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  • Buy-to-Let

    BTL out-performs most other investments

    Past performance is not necessarily a guide to future returns.

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    DISCLAIMER just my personal opinion - for legal advice consult a qualified professional grown-up.

    Classic cars of course have other advantages, like you can have fun and go travelling in them.  They attract no capital gains tax and therefore can be given away if 7 years before death without any tax implications.  Unless you rent them out, they are a drain on resources the more that they get used.  You do not want to get lumbered with a prewar Bentley engine rebuild by buying a pup!!

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    The FTSE 100  only looks good in comparison  because 10 years ago was the bottom of the post 2008 crash.

    20 years ago FTSE 100 was in the low 6000's, now it is in low 7000s -- that is a tiny gain over 20 years.

    the FTSE 100  peaked near 7000 at the end of 1999, and again in 2007 -- so you could have effectively zero gain over 20 years if you bought at the wrong time.  There is much more volatility than house prices.

    The big difference with BTL is that a lay person can leverage.  That effectively increases volatility, but also leads to much bigger potential gains.

    Here is a very simple and conserative back of the envelope calculation long term calculation to illustrate how leverage works:

    Post 1970s, inflation has very roughly meant a doubling of prices every 20-25 years.  Barring new economic crises, it is likely to stay roughly at that level, which is what the BOE aims for.     So if you buy a house for £100K, with £25K down,  and the rent covers mortgage interest (so no positive cash flow), then in 20-25 years you can expect that

    A) your rental income will have doubled.  Since the amount you have borrowed has stayed the same, e.g. £75K, and  wince prices have doubled, you have effectively half the debt but effectively the same income (taking into account inflation). So you should now be making a substantial rental profit (pace interest rates).

    B) your house will be worth about 200K, so a 100K gain if you sell.

    C) You now have an equity £125K, which is 500% gain.  Note that a 500% gain is not a great as it sounds., You should really be taking inflation into account.  Since prices have doubled over this period, You are left with  £62.5K in the equivalent of today's money.   It's still much better than what you are likely to get anywhere else.

    You can do the math with smaller deposits, or with larger inflation rates, but roughly speaking it is the leverage element that BTL investors are trying to exploit.

    I realize that house prices don't exactly follow inflation for many complex reasons (e.g. see North v.s South post 2007), but on very long time-scales (more than 10 years)  they are fundamentally tied down to income, and so it should even out.      You can obviously make more if you develop, or if you get lucky, e.g. I bought in Cambridge about 15 years ago, and prices there are up 250% on that period.  Should have bought more, but these things are hard to predict.

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    I should add the obvious which is that leverage also means that you can loose a lot.  For example,  if you bought a 100K house at the peak  2007 up North with a 25K deposit, then if it is now valued at £75K,  and you will have lost everything.  100% loss!   I know stories of people who bought city centre flats through investment clubs who have seen these kinds of drops.   But I would maintain that on a longer time-scale (say 25 years) prices should all pick up again simply due to inflation.

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    Another point: leverage doesn't quite work on your own home.  Although you benefit from the rise in value, if you sell and need an equivalent home, you also need the new higher value to buy one.    However, inflation does eat away at the value of your debt over time, so if you buy with a mortgage, it becomes relatively less expensive over time. 

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     I guess good Investment Trusts that employ some level of gearing, held within an ISA would give similar results over longer time periods if not outright beating BTL.

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    I agree. Leverage is a key difference but not the only one. It magnifies everything + or -

    However I refer to a post of a couple of days ago, if your lender no longer wishes to or is able to play ball with you to 're finance on acceptable terms you are - how shall I put it.... buggered...

    Then your risk comes home to roost as your liquidity is very low if you only have highly geared property.

    That's two reasons why cash is king these days but asset classes in themselves are not to be slavishly invested in to the exclusion of others.

    DL talked of taxes and possible legislative change and others are rightly optimistic about a BTL.portfolio. However, those people are professionals and do it as a business for a living. In running a business you plan, control where possible, act where necessary and learn along the way. You also diversify (e.g. more than one customer or more than one supplier or more than one type of investment). Why? To reduce RISK.

    Rant over.

    Dave

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    This report is an historical assessment based on factors that are simply not going to be there going forward. We have been in Cornwall this week looking at properties for my step daughter who is taking up a new post there. Every property we viewed has been reduced since they first went on the market and most have previously been BTL with a tenant but "the owner has now decided to sell"

    Well no surprise there, I know exactly why that is.

    The flat we have put an offer on (and has been accepted) is £17,000 cheaper than the present owner paid for it in 2006 I found out today doing my own searches.

    Saying that, as a cash buyer, on that flat the ROI would be around 5% if we decided to let it in the future. However, for a LL with a mortgage that's not just going to work any more

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    Interesting the see the rise and falls over the years across those investments, nice thread Vanessa.

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    Transparency notice: OneandOnlyPro is a commercial partner of Property Tribes.

    Hi Vanessa

    Very interesting thread.

     Buying desirable, well-maintained, below market value properties and having them professionally managed seems like a pretty solid investment model and is working well for our landlords - many, cash buyers or with low gearing.

    Agree not as sexy as fast cars, wine, gold, bitcoin etc but, in my experience, you don't really want to see the words, 'exciting', 'property' and 'investment' in the same sentence!!!

    Ed

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    LETS MAKE HOMES by treating landlords as partners, tenants as customers & every property as our own."

    http://www.letsmakehomes.co.uk