How to make money in buy to let

U

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How to make money in the current UK investment market.
 
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?
 
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.
 
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.
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oversupply ! , so no.
 
That's convinced me !! I'm selling up and fast !!
 
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?
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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 ;-)
 
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.
 
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.
 
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.
 
oysterman said:
Why are the financial institutions still so bullish about lending for buy to let?
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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.
 
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?

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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 ?
 
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.
 
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?
 
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.
 
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.
 
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.
 
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?
 
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.
 
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.

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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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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