Buy to Let Negatives.


We at Landlord Mortgages have a new friend, a resident landlord called 'lurker' and would like to introduce him to you. We have decided to shield his identity because, as will become apparent, negativity can breed dislike.

'Lurker' is around every corner of our web space and like a virus he becomes very destructive and at times can be uncontrollable but we are, nevertheless, glad to have him on board. One thing he really does well and that is to derail the thought process of other Property Investors to at least consider some of the negatives associated with Buy to Let.

Why are so many people mad crazy to acquire Buy To Let properties when I can’t make the figures stack up?

You are subject to market forces like everybody else. What has been happening over the last few years is that the demand for property, and in this case, property suitable for rental, has pushed up prices until a point has been reached where it is no longer feasible to buy properties specifically for rental. By this I mean that the repayments required on an interest only Buy To Let mortgage plus the minimum costs of maintaining a rented property (including insurance, corgi inspection fees and an allowance for voids, when no rent paying tenant is occupying the property) is in excess of the market rental for the property concerned. Thus in exchange for the privilege (and problems) of owning a rented property, you are having to fork out of your own pocket each month despite the property containing a good rent paying tenant.

What has happened here is that the property is also at present appreciating in value and what purchasers in the current market are considering is that this increase will, when the property is eventually sold, pay off the additional sums that have had to be paid out plus the necessary capital gains tax plus a profit. This is where the judgement bit comes in which is what entrepreneurs have to do!

You see, you have to satisfy yourself (somehow) that over the period you intend to own the rental property, inflation will cause the rent to rise sufficiently and/or it’s capital value will rise sufficiently to make the venture worthwhile. It also needs you to satisfy youself that your calculations will not be railroaded by mortgage rate interest rises, non paying tenants who take (using due process of law) months to shift and damage your property to boot.. There is also the possibility of non-friendly anti landlord government legislation as well!

Owning rental property is a business within which there are risks as well (we hope) of rewards.

When is the right time to get into Buy To Let?

How long is a piece of string?

The right time to get into Buy To Let is when you have done your research, your sums and are able to convince yourself that over the period concerned, you will be able to make the profit you need to justify the original costs and effort.. Many people are now considering Buy To Let as an investment for retirement, which may mean owning rental properties for many years before the sums start to work. As it is now difficult to buy a property on a mortgage for which the market rent will pay the mortgage and the costs of maintaining the property it is obvious that there are plenty of people out there who are prepared to pay what some might consider over the odds to secure their future in this way.

What these people are hoping (gambling on?) is that inflation and other causes will increase rentals beyond the point at which the cost of owning the property has to be subsidised out of the owner’s pocket (this is their pension contribution I suppose). Of course this is also affected by adjustments in money market interest rates – yet another factor to attempt to forecast.

Why did you get into Buy To Let – when I can’t see how to make a profit?

The answer as ever is market forces: Eight years ago when I got in, nobody had ever heard of a Buy To Let mortgage, and if you asked a financial advisor what he recommended you do with some money you had to invest, the last thing he would suggest is to put it into property. – Well, that is not strictly true, he may suggest that due to the strong growth in property prices he may recommend investment in some form of property bond. This maintained the dual function of ensuring he earned a commission and also kept your gains down to what the establishment thought you ought to earn. (So that they could take the rest to continue to fund their champagne lifestyles!)

You see, at that time property prices were growing at about 10% per annum and rents in those days were also returning a gross of about 10% of the capital value of the house per year. That is a total income of 20%!

Now the financial advising industry likes to be very careful and conservative – it wouldn’t want to be seen to cause you to loose your hard earned savings and it needs to look after its own so an investment which earns a gross annual return of 20% must, on principle, be very risky – what is called venture capital. This was what the book said and it was invariably trotted out to all and sundry, possibly for the reasons given above.

My financial advisor said the same to me even when he asked me what was so secure but gave a gross return of 20%. When I told him “British Residential Property” he blustered and made up all the excuses he could to justify his (book) opinion that such an investment had, on principle, to be very risky. The financial journals took exactly the same line at the time, trying to find all sorts of reasons why British Residential Property would not continue to appreciate as it had done for the last 60 years to my personal knowledge.

Because of all the contrary advice from many people who should know much more about it than me, investing directly in property to rent out was not a thing I did lightly back at the turn of the century. I just couldn’t believe that I could buy a property with someone else’s money, pay 6% or so for the use of the money, take a further 2.5% to maintain the property and put the rest (after tax of course) in my pocket! There had to be a catch – but there wasn’t!

In those days, it just wasn’t fashionable to buy property for rent, so only a few were doing it.

Now of course, the boot is on the other foot, the market has swung the other way, the financial advisors have seen the error of their ways, the money lenders are keen to lend to individuals who want to buy to let out (so the FI’s can make a commission from these lenders) and so the demand has pushed property prices through the roof.

Will those days ever return?

Well, all markets are cyclical, and we need an event to put people off buying to let. I suppose the best one would be for property prices to fall to an extent that many Buy To Let’ers got into negative equity and lost confidence in the market. This could be triggered by sending interest rates to where they were in the 1980’s which is why the B of E has to be very careful when deciding to increase interest rates. The last thing that they want is a property market collapse! We must however be extremely patient. As we are now in a low inflation economy and the political principle is to keep it that way, property market cycles will be very slow indeed..

Have you always made your living from renting out property?

All my life I have watched the rental market, but only found myself dependent on my rental income when I lost my then current job. This was due to the diagnosis of an incurable illness in 2002.

Checking some basic financial figures has always amused me, and I have long noted that it has often been possible to acquire a house on a mortgage where the mortgage payment was less than the rent that such a property would earn. Of course this meant an opportunity to make money, but the great British financial industry stopped you in your tracks. If you had the money yourself – fair enough, but if you wanted to borrow the money then no way! Although you could borrow money from a building society on a mortgage to buy a house you intended to live in yourself, you could not do this for any other property. To do so a commercial mortgage was needed for which the interest rate was about double the rate for an ordinary mortgage which made buying to rent with someone else’s money out of the question.

It is only since our financial institutions have become awash with money that they try to get us to borrow (with the personal debt problems that we are now becoming familiar) that these restrictions have been lifted. Thus after the initial inertia (when I got in) property prices have rocketed due to the demand from the new generation of Buy To Let’ers.

There are vestiges of the old quaint (these days) irrational lending policy still to be found: About three years ago, I was offered a superb house in an excellent location for renting at a very good price. It was in fact an offer not to be missed. As I had no mortgage secured by my own premises, I got a mortgage broker to do the necessary and a Halifax mortgage at an excellent introductory interest rate was forthcoming. Of course, after two years the rate jacked up to something horrible, so at the appropriate time, I looked for another mortgage provider. Wandering down my high street, I noticed that Nationwide (with whom I have a small, old savings account) were offering very attractive rates, being clearly determined to increase the amount of money they had loaned out.

I went in and told them of my situation, and that I wanted to move my principal home mortgage to them. They were quite excited and happy to oblige. Then, when we got into the in depth session with their mortgage advisor, he discovered that I owned a number of houses outright. (Yeah, so I had invested my money in bricks and mortar instead of shares or securities or other “approved” forms of investments.) Because of this, the man said that despite it being crazy, he doubted head office would approve my mortgage. He was determined to get my business and was going to have a go at his head office as soon as the correct bod was available and would be contacting me very shortly. I never heard from him again.