Buy to let (bubble)

[Nugget]

I was contemplating buying a house to let as an alternative to a pension, but fear that if interest rates continue to rise (which is probable in November) then the buy-to-let bubble may soon burst, as the guys that got in when house prices were low will run for the door at the same time, causing a stampede to sell, thus causing a long gradual crash in house prices. Is an interest only mortgage is even riskier in this possible situation, as this type of mortgage is more of a gamble on house prices than a repayment mortgage.

Just wondered what you guys thought, would be interested to hear your opinions

[MICHAELA8668]

I am an amateur at this but for what its worth I have chosen an interest only mortgage as I am not particularly bothered about paying off my property in its whole at the end of the term. I am gambling on my assuumption that my flat will be worth more than I paid for it by the time I come to sell. This also makes sense for tax reasons, not just CGT but also income tax paid on the monthly rent as only the interest part of the mortgage payment is tax deductible.

[Reg]

Very sensible points nugget, most people on the forum are much more bullish than yourself.

I have two mortgaged houses, the first one I was lucky enough to buy 10 years ago, the second one is a buy-to-let which I have had for just over a year now. Both are repayment mortgages.

I bought the buy-to-let a year ago, I put down over £30k as a deposit.

The difference between my rent and mortgage is +£103 a month. However, the property was empty for 5 weeks b4 I could get a suitable tenant in, therefore a mortgage payment was taken without reimbursement. The insurance is £22 a month. Plus there is also the one off costs of Solicitors, a survey and in my case stamp duty. Plus, if I really open my eyes there is the loss of interest on the £30k deposit to consider. Then there's the hassle of chasing rent (again in my case) because I didn't use a letting agent due to mounting costs.

So, it isn't the walk in the park that alot of people make out it is.

I've considered buying another buy-to-let, in fact I saw a mortgage advisor a few months back and I apparently I can remortgage my 10 year old house whenever I want to, I could then have a meaty deposit to put down on another house if I choose, but with house prices now bordering on the ridiculous I'm not going to jump in right now, because the sums just don't add up anymore.

When you hear all and sundries mother-in-law saying things like 'you can't go wrong with bricks and mortar' and 'prices won't go down, the government won't let it' then for me the alarm bells are well and truly ringing.

Your right, the smart buy-to-let people bought 4,5 6 years, now the bandwagon is well and truly rolling, will the wheels come off under the weight?

The real smart guys who bought buy-to-let when it was affordable are loaded and are probably contemplating selling up and jumping ship, whilst the get rich quick crowd will probably buy their properties at an 'artificially high price'.

The problem is, along with current house prices, the buy-to-let market is getting more and more saturated, pushing down rents, coupled with future possible interest rate increases, will pinch my small profit margin to the point of being minus. Other landlords (especially the ones who bought in years ago may see this then sell, sell, sell), causing a panick to sell. Wait until house prices are half affordable again then jump back on.

Look at the dot.com scandal. It was a sure thing, a banker, buy a share for 1p and see it shoot up to 90p. But what happened to the people that bought in at 90p, you could say that there is a slight comparison to house prices, I don't want to be the fool who buys in just as the big boys are selling up. Look at Japan, there was an initial house crash 12 years ago, prices are still falling now! This is all doom and gloom, but people have to face up that buy-to-let isn't a get rich quick scheme. I will keep hold of my buy-to-let and do not intend to sell it, because in 24 years I will have no mortgage and a monthly rental income. The people that are jumping in now on an interest only mortgage are simply gambling on house prices even though they are now sky high. Don't get me wrong i'd love to jack in work, own 10 properties and semi retire, but when you look beyond the natural greed of it, it's not financially feasible right now.

Doom and gloom aside, research I have found shows that house prices have historically risen by 7% year on year since the 1920s, so this gamble should come off over 25 years, but short term I personally think it's very dicey. I would still contemplate buying another buy-to-let, but not as you rightly pointed with the threat of future interest rate increases.

Personally, I would put into a ISA, and sit tight whilst keeping an eye on the market, like I'm doing.

Best of luck

[Nugget]

Thanks guys, i guess it's abit of a gamble right now, but they said there would be a crash for years now, I wish I had a crystal ball!!!

[Melboy]

Personally speaking I would hold back. The BTL Game is climaxing now and the returns are not worth the hassle imo.

People like me who bought properties in the late 80's and 90's have made a killing but I hasten to add it was purely by chance and good fortune because NOBODY forsaw the rise in property prices on the scale that has happened and that includes me!

Mark Trenners will know what I mean when I say that there are some people still buying BTL at outrageous prices and the returns and the figures just don't add up at all.

I am in the process of refurbishing a property right now for a BTL couple and quite frankly I feel they were seen-off regarding the purchasing price but hey! what do I know!

I am almost certain in my own mind that interest rates are going to rise in November and coupled with the huge amount of personal debt and mortgage repossessions etc. etc. there will be a downturn and that is when people like me who have been patiently waiting for the last 3 years will step in again.

Bring it on!

Mel.

[Nugget]

Thanks for the advice guys, I think I will wait on the sidelines for now, rather than being lured in on the false belief that BTL is a win win situation. Some of the estate agennts I have recently seen have bigged up the current BTL potential and some estate agents have also lied on the amount of rents that I could achieve.

[russ295]

hi

i am in the same boat mate, i have 5 properties but only have a 50% ltv mortgage on the property i live in. i have been toying with the idea of remortgaging the other 4 and using it for various deposits, but the sums dont look good, i would be basically gambling on future price rises, and with the costs involved with btl loans and remortgaging i would have to be 100% occupied at all times to even be slightly better off!

russ

[Pauly]

I have three flats and intend to buy another couple as soon as possible.

I can't see house prices dropping, on the contrary they will still rising because the influx of Eastern Europeans there is an endless supply of tenants.

I would invest now, don't listen to Melboy, he probably doesn't want you to buy because he wants to buy more now because it's a good long term bet!

[Melboy]

I have three flats and intend to buy another couple as soon as possible.

I can't see house prices dropping, on the contrary they will still rising because the influx of Eastern Europeans there is an endless supply of tenants.

I would invest now, don't listen to Melboy, he probably doesn't want you to buy because he wants to buy more now because it's a good long term bet!

I've made my money Pauly in Property Development over the past 20 years or so, so I am not too concerned what really happens in the future as such. Yes I would buy given the right price and profit margins etc.

I have kept back a couple of properties for rental purposes but that will be to hand over to the Kids or Grand kids at some time in the future.

I have personal experience right now of a couple who have bought a house for rental purposes but the sums just don't add up and won't for a couple of years I reckon. You can make more money on the stock exchange at present (as I am) then ever ever you can from the current rental market if you are a Newbie buyer. You could probably better get better returns from a BS Account especially if the IR's go up next Month.

I'm no mathamatician but I can work out basic finance on returns etc. and what I am saying is that for those about to enter the BTL market be very careful because it is at a tipping point where anything might happen.

Mel.

[Pauly]

Fair comment

[Trenners]

Wow ! This topic has sparked a debate !

I agree with Melboy that the figures don't stack up at the moment. ie: the amount of monthly mortgage interest payments coupled with property maintenance expenses and insurances etc are not covered by the montly rent payments.

However investing in residential property is a long term marathon and not a short term sprint. If you are taking a 20 year view then I would suggest that there is never a wrong time to buy more property.

After all - if property rises by an average of 3% per year then the capital value will DOUBLE in 20 years.

So the only risk to buying more property now is - will the property easily let out or will it stand empty for ages ? I always invest using the 5% rule ie: if annual rent is 5% or more of the purchase price then I tend to buy.

I know, in the short term, the rent won't cover the outgoings - but the property is going to DOUBLE in value in the long term ...... and, in the medium term, the rent will go up and cover the costs as well .....

I say ..... buy, buy, buy !

Good luck,

Mark

[Melboy]

That is exactly it Mark. People can't cover the bet in the short term.

If you can project your finances over a minimum of say 5 years then you should be more or less alright.

The problem today is people are mortgaging themselves up to the hilt and with initial deposits on credit cards etc. to buy a BTL property.......crazy!

There is absolutely no guarantee whatsoever that property is going to rise by any percentage and indeed could easily start to drift downwards.

The point is be very, very careful if you are going into the BTL because you could quickly find yourself in a mire of financial trouble very quickly and even quicker if you have an empty property not providing you with the necessary cash to finance your BTL.

I've seen it happen at first hand. Finance Companies will NOT be your new best friends either!

Mel.

[poiuyrew]

I agree with many things that have been said above especially about BTL being a long term thing. I would also be very cautious about moving into the BTL market right now but that is down to value for money relative to other investments NOT because I think there is a crash coming.

Couple of other points:

1. Personally I would not touch a repayment mortgage unless the lender insisted (as they did with me recently on the purchase of a commercial property). If I want to be clear of the mortgage at the end of the term I would always take out an interest-only mortgage and plan to invest money separately to repay the capital. Even if I am just putting these separate amounts into a high interest bank account it is at least earning something, which won't be the case with the repayment part of the cash you pay to a mortgage lender. Arguably IO mortgages are also more flexible. If, at any point, you need to stop these investment payments, you can and then pay more to catch up when you restart them. You obviously have to be disciplined and to review the situation regularly to ensure you meet your goals. I would never stretch myself too much financially to invest in BTL though and would also be prepared for it to cost me money on a ongoing basis for the first few years.

2. I am wary of people that talk of bubbles and crashes and compare property to other types of investment. Property can obviously go down in value as well as up but this, in the UK at least, has actually been quite rare (though see the point on historical pricing below). Unlike, say, shares which no one HAS to own, you HAVE to live somewhere. Unlike, say, commodities (eg sugar and coffee) the supply and demand acting on the housing market is actually reasonably predictable. I don't believe there are enough homes being built in the UK and I have no reason to expect the population to drop or become hugely more efficient in its use of housing. So I would say it's affordability that is likely to be the biggest factor affecting returns. Unless there is a recession, I think slower growth in house prices than in the past is much more likely than a full-on crash.

3. I am also wary of historians. I think past market behaviour is actually pretty irrelevant. Markets change significantly over time and as it says on all the ads 'past performance is not necessarily a guide to the future'. The factors affecting the market now are very different from what they were even 10 years back. Especially the availability of capital and the relative stability of the UK economy. The risks and the opportunities are different. I believe its best to make a balanced judgement based on what the fundamentals are now as you see them. But I would always be looking at more than one type of investment to decide what is best in the moment.

[tricky5971]

I was contemplating buying a house to let as an alternative to a pension, but fear that if interest rates continue to rise (which is probable in November) then the buy-to-let bubble may soon burst, as the guys that got in when house prices were low will run for the door at the same time, causing a stampede to sell, thus causing a long gradual crash in house prices. Is an interest only mortgage is even riskier in this possible situation, as this type of mortgage is more of a gamble on house prices than a repayment mortgage.

Just wondered what you guys thought, would be interested to hear your opinions

[Melboy]

I agree with Reg's comments.

I bought most of my properties over the last 15 years or so having developed most of them before letting out. Some I have sold over the years, some I wish I had kept and not sold because they would be worth treble what I sold them for.

I have followed the house price debate for the last 5 years now and studied it in every detail and to date I have been wrong on every count!

I cannot see this relentless rise carrying on for much longer as IR's start to rise with this Months quarter point rise a dead cert in my view.

I know of at least 6 Landlords who have sold up and cashed in their chips having made their stash and funny enough they were all sold to BTL's

Depends on your opinion whether you think it's a good time to buy into the BTL market but for me, at the moment, I would suggest sit tight and wait until at least the early New Year to see what happens.

Mel.

[zinyowem]

There is one thing most of you have forgotten. I got involved in the buy to let game about 19 months ago with my wife. We currently own 4 buy to lets and are still on the look out for more. The difference is this. We buy properties that need work doing to them (we don't care how much as long as if we ver have to sell we can make a profir or the rent stacks up).

Rather then selling at a profit when the work is done we rent out pull out equity and use on another. First buy to let £57250. Spent just under £11000. Has off road parking as well (the only one of ours that does) tenant has been in for 18 months. Also area it is in has a lot of development going on (new shops, flats not too far away (we don't touch them with a barge pole) hospital 2 minutes in car, motorway 2 miles away in either direction), schools nearby, bus routes, park nearby. The gem of this property no problem for it to be turned into a commercial property in the furture should the whole landscape change (which it is showing signs of). Was leasehold we bought freehold from council in anticpation of furture.

Oh did a lot of the work myself that is why we spent so little. Gutted it top to bottom six weeks three days...yes i have a day job as well, i got ill afterwards, but it takes hard work. Could not find a second saw the one next door to our first got to know tenant. Really run down house, landlord did not look after tennant and always took rent as cash (draw your own conclusions). Used nethouseprices to find out what he paid. Used land Registry to get details. Got solicitor to contact. We met agreed price (not telling you but not much more than first). Interior was dump. Worked round tenant, new bathroom, wiring checked by electrician, new bathroom, damp proof course etc. Oh we are lucky with surverys as one of our friends is a surveryor so he generally goes with me when i see a house i like so that keeps my costs down.

We buy run down, we do a lot of the work ourselves. We have invested in our tools (almost £5000 now if not more), and we do research. Yes property is overpriced, but if you buy run down of get solicitor to contact owners of other properties you can get lucky. New build, flats etc...no thanks...go for the stuff that others do not want because it takes hard work. So first property valued a month ago at £86000. So there you go, but i am saying this...it might not always work out...so cover yourself.

[Melboy]

Nothing wrong with what you are doing however, one thing you need to know is that in most of the southern half of the country (and especially in my part) £57,000 doesn't buy you a garden shed!

You cannot buy anything under £100,000 here.

For anything decent whether it requires work or not you are looking at £130,000 and upwards and even if you are successful in letting out you are up against a large supply of rented houses available.

In these uncertain times I would rather see my £120,000 earning a steady 5% with absolutely no hassle for the short term and wait and see what happens over the next 6 Months.

I wish I could buy property at under £60000 and if that was the case I too would buying up property.

Mel.

[zinyowem]

Move up north then... seriously though, i think we have been lucky as the tide has started to turn and bargains are getting harder to find. If we find nothing though we are happy with what we have achieved.

[turb9]

I am about to look at 3 HMO properties that another landlord is off-loading.

The first property was bought in Aug 2001 for £57K. Current asking price £199K!

The second was bought in Dec 2002 for £74.5K. Asking price now £275K!!

He has made his money and is getting out, but is it while the going is good? Interest rates increasing won't bother him too much with what he paid for the properties - he is covering this with rental income twice over! I fear he may be hedging his bets and selling for the maximum return...

Is now a bad time to look at another property I wonder??

[Matthew]

I always look at each property on a case by case basis.

The way I see it is that as long as my returns are good, then does it matter if house prices fall? They will rise again in time, so as long as you are making profits each month it shouldn't matter.

E.g. I try to work to at least a 10% return, therefore if interest rates rise to about 10%, I should be able to cover it. I always fix for 3 years to give me even more protection and piece of mind.

So the property for £199K , if you can get £20K a year on income (£1,666 per month) then do it. By having returns any lower than 8% you are opening yourself up to the risk of having to sell when prices are low if interest rates go sky high.

[Simon Dewsberry]

Bubble has burst !? NO CHANCE !

When getting involved in any kind of investment - best and worst case scenarios should always be considered. Even more so if this is your biggest investment, which for most it will be.

The advice i was given when i bought my first property was to go and look at 100 properties b4 you evenmake an offer. if you are thinking 2 bed flat then look at 100 2 bed flats, 4 b4d house then go look at 100 4 bed houses - in the area you want to buy.

After you have done this you will be able to value a property more accurately than an estate agent !

Use your ears and mouth in the proportions god gave them to you - and listen for signals indicating motivated sellers - bereavments, divorce, splits, debts, reposessions, downsizing, bridging loans, vacant possessions etc

Look at properties with scope to improve or get more income from -

an end tce is usually better than a mid tce -more scope for conversion to flats - billboard on side wall ( i have managed to acquire 3 with billboards which produce an extra £1500pa each from sign rent!)

rear lane access as opposed to no rear access

garage or space to build garage

there is a huge list of "extra merits" to look for

Get to know the estate agents in your area - you will anyway when you look at 100 props!

Only when you done your research and have checked your maths to make sure you are clearing an absolute min 8% rtn then start making offers - silly offers ! but if it desn't add up dont walk - RUN away.

I usually offer around 20% less than the asking price/market value - which i fully expect to be rejected and usually is !

but on 2 ocassions it wasn't and i got 2 bargains. Tell the estate agents that financing is in place you are in a position to exchange within 10 days and complete within 28 days(and ke sure you are in this position!). This will go a long way in closing the deal especially when you have a couple of houses and the est agent knows you are serious ! Estate agents regularly ring me now - b4 boards even go on houses !

I have 30 properties and have only ever paid the asking price once and that was only because the estate agent had seriously undervalued it !

Bubble burst - Not a chance

Seek and ye will find!

Some people think i am a lucky person but i find the more time i spent looking and researching the luckier i get - there's a message in there somewhere!

7 years ago i was destitute living staying with my girlfriend at her council flat and £22000 in debt - today my portfolio is worth £5 million

ps I bet you a £10 you wont get any where near 100 properties before you make an offer you wont be able to stop yourself ! let me know

Simon

[GPEL]

Experts have been getting it wrong for years. House demand for smaller properties is higher than ever - first time buyers, BTL and ever increasing demand for property by overseas workers. There is a cronic shortage of these type of properties. Days of good yields are long gone. Good capital growth however is another matter and I see no discernable reason not to continue, subject to local market forces.

[Simon Dewsberry]

Absolutely agree with GPEL.

You are are only going to buy one at a time (well usually !) and at any given time there are tens of thousands to choose from - now in there somewhere is a stunning deal- and there will be another one tomorrow, and the next day, and the day after ...... Happy hunting !!

There is never a bad time, just a bad deal, and you, not the market, are in control of avoiding that - always!

Regards Simon

[BTLWhizz]

That is exactly it Mark. People can't cover the bet in the short term.

If you can project your finances over a minimum of say 5 years then you should be more or less alright.

The problem today is people are mortgaging themselves up to the hilt and with initial deposits on credit cards etc. to buy a BTL property.......crazy!

There is absolutely no guarantee whatsoever that property is going to rise by any percentage and indeed could easily start to drift downwards.

The point is be very, very careful if you are going into the BTL because you could quickly find yourself in a mire of financial trouble very quickly and even quicker if you have an empty property not providing you with the necessary cash to finance your BTL.

I've seen it happen at first hand. Finance Companies will NOT be your new best friends either!

Mel.

I wouldn't buy any more properties unless I could get 7.5% gross or higher. That gives a decent return even if the value of the property doesn't go up.

But what makes me concerned about the future is this. People talk about the long term increases in house prices being a certain percentage. But over the past ten years the gains have been much higher. Doesn't this mean that the gains over the next year have to be low or even negative if the long term rate of increase is going to be the true one?

[Simon Dewsberry]

Hi BTLWhizz

Averaged across the country yes of course - basic maths - some will go up some will go down ; see post 19/3 this thread -just make sure you buy under market value - with scope to improve, rent garage , extend , planing for developing it etc and you wont go far wrong!

Me - Still buying - the right ones !

Simon