# How to make money in buy to let



## Unregistered (12 Apr 2005)

How to make money in the current UK investment market.


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## Unregistered (12 Apr 2005)

Is renting cheaper than owning now? http://money.cnn.com/2005/04/05/real_estate/rentprices/index.htm


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## oysterman (12 Apr 2005)

The mortgagedown article is well worth reading, particularly for all newcomers to the buy to let market.

Complicating factor in the Irish market is high transaction costs, principally on acquisition.

But when the market adjustment comes what's the betting that the new to the bandwagon buy-to-let army will sit tight and reassure each other that the slump can't last forever? Meanwhile, the smart money will migrate to a new asset class for a few years.

The article mentions yield. I'd love to know what percentage of the Irish buy-to-let newcomers of the past three years could explain how to calculate it and know what theirs is to one decimal place at the moment?


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## Unregistered (12 Apr 2005)

Do you think the rental market goes in cycles,the population of Ireland is set to soar in the next few years,wont it be good for us who have property investments.


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## tonka (12 Apr 2005)

Unregistered said:
			
		

> Do you think the rental market goes in cycles,the population of Ireland is set to soar in the next few years,wont it be good for us who have property investments.



oversupply ! , so no.


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## Unregistered (18 Apr 2005)

That's convinced me !! I'm selling up and fast !!


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## grim (26 Apr 2005)

oysterman said:
			
		

> The article mentions yield. I'd love to know what percentage of the Irish buy-to-let newcomers of the past three years could explain how to calculate it and know what theirs is to one decimal place at the moment?



Oysterman, I guess you know how to calculate it. If it's not too much trouble why not do a quick calculation for a reasonable scenario on one of the new 2-bed apartments being built in Dublin.  Assuming price stagnation (optimistic) over the next few years.

I'd be willing to stick my neck out and say the calculations will look very grim indeed ;-)


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## oysterman (3 May 2005)

Sorry it took me so long to revert - hadn't seen your post.

I have never been a landlord and am unaware of all the costs involved.

A quick bit of googling showed a 2-bed apartment in Ongar Village for sale at €212,000 and one for rent at €950.

Let's allow for €1200 service charge per annum (I'm just guessing here as google didn't help) and €200 per month repairs and depreciation of fixtures, fittings and furnishings (which I reckon is conservative).

Assuming 365 days p.a. occupancy (which seems very brave in the current rental market....) the yield is looking as low as 3.67% and if you assume 80% occupancy it falls to 2.94%.

This is a pretty poor result in anybody's language.

Time to sell?

_I would appreciate any input in to the workings and assumptions of the above._


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## Unregistered (3 May 2005)

Oysterman I would agree on your general calculation to reach the net yield on this property.  The two crucial variables are rent and voids, falling voids mean rising rents and rising voids mean falling rents.  However another method of accessing value apart from a net initial yield approach is to construct  an equated yield, for example obtain the net yield on long dated gilts and add a risk premium to reflect sector risk(say 1.5-2.5% for Irish residential property)  then calculate the appropriate multiplier (Years Purchase = 100  divided equated yield) and multiply this by the gross rental income to arrive at a capital value.


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## oysterman (3 May 2005)

I think I just about follow your maths - shudder to think what the realistic level of sector risk is today given the surge in house prices over the last ten years and the successive falls in rents over the last two years.

The yield genuinely troubles me. If rents don't recover and we no longer expect asset appreciation then what is in it for new investors?

Maybe the figures on rent vs. purchase price I used in my previous post are not reflective of the real situation out there. Please post with other examples.

Why are the financial institutions still so bullish about lending for buy to let?

Is this asset class the emperor's new clothes or am I missing something?

Could it be that property investment is the only way for the ordinary punter to get serious gearing in investment as one often hears? Fair enough, but multiplying exposure to a dodgy asset is not sensible.

Is it the tax breaks for investors? They're nice but a tax break, no matter how generous, doesn't make a good investment out of a bad one.

What is it? Please tell me.

_P.S. While I use the word "investment" in this context in accordance with convention, at the sorts of yields I mention in my previous post, "speculation" would surely be more appropriate._


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## Unregistered (3 May 2005)

oysterman said:
			
		

> Why are the financial institutions still so bullish about lending for buy to let?
> [/i]



Lending is how they make their profits. However the big banks are getting nervous about problems in this area and a recent article on RTE.ie said they were getting more fussy. (rte search engine seems broke at the moment)

Interesing, a major financial survey conducted in Ireland shows that a staggering 76% of people do not now see Dublin as a good location for property investment. So it looks like the Banks are being wise to pull back from this area.


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## Unregistered (4 May 2005)

oysterman said:
			
		

> The yield genuinely troubles me. If rents don't recover and we no longer expect asset appreciation then what is in it for new investors?
> 
> .[/i]



I agree the whole situation is looking very troubling.

Here is another example.

Bushy Park House is a prestigious development (2002) in Terenure. Terenure has got to be one of the best areas in Ireland to live (Schools parks etc.)

Now look on Daft.ie for apartments in Terenure. Apartments are sitting vacant in this developent month after month.

You can buy a two bedroom for 475,000 and rent it for maybe 1400. With all the other expenses and with vacancies the yield becomes a *fraction* of one percent.

Is there anywhere else in the world with a worse yield than that ?


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## Varmit (4 May 2005)

No doubt that net yields in many of these developments are underwater, however I get the impression that most ‘investors’ are working in capital growth into their calculations, (capital growth continues to slow)  so I would imagine that we will reach a chock point at some stage, where investors reach for their calculators before deciding to buy.


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## Unregistered (5 May 2005)

But isn't oysterman's point that negligible and still falling yields like the ones outlined simply point to it being time to sell? So where's the capital appreciation then?


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## _darag (6 May 2005)

I developed a spreadsheet recently to analyse whether there was a reasonable return available from buy-to-let.  I think it probably does a little bit more than Oysterman's calculation.  I just fired it up and put in his assumptions about the place in Ongar village.  The model takes a number of other inputs.  I picked the following:

1.  you'll need 20k initially to decorate the place and pay legal fees, etc.  
2.  you'll get a 95% mortgage.
3.  a mortgage interest rate of 4.1% (relatively low in historic terms)
4.  an annual inflation rate of 4% (also low)
5.  rental growth of 2% (very low - reflecting increasing supply)
6.  deposit account rate of 2.5%
7.  a capital appreciation rate of 2% (very low - reflecting the level of building at the moment)

I also assume at a 30 period for investment which is probably on the long side for many people considering this type of investment.  However the rate of return is pretty stable after about 12 years.  It boils everything down to a single rate of return based on the cashflows and capital appreciation generated over the 30 years.  I also assume that the 200 a month (index linked to inflation) which Oysterman mentions for repairs and depreciation includes the cost of your own time in administering this business.  The start-up costs in this particular case would be almost 40k.

The results show that the yield is not a useful measure of how sound a business being a landlord is.  While the yield is low,  the above assumptions gives a rate of return of approx 5.5% over the 30 years which is not too bad and explains why people are still buying property to let.  The return is in the capital appreciation;  if you assume 3% annual capital appreciation, the rate of return rises to 7.3%.  It's very improbably but if the boom continues with prices rising 10% a year then your return rockets to 16%.  This explains how many people became extremely wealthy by becoming landlords in the mid nineties.  These rates of return are relatively stable relative to the other inputs into the model EXCEPT the mortgage interest rate.  This is a huge risk;  as mortgage rates rise, your rate of return falls at a reasonably slow and steady pace UNTIL you hit around the 6% mark;  all of a sudden your rate of return plummets and catastrophically goes negative.  This is interesting and shows how difficult it is for central banks to cool property markets without causing a big crash.


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## Kipper (11 May 2005)

I rent out a few properties. I do not see the relevance of the yield figure. All I do is ensure that 

Rent - (Service Charge+Managment Co.+Repairs+Tax Mans Take) > 0

As long as this is zero or more, the property is paying for itself and any increase in the capital value is yours for the future.

I do have to get interest only loans for this to work.


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## oysterman (11 May 2005)

I can't see how ignoring the yield is sensible.

You simply can't take future capital appreciation for granted unless you know something about the residential market that the rest of us don't.

I'm assuming you have some equity in your properties.

Your formula showing a positive is the equivalent of somebody with €100k on deposit saying that s/he's getting a return >0 so evertything's great.


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## ddarag (12 May 2005)

Oysterman.  I'm not a property investor but if I was, I don't think yield would be the bottom line for me unless I wanted to derive an income from it which, given the nature of the tax laws here, would be unusual.  This may be different in other countries.  Yield in property investment is like a dividend payment in share investing;  for most people, it's actually an irritation because of the tax situation.

Having looked at it,  I believe the only sensible way to structure a property investment in this country is to try to derive all the returns in the form of capital gain.  Kipper's response is not only typical, it actually makes financial sense.

Just because no-one can confidently predict future property price movements or can authoritatively state that current prices are x% above what they should be, doesn't mean that you shouldn't take into account of the expectation of capital appreciation.  No one can predict the movement of share prices either but that doesn't (and shouldn't) put people off investing in shares.

Personally,  I believe property in Ireland is way overpriced at the moment, but who knows?


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## Kipper (12 May 2005)

Oysterman,

It works for me. Its simple - the apartment pays for itself and I make on the capital appreciation. I know there are no guarantees on future performance, but I'd rather take a chance than let it pass me by.

Using my plan, I've made money over the last few years that would take a lot of time for me to earn.


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## Unregistered (13 May 2005)

ddarag said:
			
		

> Oysterman.  I'm not a property investor but if I was, I don't think yield would be the bottom line for me unless I wanted to derive an income from it which, given the nature of the tax laws here, would be unusual.  This may be different in other countries.  Yield in property investment is like a dividend payment in share investing;  for most people, it's actually an irritation because of the tax situation.
> 
> Having looked at it,  I believe the only sensible way to structure a property investment in this country is to try to derive all the returns in the form of capital gain.  Kipper's response is not only typical, it actually makes financial sense.
> 
> ...



I think you're wrong about the analogy to share dividends. Gross rental yield is more analogous to a businesses turnover and net yield to a businesses profits.  If a business paid out all of it's profits in dividends then your analogy would be correct.  But this would leave nothing to invest in the growth of the company. The result would be stagnation of the business and you would expect to see a level or falling share price.  If you ignore yield then you are making the same mistake that many dot com investors made when they looked only at rising share prices and ignored profits (or lack of).
Now I know that property is different to shares in some aspects but the fact remains that the true value of a property is intrinsically linked to the rental yield it can generate. When the bubble bursts the market will revert to fundamentals and with a 95% geared investment with current negative or zero net yield you are looking at capital depreciation x 20 as your bottom line and that sucks.

HPC'er


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## oysterman (13 May 2005)

Genuinely don't want to flog a dead horse on this thread so to sum up:

What might be described as the Kipper/ddarag view is predicated on continuing house price rises. Mine/HPCer's emphasis on yield is more important in the event of any stagnation or reverse in the market.

We'll all have to agree to differ. Mind you, I'd be very worried being hightly geared in an investment which looks suspiciously like being at the top end of a very prolonged wave....


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## Unregistered (13 May 2005)

can't wait for this pyramid scheme to unravel.  The unravelling is accelerating in the UK and the cheques in the mail for us.  It's gonna be absolute carnage in Dublin.  The number of heavily geared people who are going to be sitting on enormous neg equity  in the future, assuming they can sell at all, will cause not just economic turmoil, but social turmoil.  €475,000 for an apt in Terenure that returns €1400/mth GROSS when it's rented out (€0/mth when it's not). COme again?

Sorry Im not going to provide "analysis" of my view.  Already been there and banged head against that wall.  It's clear that we're all beyond analysis in this country.  €475,000 for an apartment in Terenure.  What?  How much?

Boys and girls, heres my advice:  make sure you can afford the roof immediately over your head, go to zero exposure to property beyond that your ppr, pay down mortgage and build up a nice rainy day fund.  Batton down the hatches lads!


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## Unregistered (13 May 2005)

Unregistered said:
			
		

> €475,000 for an apartment in Terenure.  What?  How much?
> 
> Boys and girls, heres my advice:  make sure you can afford the roof immediately over your head, go to zero exposure to property beyond that your ppr, pay down mortgage and build up a nice rainy day fund.  Batton down the hatches lads!



Here's a little 2-bed apartment in Terenure for a cool €500,000
[broken link removed]


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## Unregistered (13 May 2005)

Unregistered said:
			
		

> can't wait for this pyramid scheme to unravel.  The unravelling is accelerating in the UK and the cheques in the mail for us.  It's gonna be absolute carnage in Dublin.  The number of heavily geared people who are going to be sitting on enormous neg equity  in the future, assuming they can sell at all, will cause not just economic turmoil, but social turmoil.  €475,000 for an apt in Terenure that returns €1400/mth GROSS when it's rented out (€0/mth when it's not). COme again?
> 
> Sorry Im not going to provide "analysis" of my view.  Already been there and banged head against that wall.  It's clear that we're all beyond analysis in this country.  €475,000 for an apartment in Terenure.  What?  How much?
> 
> Boys and girls, heres my advice:  make sure you can afford the roof immediately over your head, go to zero exposure to property beyond that your ppr, pay down mortgage and build up a nice rainy day fund.  Batton down the hatches lads!



any sense of proportion and sense of reality has slipped away....
remember irrational exuberance ?


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## darag_ (14 May 2005)

Yes, the dividend/yield analogy is not precise but it does express the attitude of property investors to yield.

My point is that it is does not make sense to look at yield as the bottom line.  It is not realistic to assume that over the long term that there will be no capital appreciation in the value of a property.  Historically, property has always appreciated in value; it has outpaced inflation - outperforming bonds but underperformed shares.

We may well be on the cusp of a property bubble right now.  We were on the cusp of a share price bubble a few years ago but that hasn't altered the established consensus that over the long term, shares will deliver a return above the rate of inflation.  It is not unreasonable to have the same view of property.

The calculations I did showed that even with zero yield and with falling REAL property prices (i.e. growing at less than the rate of general inflation) that a reasonable return can be expected from property if you're prepared to put in the time and effort of being a landlord.  Of course there are lots of things that could go wrong (a big jump in interest rates or a collapse of rental rates) but that's the case with any investment.

People sometimes can be right (to invest in property for example) for the wrong reasons.


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## walk2dewater (14 May 2005)

darag, do you know the punch line to the old wall street joke "what's the definition of a long-term investment?..."

As for valuing property, yield is the bottom line.  yes it is.  But if you're talking about highly geared debtors who are speculating on there being no upsets in the property market here, ever, well then use whatever makes you feel good.


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## darag_ (15 May 2005)

I don't need to feel good;  I'm not a property investor.  If anything I'd rather feel smug about not being an investor. I'm not convinced by the argument "yes it is".  I've done the calculations.  If you are able to present a convincing argument that it is reasonable to expect property to fall in value in REAL terms, I'd be interested to hear it.  Historically it hasn't been the case (over hundreds of years).  Otherwise it is reasonable to assume that property will nominally rise in value.  The rest is just basic financial sums.


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## walk2dewater (15 May 2005)

Darag, you seem to suffer from the same delusion of just about everyone I talk to in this country.  I.e. that property values cannot fall, that theres some miraculous floor under which prices cannot move.  As if prices only ratchet upwards and cannot ever go down.  As if someone, somewhere is going to insist that everyone will always have to pay a certain price and no lower.  I dont't know where to begin when I hear otherwise intelligent people holding these views.  Property prices fell in Ireland in real terms by 26.2% over the period 1979-86.  But Ireland is a bad example of cyclical property values cos we've only just become a rich country.  Countries that have been rich for much longer, all exhibit multiple boom/bust cycles in property values.  I refer you a study by Goldman Sachs, Global Economics Weekly, April 30, 2003 (p7) which lists 29 busts in the last 30 yrs in 15 developed countries.  The average peak-to-trough bust lasts 18 quarters and average real price falls 27.2%.



The evidence is overwhemingly pointing to the existence of a speculative bubble in property prices in this country.  Darag, I can and would present convincing arguments but I'm blue in the face.  Fact is people are beyond listening in this country.  It's speculative fever wrought on a massive scale, and I believe we'll reap some nasty results for it.  I've already outlined my views of why and what's in store.  I refer you to post No. 48 in the topic Bought apartment 12 months ago - value is still the same


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## tonka (15 May 2005)

walk2dewater said:
			
		

> Darag, you seem to suffer from the same delusion of just about everyone I talk to in this country.  I.e. that property values cannot fall, that theres some miraculous floor under which prices cannot move.


A SUREFIRE indicator of a bubble of course  . /me is with walk2dewater 100% on this . 

The Last punters in the pyramid are typically more delusional as  they have most to lose with their 90% interest only investments and only 10% equity . It is they who tank markets when they cut n run ....as they must .

Post 48 sums it all up so well


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## darag (15 May 2005)

> Darag, you seem to suffer from the same delusion of just about everyone I talk to in this country. I.e. that property values cannot fall


walk2dewater, I probably haven't been very clear but that's not my position at all.  When I talk about expectation, I mean in statistical sense.  For example, just because I'd "expect" to lose money playing roulette (about 2.5% playing red or black), doesn't mean I believe it's impossible to win.  Of course I believe property can drop in value.  We've seen it happen here and elsewhere.  And I have plenty of time for the opinion that we're currently hitting the cusp of a bubble.  People have been saying we're at a cusp for the last five years now;  this time they may well be right.  

However if you're trying to apply your intelligence to the decision on whether to invest in property, shares, gold or anything else, trying to time the market has been proven to be a waste of time.  The only smart thing you can do is to make sure you're in for long enough so that you don't get screwed by a cycle.  Shares have a number of advantages:  you can use cost averaging to lessen the effect and they're more liquid and incur less trading costs which seem to be factors in damping cycles.  

But fundamentally the investor in shares is facing the same dilemma;  a bunch of people will state that the stock market is overpriced and another bunch will say it's cheap.  You could spend your life listening and evaluating both sets of arguments or you can join the fray yourself and talk up/down the market.  You might end up on the right or wrong side but it's all pretty pointless as far as I can see.  If I'd been putting money regularly into the stock market over the last 10 years, despite there being a major boom and bust with a couple of smaller ones, I'd be far wealthier than I am now.  Instead I've spent the last 10 years reading about the the overall state of thte market and giving out in the pub about the market cap of such or such company and discussing why one companies business strategy was far superior to that of its rivals.  It hasn't made me any wealthier.   My strategy now is to have a long term investment window and use cost averaging if possible and let averaging do its magic.


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## walk2dewater (15 May 2005)

Darag, you want to cost-average into property in Ireland at this stage of the game?  Fair enough, be my guest.  Good Luck and let me know what you find and how you end up doing it.  As for market timing, well with equities you’re probably right, but with property, my god, a blind man can see that this is a horrible time to bring new money to the table.



Look- here’s my big picture view for what its worth.  There are 6 things to invest in;



1) your earning ability

2) cash

3) property

4) debt (e.g. bonds)

5) equity (e.g. shares)

6) precious metals (e.g. gold)

7) art/collectables/wine/john lennons guitars etc.



The ranking is not random, its based on my normal preferences.



Today, I am 20% in cold hard cash, 40% intl government bonds (ex-US), 2.5% gold (cost-averaging up to 10% max), and the remainder divided b/n two equity purchases, a canadian gas pipeline co. and a US nuclear/wind electricity utility co.  Both of which pay me dividends > inflation.  I consider property, virtually anywhere in the developed world to be a very poor bet at the moment.



I’ve made 4.5% on my capital in the last six months.  Yeah not great, but better than –ve and importantly with a VERY low risk profile.  I’ve owned, sold and made money on property in the past.  However, IMHO property in the Anglo-Saxon world a lousy bet right now.



Let me conclude by saying that the property party may still have some legs left in this country- the psychotic fixation is mind-boggling here- we may end up having the most expensive property prices the world has ever seen.  God only knows what the hangover will be like though.  In fact I'd rather not be around to witness it.


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## tonka (15 May 2005)

Another 10% off in Oz, and so say JP Morgan no less. This is not even a slump , more a correction.  

From http://finance.news.com.au/story/0,10166,15235652-14302,00.html 

10 May

Economists at investment bank JP Morgan said prices would fall 10per cent in nominal terms, assuming no rate rise and without taking inflation into account.

Even those who believe prices nationwide will remain flat or rise slightly in nominal terms predict house prices in overstretched Sydney will fall.  But weakness in Sydney and Melbourne will be tempered by healthier markets in cities such as Perth and Brisbane.

JP Morgan said the demand for new housing was running at about 155,000 dwellings a year, while the supply had averaged 170,000 a year over the past three years.

"Australian house prices are falling as there will be a shortfall of home buyers willing to soak up the excess supply of housing at the prevailing price," the bank's economists said.

They also pointed to the strong relationship between house prices and auction clearance rates, which have fallen to 40per cent in Sydney, as evidence that house prices are falling. "As a rule of thumb, when auction clearance rates are below 50per cent, house supply probably exceeds demand and house prices will fall."

Private surveys of house prices in the March quarter also suggest that prices are falling. "Prices have already come down," JP Morgan chief economist Stephen Walters said. "I suspect at least half of that (10per cent) has already been achieved."

The bank's economists said that because of high prices, buyers had returned to the rental market, causing rents to rise, and there were even signs of a looming undersupply of rental properties in Sydney.

However, the huge amount of residential building work still to be completed - $13.7billion nationwide - would tip the balance.

"Rents are likely to come under (downward) pressure as more high density floods the market," they said.


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