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Buy-to-let doesn't add up
Buy-to-let doesn't add up
But, in reality, it’s not actually that simple.
I’ve just sold a flat I’d been renting out for five-and-a-half years, having lived in the property for six years previously. A quick look at the figures and I worked out that over that period I’m £3,500 down.
So what went wrong?
Mortgage rates might be low now but they haven’t always been and even if they were, I was stuck on a fixed rate for several years.
When I became a landlord the mortgage was around £550 a month on an interest-only basis.
The rent at this point was £700 which gave me £150 a month to cover maintenance, ground rent and service charges (the flat was leasehold). I could just about break even providing nothing went wrong.
It wasn’t until 2010 when my fixed rate ended and the mortgage reverted to a tracker that I began to enjoy the full benefit of the low base rate.
So was I raking it in the first three years? No. I was just scraping by and I wasn’t even repaying the mortgage.
For the uninitiated, service charges are levied by the freeholder or a managing agent appointed by them if your flat is in a block. The service charges are supposed to cover upkeep of the communal parts of the building.
The trouble is, leasehold is a completely unregulated sector. Managing agents and freeholders contract out jobs to their associates and add their percentage fee on top.
I typically paid about £1,200 a year in service charges and £150 in ground rent. However, the lease stated that certain external and internal works must be done every seven years – something leaseholders are billed extra for.
So, in June 2009 I was billed £1,900 for external works. So that was my first big hit.
The great leasehold rip-off is explained in more detail here.
During my five-and-a-half years as a landlord I saw the good, the bad and the ugly in terms of tenants.
It quickly became apparent my first tenant couldn’t afford the rent. After paying late nine times out of 10 she did a moonlit flit leaving the deposit as the final month’s rent. However, she left the flat in a dreadful state and I had to hire professional cleaners, decorators and a plumber.
Finding and recovering money from someone who’s legged it without leaving a forwarding address is nigh impossible. So that was another £500 or so down the drain and I spent my time organising repairs while trying to get rid of debt collectors and bailiffs looking for my now ex-tenant.
My next two tenants, both siblings of friends, were perfect. The rent was paid on time and the flat left immaculate at the end of the tenancy.
My luck ran out when the tenants from hell moved in. Late rent in the first month aroused my suspicions and things generally went from bad to worse. If they weren’t making random complaints, they were infesting the flat with fleas and breaking things while denying all responsibility. I felt less like a landlord and more the mother of two irresponsible teenagers (despite the tenants being a married couple in their late 20s.)
They didn’t cost me much money, as such, but they time, sleep and energy. Consequently I learnt the first rule of BTL: trust no one.
Obviously in five-and-a-half years there was a fair amount of maintenance to do. A new washing machine here (£300), minor plumbing issues there, and some new radiators (£700) soon dented my budget.
The bathroom suite was ancient so I got it replaced last year for about £2,000.
Then not long after the terrible final tenants moved in, the hot water cylinder packed up and I was on the receiving end of another £1,800 bill plus £200 to put the tenants up in a local hotel for four nights while it was repaired.
Not that they appreciated my efforts. When they handed their notice in I put the flat on the market for sale and, if the estate agent’s feedback is to be believed, the tenants did everything they could to sabotage viewings.
When they finally left they dumped their rubbish in the front garden, refused to give me a forwarding address and, inexplicably, failed to forward their post or tell their creditors where they had moved to. They also threatened to take me to court if I didn’t return 100% of the deposit despite the fact they hadn’t bothered cleaning the flat.
Surely the flat had gone up in value during all this? If only. I should have sold it a year after I moved out when the market peaked in 2007 but I failed to recognise the top of the market. But then, who did?
So when I sold the property I had enough money to repay the mortgage, pay the estate agent and solicitor, and buy myself a drink in consolation.
I’d never be a landlord again.
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I've been a landlord for 40 years, when I started I was borrowing at 6% and renting for a15% return.
Then successive property booms encouraged too many buyers to rush in and the high property prices made the business plan unworkable.
To start now would be financially daft and break many cardinal financial rules.
You would borrow 'long' as a secured low risk borrower at 6%, and lend 'short' to high risk tenants at an average UK return of around 3-4% ie it is charity work. You may decide that is OK because of the capital gain will pay you back, but no, property prices will flat line for the forseeable future (see the 1990s Japanese experience) and if you do make a profit Vince Cable made sure you will pay up to 28% CGT with no taper relief.
If you have owned property for 20 years or more, the taxable profit is predominently on inflation.
Sad to say, rents are far too low to sustain a private rented sector, in fact many tenants are now spending more on cigarettes than rent, and Council Tax in many areas is more than 25% of the rent. Rent has been this stable because Landlords' expectation of an eventual capital gain led them to rent at below cost, thus passing on some of the benefits of the property boom to the tenants. This in turn reduced pressure for wage and benefit rises and kept inflation down.
Landlords and small builders (frequently the same) are responsible for the efficient renovation and maintainance of a great deal of the counrty's older housing stock at much lower costs than subsidised Social Housing. The PRS (private rented sector) has been targeted by government, housing charities and greens in terms of regulation and taxation and is now subject to 73 laws and regulations, many duplicated and punishable by heavy fines. London (8m people) is a very special case but tends to be used as the norm for the country (52m people). Grant Shapps (Housing Minister) is aware of the potential problems ahead, it will be interesting if he can come up with something workable. I have to say, from what I have seen of him, he seems the most realistic housing minister in my 40 years experience, but he is rubbing shoulders with some serious anti-capitalist/socialists.
seems to only realy work out if you have the funds to buy it outright.
that is true "buy to let"
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