Buy to let in the South East

Other areas seem to be fairly similar. Basically, house prices are too expensive at the moment. With interest rates likely to go up rather than down in the near future, this will only make it worse.

"Mike J" wrote

That is 6.33% interest - you are paying too much!!

Agreed. I'm paying 5.44% reverting to SVR 5.94% when the discount runs out, and that's for a flexible loan. You should be able to do a bit better with a discount deal especially if non-flexible.

Otherwise, the answer is to invest more of your own money and to borrow less than 80%.

Just so that you know what you are getting into.

5 of the 8 flats in my block are not lived in by their owners (so nominally tenanted). 4 of them are currently empty and have been so for several weeks.

tim.

Probably not a good time to buy at the moment, unless the property is undervalued.

Gearing of 80% seems to be too much of a gamble - a max of 50% is more sensible.

Or, of course, not to invest at all. If the rental yield is less than the interest rate (never mind voids and maintenance costs) you are relying on capital gains (generally taxed at 40%) to end up with a net gain, and to say the least it's far from obvious that prices will go much higher.

Which interest rate? :-)

If you have cash to invest, and are a HRTP, you can stick it into and ING account and earn 2.65%, or you could invest in property yielding 6%, without gearing (if you have enough lolly), and get a net return of 3.6%. Which is better?

If you need a loan, and the interest rate happens to equal the yield, your return will be the same irrespective of how much you borrow.

The beauty of gearing, provided you've assessed your risks properly, is that you can still make a positive return even if the loan interest rate exceeds the yield: 5% yield with 6% interest rate will still beat the 2.65% of a savings account provided you borrow no more than about 36% of the value. Note this still takes no account of voids and maintenance costs, but it also takes no account of capital gains.

Only if you're already a HRTP.

Capital gains are not "generally taxed at 40%". If you arrange your affairs suitably, such that you have no taxable income to speak of (say, no more than £6575), you can realise a £36440 gain and pay only £5708 CGT.

Indeed. On the other hand, they don't need to go *much* higher, because their growth rate will be geared. But if they go down....

Or you could put it into higher-yielding shares and probably still get about

4% net of basic-rate tax for a relatively low-risk portfolio - and over the next few weeks you could put 14k into an ISA, or 28k for a couple. Apart from which, interest rates are almost certainly going up. If you judge from the gilt market the expectation is for an average rate of something like 5.5%, and it wouldn't surprise me to see base rates over 6% in a couple of years (unless the housing market collapses, but ...) If you assume something like base +1.5% for a BTL mortgage that could well be 7.5%. And while the gross yield on the property may be 6% that's probably 5% or less after voids and costs and before tax, compared with what by then may be over 6% in ING or whatever.

Well, indeed, so how do you assess the risks of property prices rising or falling?

Capital gains are in effect added to your income and even a BRTP will almost certainly be pushed into the HR band by a property sale; unlike shares it's hard to sell gradually so you only get 1 year's allowance and 8k isn't very big compared with typical embedded gains on houses at the moment. OTOH I did forget to mention tapering.

Err, how do you do that exactly? I'm sure everyone would be delighted to know how to avoid having any taxable income (other than by having no income at all of course :)

Single premium insurance bond with (up to ) 5% draw down.

Perhaps, if you know how to spot low risk. The same is true of property, i.e. if you're careful you can keep a lid on the risk.

Nah. Too risky. :-) But you could put £6k or £12k into a cash ISA. But that's nothing if you've got enough to invest that you could even think of buying a trendy flatette with a low-LTV loan.

Against that, there could be a chance of an upward correction to rental yields as the more fickle BTL investors bail out when faced with the prospect of diminishing equity.

Ah, well...

Indubitably more often than not *some* of the gain will be taxed at the higher rate, and admittedly my example was a little contrived, but your "generally" claim was a bit, well, too general to let pass without comment.

But don't forget that if you bring a spouse into the equation you get double the £8k exemption, and if the spouse has no income you can tinker with the beneficial ownership split to minimise CGT.

Well, apart from living frugally off savings, an inheritance, or lottery winnings, you could be scraping by on meagre rental profits, having invested all said savings in one or more properties.

You could fire your boss, quit your job, and get a life. :-)

But the most obvious way is to be the non-earning member of a two-person one-income household.

The 2.65% is risk free (near enough). The 3.6% is not. It depends on your attitude to risk.

Lots of useful comments.

I spoke to a very sage letting agent today and he basically said if it were his money he would wait 18 months. If interest rates jump, prices could slide and more people will be looking to rent.

Also it sounds like a lot of people who are leaping into luxury new builds for BTL might get caught out. Prices are typically 15% higher, and normally the market takes a few years to catch up. However, over the next few years this may take longer than in previous years.

Ah, but if you're in it long-term, the biggest risk in that particular scenario is voids, and 3.6% would need to show a lot of void to fail a comparison with 2.65%. The point is that, in this example, the fact that you can't go into negative equity if you haven't got a loan means that the risk of price collapse is less critical than with a loan.

Obviously there are people who know what they're doing in the property market, but there are also a lot of newbies who don't. I would say that picking a low-risk equity portfolio is relatively easy, although obviously I'm biased by the fact that I do know quite a lot about it. However, I also think the nature of the risk is rather different. With BTL, unless you have a lot of money you'll be talking about one or two properties, so you really do have to get it right, pick an area where it's hard to get tenants and you're in big trouble, likewise if you pick a tenant who doesn't pay the rent and trashes the property. With shares, even with a fairly small amount you could have 20 different directly-held shares without too much trouble, or several hundred if you buy a fund, so you will only be exposed to overall market movements.

If you think the shares are too risky you should also see BTL as too risky. However, most people tend to base risk judgements on the recent past. In 1999 everyone was piling into internet shares - how could they be high-risk when all they had done was rise? Similarly with houses now. A 20% fall in house prices is entirely feasible, and with 85% LTV that would put you into negative equity; even the worst dot-com didn't lose any more than 100%! Even with, say,

50% LTV you could still quite easily see your equity halved, and I would stick my neck out and say it's really very unlikely that the FTSE would halve from the current level. Buying for cash only is another matter, but of course then you're losing on the tax side because you have no interest to deduct.

But who are the BTL investors going to bail out to? Assuming that someone lives in the property most of the time then a switch back from renting to owner-occupation takes people out from both sides of the equation, fewer rental properties but also fewer tenants. And since owner-occupied property is less likely to have voids the overall usage probably rises, which would mean that overall demand falls (although maybe you tend to have more people per property with rental, I don't think I've seen any figures).

It was really just a side remark, but I suspect that many BTL investors haven't thought about CGT because they don't see themselves selling. Some of course really won't sell even if interest rates rise a lot, they have other sources of income to pay the mortgage interest, or other capital to reduce the total amount, or they've gone for long-term fixed-rate loans. However, most people who do sell are likely to find themself with a significant tax bill. One consequence of that is that I don't expect any sudden collapse in the market, it takes a long time to sell anyway and people will delay because of the tax, so I suspect that whatever adjustment there is will take two or three years to work out.

Cue John Smith on the dangers of handing over large chunks of your property to your spouse :) True, you can do better in that situation, but even fairly minor dabblers in BTL over the last few years could easily have embedded gains over £100k.

Err, but the rent isn't tax-free! Likewise savings income outside ISAs. And surely living frugally isn't really the point; building up a big pile of investments in whatever form is no use unless you plan to spend it at some point.

True, but as Andy Pandy always points out you get screwed in other ways in that situation, overall a couple is nearly always better off having income split equally between them.

There is plenty of demand; people are queueing up to buy, and the only thing preventing many of them is that purchase prices are too high. Not all of them are renting, they could be living with parents, and so when an empty rental property changes status and becomes owner-occupied, this doesn't always mean an existing full rental property becomes empty. The folks in the buying queue are simply waiting for prices to drop, and if enough wannabe landlords throw in the towel, under pressure of watching their equity shrink and their cashflow go pear-shaped, will be desperate enough to bail out to drop their prices.

I'm not sure people will delay because of tax. If there is little profit in BTL from actual rental yield, then most of the profit is in gain. If gain is your aim, delaying selling because you've made too much gain is daft, since if prices drop, you'll lose more in gain than you'd save in tax. Once someone's marginal CGT rate is in the 40% band, then each two pounds of tax they have to pay will still leave them three pounds better off. If you can't sell a house in bits to utilise several annual exemptions, then delaying sale for tax reasons seems daft. At best you might have situation where, with negligible prospects for further gain, you might chalk up an extra year's taper relief, but that's about it.

Oh yes it is. Well, it can be if you don't have too much of it. I did say "frugal".

Sure, but one has to play one's cards right. One of my rental flats was actually my home for over 7 years before I started to rent it out, and as a consequence I expect to have to pay no CGT on it whatever if I sell in the foreseeable future, provided they don't mess up the rules on PRR, LR, and the 36-month rule. The other was a pure investment and I fully expect to have to pay CGT on that in due course, but I wouldn't rule out mitigating that by living in it for a while first.

But that isn't always an option, nor always wanted. So you don't always get screwed.

When you said that rental yields might rise I was assuming that you meant they would rise based on current prices, i.e. that actual rents would rise as the supply of rental property decreased. Obviously if prices fall then yields will rise based on the new prices, but that isn't a lot of comfort if you're already a landlord now. What I think is true is that prices may not fall all that far, because as you say there are plenty of would-be FTBs waiting for prices to get into their affordability range.

That assumes that you know that prices are going to drop significantly, but in practice people always tend to hope for the best. Also a lot of people dislike paying tax on principle. True, once you've decided to sell there is little gain from delaying, but I suspect that many people will leave the decision in the hope that it won't be necessary. As indeed it might not be, it's possible that interest rates won't rise as much as expected, and house prices may just flatten out rather than fall. For a new buyer, zero capital growth and a rental yield below what you can get on cash might not look that appetising, but for an existing investor it may be good enough to stay in. The real killer is negative cashflow, once you're paying out more in interest and maintenance than you receive in rent you will be forced to sell if you don't have other income to cover it. As I understand it lenders have been asking for a minimum rental cover of 130%, so if interest rates rise by more than 30% - i.e. something like 2 % points - that margin will be pretty much eroded. That suggests that base rates at 5.5-6% is the significant region.

That is indeed what I meant.

That's very true too, of course.

I'm sure you're right, and I daresay quite a few of them even let that principle get in the way of maximising their net gain. They're daft.

It's not necessarily a question of necessity. If the aim of your investment was to make money, and if it was clear from the outset that more of your return was going to be coming from gain than from income, then if you're ever going to see any of your return, you will have made an in-principle decision to sell right from the start, the only question being about the timing of it. I suppose in that case the best thing to do is to monitor the gain rate (keeping an eye on the yield too, of course) and get out before everyone else, but not much before, all the while balancing it against your requirements.

Agreed, unless he wants to cash in. If the purpose of the investment was to be able to afford some ridiculously expensive toy, such as a Ferrari, then the timing might be dictated by when the equity is sufficient.