really wanting was just a bit of reassurance from a wider community that I wasn't throwing my long hard saved money away for nothing. I over think things a lot. Sometimes and have asked for advice from so many people that it all gets very confusing sometimes.

Oh yeh the mortgage @3.6% is 2 year fixed but had no fees so broker decided it was cheapest over the fixed term.

The property is a 4bed terrace in scarborough North Yorkshire. Hopefully no dss tenants.

Plan is to overpay on the mortgage as and when but we are investing money in my partners farm as well at the moment so overpaying is not priority but it will happen at some point.

Further. Comments welcome it's good to hear the differing views etc, thanks.