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I've seen a few investors say "They're waiting for a crash before they buy".
I thought it would be interesting to see if that is a good methodology when it comes to BTL.
To make things simple:
1. A BTL is £100k. 75% LTV so £25k input. Repayment or IO, let's not factor that in to make it simple.
2. Bought Jan 1st 2019.
3. Rental is £500pcm ie. £6k PA. Let's just call that NET to make the figures easier.
4. Capital growth is 3%.
If the definition of a crash is say a 20% reduction (it's hardly ever immediate though is it?), for every year that it doesn't happen based on the above, how much £ would not have been made/repaid by waiting?I've tried to simplify the process as much as possible to just purely look at the figures.
1st Jan 2020 MV £103k, rental income £6k.1st Jan 2021 MV £106,090, rental income £6k.1st Jan 2022 MV £109,272, rental income £6k.
So at this point if there was that overnight crash then that £109,272 would now be £87,417, but rental income would be £18k (and hopefully continuing!).
£87417 + £18k = £105,417.
So if 'the crash' happens before 3 years you could be worse off, but after 3 years you would still be ok. And each year it didn't happen you would be less vulnerable.
So is 'waiting for the crash', as it's very difficult to guage, a sound strategy?Basing investments around when a crash may happen seems more stocks & shares to me than BTL as there's the rental income in the meantime compared with dividends (if they're paid).
In my area prices have already fallen around 20% and nobody is taking any notice, properties are staying on the market longer, people accepting offers, properties reappearing for sale again a couple of months later as result of sales falling through.
I think a crash will have to be more than 20% to be noticed, 20% is a correction.
Let’s add a question, if you were reasonably confident that property was going to be 10-15% cheaper within twelve months would you wait or buy now?
In your example above how much interest payment on the mortgage is there to be deducted? In my area 6% net is not currently achievable so not really possible to ignore interest payable.
With your figures i agree.
However take london for example. In zone 1-2 prices have been falling for the last three years or so, not by much but by around 3-5% per year.
You still cannot get 6% net yield if you bought today. Realistically you are looking at a gross yield of about 4% on a flat. To me that suggests there could be a bit further to go with rising interest rates. Throw in the risk of brexit and it could be worth waiting.
Ultimately everyone needs to run their own numbers on each deal. If i was living in the NE or NW i would be buying now, in London i am not - and having done the commute to Liverpool to look its not for me.
Since peak of 2017, average central London prices have already dropped over 20% (£180,000 in about 16 months). That is not taking into account most amateur landlords have not even heard of S24. They will find out about it when they submit their tax return in Jan 2019, and most will run a negative cashflow business if they leverage over 60% LTV. There will only be 2 options, those with deep pockets will inject cash monthly to support the property "business. The 2nd option is to force sell the protfllolios.
Even for those who have very deep pockets to cash inject, they will have a second surprise waiting when they come to refinance and realise they no longer able to due to PRA stress test came into force Sept 2017.
Even the average London property at 6% yield today (which there are any around), will fail the PRA stress test. The only way investor can make the numbers work is either use no mortgage to buy, or the average prices drop for another £200k (around 30%) from today's prices.
Sorry for my typos in my previous posting.
Even IF average London property can achieve 6% yield today (which there aren't any around), will fail the PRA stress test. The only way investor can make the numbers work is either use no mortgage to buy, or the average prices drop for another £200k (around 30%) from today's prices.
I agree Jan 31st 2019 is a key date for S 24
I agree PRA will make things awkward going forward
If ,and its a very big if in my view , your forecasts look like becoming correct ......
Do you think the Gov though will allow a massive 50% drop in capital values within a 2yr period
Or will they perhaps take remedial steps to temper the catastrophic crash and the inevitable ensuing negative knock on effect for vast swathes of the economy that a 50% drop would have
They would see that they have overcooked it and put in some checks and balances
They could make S24 non retrospective for instance to prevent a complete meltdown
No government aiming for a balanced economy surely would welcome a 50% drop in values
So many other sectors rely on a healthy housing market and they too would be in uproar
The government will want to get re elected so they would address the problem
Jonathan Clarke. http://www.buytoletmk.com
I dont think we will see a 50% drop.
Any major correction in my view will be centred around London not in places where yield is still 8% such as many northern towns.
In London average price to earnings was up at 14.5x last time i looked some might see that as unsuitable and a good thing be reduced in order for their electorate to own a home.
It might be great for landlords for london prices to turn into hong kong levels but i dont think any party would campaign for that.
You are right, government will try to back paddle when the market drops another 20% (having said that we have already dropped 20% and people in London don't even realise it and government couldn't care less), but by then, as with previous crashes, government intervention tend to be the slowest in the chain of command and public "fear" already well underway. Like previous recession, by this stage the snow ball will only stop at its own momentum. And hopefully our smart money would already be in it before anyone else realise the snow ball has stopped.
In your example Adam there's a few factors that come into play, such as:
1, How long was the 75% mortgage fixed for?
2, Would the owner need to refinance in 2022 because their fixed term has ended and interest rates have gone up? If so then they'd be stuck in a sticky situation.
3, The £105,417 (£5417 profit) figure doesn't take into account buying or selling costs, mortgage payments, all taxes (inc stamp, CGT and S24), rent arrears or maintenance. If everything was taken into consideration and that owner needed to sell then I'd say they were already at a loss before putting on the market. Then consider trying to sell a property in a falling market, they'd be lucky to get the £87,417 asking price.
4, If the owner had a 10/20 year fixed rate mortgage and the property was in a desirable location with good rental demand, and had enough cash in the bank to cover emergencies when they arise.
In your example I'd suggest your rental income figures could be wrong, I'd expect it to move up each year as more landlords exit the market. Unless that particular property is a HMO in an already oversupplied area.
Sale figures are a different kettle of fish though. It's inevitable a crash will come along again, just depends when and how big.
I am a human bean.
Sorry I just realized you put NET income of £6k pa, so I can take off the mortgage payments out of point 3.
I make it you'd need a rental income of about £850pm+ on a property worth £100k with £75% LTV. Anyone know where these exist?