Singing Pig

Hi again Pod,

I'd love to assess a property's value based on the owner-occupier market but I think the market has become so skewed by BTL activity that this seems very difficult to me these days - hence why there are so few FTBs around (what they are willing and able to pay is below the level competing BTLers will offer, so their opinions as to the price of the property don't count).

If you can get a true discount of 20% on what those owner-occupiers would offer then I agree you are well insulated but if the market value is based on newbie BTLers bidding the yield down to, for example, 5% that means a 20% discount still only pushes the yield a bit above 6% and it may turn out that these BTLers then wither (perhaps because of a credit crunch) and suddenly the owner occupier valuation is at or even below the discounted level (while professional BTLs will still say a 6% yield doesn't work for them). For example, a 20% discount to fourwalls' £220k valuation would price the property at £178k, offering an OK but not great 7.2% yield... so the 20% BMV is perhaps not truly BMV (if it's below a temporarily elevated MV).

As an example, where I am, there is a very nice 2-bed flat on a very nice street for rent at 875pcm or to buy at £275k... that's a 3.8% rental yield. In terms of the owner-occupier market that represents about 10x average earnings around here (for a leasehold on a 2-bed flat). There are several similar flats on the same street for sale at the same kind of price, all with "no chain". I don't think this has much to do with the owner-occupier market. If the rent doubles or the price halves I think it starts to look interesting. It sounds crazy to me but those numbers are correct in terms of asking price/asking rent. 

 

No Troll:

Hi Pod,

I understand the quote, I'm not sure everyone appreciates the two side of its though (again this is not aimed at you directly).

As an example, I remember having a conversation with my company's chief technical officer in early 2000 when he confidently explained to me that there were two types of investors in the world... those who focus their investments purely on options on technology stocks and then every other idiot (he was telling me I was in the latter category, obviously). Just a few months later he discovered that he in fact didn't understand his market as much as he thought he did and that diversification might have been a good idea.

I think there are plenty of BTL investors out there who have opted not to diversify because they "understand" the BTL business who may discover relatively shortly that they don't understand it as well as they thought. 

 

 

 

totally agree ... a lot of BTL investors don;t really understand the nuts and bolts of the business.  but, let's not confuse these types with "landlords" (as opposed to "BTL investors") who, usually, do understand it.  many think they "understand" property, as in the bricks and mortar maintenance side, but few understand the financial side.  in the new post-credit-crunch world, many will striggle to re-finance as max LTVs fall, interest cover increases, prices fall a little ..... so they get stuck on the SVR .... hack it for a few months, then eventually succumb to the inevitable.

i am really hoping that "BTL" becomes seriously unattractive to joe public as BTL horror stories abound .... panorama, 9o'clock news, word of mouth etc ......... while i wouldn;t wish personal financial collapse on anyone, as a pro landlord it will only help long-term to have these players fall by the wayside  .... thats life i'm afraid.

Wow. That's a lot to answer!

Firstly, to be fair, I think some BTLs do calculate the yield as a percentage of the purchase price... the yield can look very nice then, trouble is it never gives you a selling signal (unless rents collapse!) and never gives you a true picture of the rental yield. It might partly explain how yields end up at less than 4% though!

I think those sold prices from the Land Registry are significantly lagging indicators of prices, especially in a fast-changing market such as we are currently in.

I accept everyone thinks about these things differently but, for me, what the income is telling you is the key starting point - a realistic £1050 rent suggests a reasonable fair price of ABOUT £160k (putting the yield towards the higher end of the 7-8% you wisely suggest, although arguably this is still not high enough given all the uncertainty in the market at present). This allows for all the other costs and hassles of being a landlord and leaves room for a reasonable monthly profit and decent prospects of growth. But that's a big haircut on the £220k recent comparable from the Land Registry! Today's RICS valuation may well be significantly lower than a RICS valuation given late last year (before the Spring bounce didn't spring) on a property that recently appeared on the Land Registry database.

I have no problem about managing it yourself saving money etc - I only mentioned the management fee since you highlighted it in your post (so I read that as someone NOT doing the work themselves). 

Also, remember the £7k taken out is costing you 6.44% per year (well, for at least five years on a five-year fixed interest-only mortgage... it's anyone's guess what it might cost you after that). If you need a relatively cheap personal loan I guess this isn't too bad a way to get one (if you were going to buy the property anyway) otherwise it is a potentially costly way to hold "your own money".

As for whether it matters whether a BTL falls into negative equity if you don't want to sell obviously depends on the small print of the loan (for example, can the lender call in the debt early or force you to put up another deposit?). I agree that none of us can predict precisely what will happen over the next 5-10Y (which is why I believe a good risk premium, in terms of sufficient yield, should be built in to a sensible BTL investment) but I don't understand the logic of holding a poor investment hoping it will later turn into a good investment (for example the BTL in my post above).

 

Ben Ogunby:

Hello All,

Due to what seems like daily negative media coverage regarding mortgage rates rising, I was wondering what people’s “gut feelings” are towards lending now and in the near future. .............. Unfortunately nobody (that I know of) has a crystal ball,...................., I’m interested to see what other people think regarding this topic.

Ben

Hi Ben,

On the 30th of this month I will have completed 30 years in business, which means I have been through at least 3 of these situations...., the media always give them a great name (like they do with hurricanes & meteorites etc.) I hate "Credit Crunch" and I won't use the phrase!

My 'Gut' feeling based on my personal experience is that this volatile period offers lots of new opportunities and ways to make money.

Remember 'we' are only in this position because of the incompetence and greed of the banks & other financial institutions, well the people who work there, I say that because the "Market" and the "Banks & Financial Institutions" are not one cohesive body that works in a linked up co-ordinated way.

They operate like a literal heard of (greedy) sheep, the main mass move in more-or-less the same direction at more-or-less the same time - but - watch the edges of the flock. That's where you will see the interesting action - the same for the banks & building societies - watch out for the ones who want to break from the pack (it won't be long). There will be financial business that will smell a quick profit from some new 'product.

I remember when BTL type mortgage borrowing was illegal, you had to prove your income and adverse credit information meant NO MORTGAGE, but the "industry" saw that they had to cope with these things to continue making money - SO THEY CHANGED THE RULES!

Remember that these people ONLY make money when they lend it out - there is no possibility that everyone will stop lending because it means no profits and with the massive financial activity over the last few years the chances of finding people who don't have some, even small adverse info, is more & more unlikely, so they will create exceptions so they can lend again and make money.

My point? don't anyone panic! Yes, work your spreadsheets and watch your bottom line, but look for the opportunity to find the way through the few months of negative sentiment because for serious operators there will be money made available.

Finally - try to keep growing your property business, even if you have to do a second job or find some additional income to subsidise your payments for a few months. It probably took a lot of work finding and acquiring your portfolio, whatever the size, it's a fair bet that if you sell up now it will cost you a lot more to buy back in when the good times return.

My gut tells me to hang in there what ever it takes, use this 'industry given' opportunity to do some good buying, keep the purse strings tight, manage your lettings well, be proactive so you can head off potential problems and watch out for the lenders who are about to 'innovate' - it's going to happen, then we'll all be off again like a rocket while 99% of the population are still half asleep muttering "Credit Crunch" until 2012....,

Regards,

Carl Henry

Not much to add to all of that!

Experience..and attitude stands for a lot doesnt it?

Incredibly wise words.

Ok. 2 scenarios,

 1. You put your money in a rising asset (e.g. oil) and then invest it in property once it is gaining value again

2. You put your money in a declining asset and wait 7 years for it to reach the value you bought it for.

 For someone who has been doing this for 30 years Carl you make some strange suggestions... There I was thinking investors tried to maximise gains. Warren Buffet may have warned against diversification but considering the number of pies he had his fingers in it seems a little hypocritical. When did buy low, sell high become so unfashionable?

speedy, a typically 1-dimensional view ... you think that riding the market up or down is the only way to make money?  warren buffet might have his fingers in a lot of pies NOW, but not when he started out ... when he started he piled everything he had into deals he had researched & put all his chips on black ... and buy low and sell high is still the baisc plan ... not sure why you might think otherwise?   

SpeedyThing:

Ok. 2 scenarios,

 1. You put your money in a rising asset (e.g. oil) and then invest it in property once it is gaining value again

2. You put your money in a declining asset and wait 7 years for it to reach the value you bought it for.

 For someone who has been doing this for 30 years Carl you make some strange suggestions... There I was thinking investors tried to maximise gains. Warren Buffet may have warned against diversification but considering the number of pies he had his fingers in it seems a little hypocritical. When did buy low, sell high become so unfashionable?

Hello,

In response to the above, and for clarity, I was commenting specifically on strategy for the single BMV sector. I did not make the above suggestion because that was not what the person starting the tread asked.

Also the ways different industries work and are traded makes it difficult for inter-trading, for instance property is not what I would call a liquid asset. Now depending on how you would trade or invest in your example of oil my response would be different in terms of using oil as a way of either earning additional income or somehow switching from property into oil.

With oil, and other commodities, you are either a direct buyer or seller, broker or you deal or invest in the stocks or financial markets. Getting out of your property investments in time to catch a rising market in commodities would be difficult due to the time lag created by selling up, switching back would be even harder.

In conclusion I am happy to discuss all types of investment strategies across a number of industries if someone starts a thread on it, I have traded oil in the 90's and I have a number of friends who do it full time.

As for this thread I have confidence that as an investment strategy property purchased at the right prices, which reflect the UK's boom & Bust cycle, will always be a good asset class to be invested in and to trade in. Having said that I certainly agree there are lots of other, more liquid, ways to make (and loose) money.

I would be interested to contribute to a thread which focused on how people work their way though these difficult times, manage their property assets, ideas to save money in their portfolio, ideas on how to make extra money to see them through and even (possibly another tread altogether) how the BMV industry can develop a professional voice to lobby for a special class of mortgage product that is not available to the public.

Any thoughts?

Cheers!

Carl Henry