Buy to let. Why not sell?

beeno67

If most people agree with the Davy report that house prices will drop another 10% this year, then why are the people on this site with investment properties not selling? I mean even if you think prices will go up next year or the year after, why not sell now and buy again next year or the year after? Is it by choice or are you locked into contracts?

astrofool

Stamp duty and EA expenses mean that the property has to fall in value by more than 10% to be worth selling, with the intention to buy back in at the bottom.

beeno67

astrofool wrote: »

Stamp duty and EA expenses mean that the property has to fall in value by more than 10% to be worth selling, with the intention to buy back in at the bottom.

I disagree. If you are renting and getting the average rent of 3% and your mortgage costs are 5% then the house must increase in value by at least 2% to break even. Add to that 1% running costs for the year means that the house must increase by 3% to break even. Stamp duty and costs should come in at about 5-6% depending on the value of the property.This means a 3% fall in property prices makes it better so sell. Capital gains tax is the real cost but even so when so many are so pessimistic about the property market I cannot see why more are not selling.

copacetic

beeno67 wrote: »

I disagree. If you are renting and getting the average rent of 3% and your mortgage costs are 5% then the house must increase in value by at least 2% to break even. Add to that 1% running costs for the year means that the house must increase by 3% to break even. Stamp duty and costs should come in at about 5-6% depending on the value of the property.This means a 3% fall in property prices makes it better so sell. Capital gains tax is the real cost but even so when so many are so pessimistic about the property market I cannot see why more are not selling.

You seem to be trying to break even year on year? Property is a longer game than that, anyone looking at yearly costs to try and decide what to do needs to look again.

Dalfiatach

beeno67 wrote: »

but even so when so many are so pessimistic about the property market I cannot see why more are not selling.

Eh, they are! In the last year the number of properties for sale on Daft has gone from 30,000 to 60,000.

But nothing is shifting you see, so after a while desperate specuvestors are taking the property off sale and trying to rent it out. Hence numbers for rent on daft going from 4,000 12 months ago to 11,000 today.

And there's still a load of denial, spin and waffle out there amongst the perma-bull brigade. The current market is a blip, a correction, an easing, all Michael McDowell's fault, and by September prices will resume their up-up-and-away-super-soaraway-20%pa natural growth rate :rolleyes:

We're still in the opening skirmishes. The real carnage, I think, will begin around October 08 and last at least 2 years after that before anything approaching a bottom, or sane value, is reached.

beeno67

Dalfiatach wrote: »

Eh, they are! In the last year the number of properties for sale on Daft has gone from 30,000 to 60,000.

But nothing is shifting you see, so after a while desperate specuvestors are taking the property off sale and trying to rent it out. Hence numbers for rent on daft going from 4,000 12 months ago to 11,000 today.

And there's still a load of denial, spin and waffle out there amongst the perma-bull brigade. The current market is a blip, a correction, an easing, all Michael McDowell's fault, and by September prices will resume their up-up-and-away-super-soaraway-20%pa natural growth rate :rolleyes:

We're still in the opening skirmishes. The real carnage, I think, will begin around October 08 and last at least 2 years after that before anything approaching a bottom, or sane value, is reached.

I agree with all this. The reason I brought up the point is I was out with a friend last night. He has an investment property and thought I was mad when I suggested he sell. He brought up the usual points like copacetic did about property being a long term investment. I still do not see it unless you believe the market predictors are wrong. Even looking at 5 years you are very unlikely to make any money.

jdivision

If you bought a house ten years ago you're sitting on a lot of profit plus a monthly income that'll more than cover the mortgage. Why would you bother selling?

beeno67

jdivision wrote: »

If you bought a house ten years ago you're sitting on a lot of profit plus a monthly income that'll more than cover the mortgage. Why would you bother selling?

Lets say you bought a property for 300k and it is now worth 400k. You have a paper profit of 100k. Great news. If properrty prices drop 10% your profit drops to 60K which means you have lost 40% in one year. Even if you own the house outright and again it is worth 400k. Your income is about 2 or 3%. This time next year it will be worth 370000 or so. You could sell house now and get 5% in the banks. It will be worth 416000 after DIRT in a years time, which means you are €46000 better off. (I haven't included capital gains tax as you have to sell property at some stage to realise profit.)

punchestown

jdivision wrote: »

If you bought a house ten years ago you're sitting on a lot of profit plus a monthly income that'll more than cover the mortgage. Why would you bother selling?

But how many have bought within the last 3 years? 10 years ago, property investment by individuals was relatively small compared to the monster it has become. I think the question about why not sell now pertains to recent investment buyers? If they cannot let the property wwhile waiting for price rises, whow can they afford the repayments on a depreciating asset?

SimpleSam06

Theres a difference between an investment property and a buy to let property. Investment properties are bought with capital appreciation in mind; the value of the house increases and you realise profits from the sale of the house. If you bought anywhere from two years back you could still be sitting on a tidy profit if you could sell now.

Buy to let is a different story, you are buying with the aim of letting out to people. How successful you are will largely depend on the state of the property and the location of it - close to colleges for example you'll probably get away with it. These kinds of investors are banking on long term gains, with the rent covering the mortgage after five to ten years. Once the rent covers the mortgage you are sitting on a permanently profitable business.

Of course even they are going to come under tremendous pressure with the collapse, as specuvestors flood the rental market, as others have pointed out in this thread.

jdivision

punchestown wrote: »

But how many have bought within the last 3 years? 10 years ago, property investment by individuals was relatively small compared to the monster it has become. I think the question about why not sell now pertains to recent investment buyers? If they cannot let the property wwhile waiting for price rises, whow can they afford the repayments on a depreciating asset?

The general acceptance is house prices are down about 20 per cent from their peak. In the first half of 2007 alone I think they rose about 17 per cent if memory serves (sherry fitz figures at the time i think). So they're basically down to levels in 2006. That means those who bought in 2005 or 2006 are still okay relatively speaking although obviously they've much higher mortgages now.

I can't answer how they can afford the repayments, but presumably many have a number of properties bought over the years and are still in positive territory.

As for those who bought recently and don't sell I'm sure they think the market will rebound. It did quite quickly in 2001, due to outside factors and again outside factors will play a big part in when house prices start to rise again. I don't think that'll be for a while by the way.

Kipperhell

People seem to have the idea that if you are renting a property worth 400k that must mean you have 400k! You may have a smallish investment of 60k. Capital gains and EA fees are quite large when consider as a percentage of your initial investment. If rent pays the mortgage there really no big deal for many investors.
You can leave it ticking along and be quite happy with your end return which is an asset that cost you nothing and pays a return that stays in line with inflation.
The maths are a bit more complicated than the way people portray it here. A good property investor can normally make a profit at any point in the market. It is a matter of the right property and the terms of investment. A buy to let could be either speculative or investment not everybody is purely speculative as many would believe.

300K purchase sale of 400K
100k profit
CGT @ 20% = 20k
EA @2%= 8k
buying new house 372k
SD @ 6%=22.32
Total deductions from profit = 20+8+22.32=50.32

Profit =100-50.32=49.68k

It is more complex than that but overall you can see that a simplistic view of how you would be better off selling doesn't consider enough. I didn't even put in the SD for the original purchase for example

SimpleSam06

Kipperhell wrote: »

pays a return that stays in line with inflation.

Rental prices and inflation have very little to do with each other.

Kipperhell wrote: »

It is more complex than that but overall you can see that a simplistic view of how you would be better off selling doesn't consider enough.

I can see well enough how BTL operations might have a justification for holding on to the place, but in the figures you outlined above, you are talking about a purely appreciative investment, and you make the assumption that prices won't drop under the 300k. I'd say its very likely that prices are going to drop for a few years to come, so to maximise profit speculators need to offload now.

SkepticOne

jdivision wrote: »

The general acceptance is house prices are down about 20 per cent from their peak. In the first half of 2007 alone I think they rose about 17 per cent if memory serves (sherry fitz figures at the time i think). So they're basically down to levels in 2006. That means those who bought in 2005 or 2006 are still okay relatively speaking although obviously they've much higher mortgages now.

The last big push up was in the first half of 2006. 2007 was a year of falls. Many people believe that the peak was Spring/early Summer of 2006. I think we're probably down to late 2005 levels at the moment.

beeno67

Kipperhell wrote: »

People seem to have the idea that if you are renting a property worth 400k that must mean you have 400k! You may have a smallish investment of 60k. Capital gains and EA fees are quite large when consider as a percentage of your initial investment. If rent pays the mortgage there really no big deal for many investors.
You can leave it ticking along and be quite happy with your end return which is an asset that cost you nothing and pays a return that stays in line with inflation.
The maths are a bit more complicated than the way people portray it here. A good property investor can normally make a profit at any point in the market. It is a matter of the right property and the terms of investment. A buy to let could be either speculative or investment not everybody is purely speculative as many would believe.

300K purchase sale of 400K
100k profit
CGT @ 20% = 20k
EA @2%= 8k
buying new house 372k
SD @ 6%=22.32
Total deductions from profit = 20+8+22.32=50.32

Profit =100-50.32=49.68k

It is more complex than that but overall you can see that a simplistic view of how you would be better off selling doesn't consider enough. I didn't even put in the SD for the original purchase for example

You miss out on a few points here.
Obviously the cost of the new house would be 360,000 not 372k. (400k - 10%)
The stamp duty would be 16.45k not 23.32k.
You also fail to include the cost of keeping the property for the year. Intrerest on mortgage approx 15k,(5% of 300k) expenses at least 4k. Obviously these figures would have to have the incoming rent allowed against them which is 3% on average or 12k. So cost of keeping property is 15k + 4k - 12k or 7k.
You also fail to take account of investing the 80k profit on the sale of house at say 5% for the year which is an extra 4,000.
Obviously the SD on initial purchase is irrelevant.
Finally the point that if the rent covers the mortgage you are gaining in line with inflation is incorrect. Obviously the rent has topay the cost of the interest and the expense of keeping the property. If it does so your investment is then getting a return of 0%.

SkepticOne

jdivision wrote: »

If you bought a house ten years ago you're sitting on a lot of profit plus a monthly income that'll more than cover the mortgage. Why would you bother selling?

To maximise your returns maybe? There seems to be an assumption that owning an investment property is an end in itself.

antoinolachtnai

Owning an investment property objectively isn't bad. What else could you invest in for the same security, steady return and most importantly, gearing?

Cantab.

copacetic wrote: »

You seem to be trying to break even year on year? Property is a longer game than that, anyone looking at yearly costs to try and decide what to do needs to look again.

Is that a "buy and hold" strategy or a "buy and hope" strategy?

Kipperhell

beeno67 wrote: »

Obviously the SD on initial purchase is irrelevant.

If it was a cost of purchasing the house it is deducted from the profit. The amounts were only rough and I did say it was more complex. The assumption that profit worked out on yearly basis proves some point in a long term investment is flawed.
Property is an awkward investment to jump in and out and has hefty penalties for coming out. Good reasons not to jump in and out. If the property costs nothing to the investor (and that is the case for many) there really is no great incentive to cash out when they planned a long term investment with all the ups and downs.

SkepticOne

antoinolachtnai wrote: »

Owning an investment property objectively isn't bad. What else could you invest in for the same security, steady return and most importantly, gearing?

I don't think anyone is dismissing property as an asset class in general. It has its advantages and disadvantages just like anything else. However, in response to the "why would you possibly want to sell?" question posed by jdivision, there are reasons you can give.

SkepticOne

Kipperhell wrote: »

IIf the property costs nothing to the investor (and that is the case for many) there really is no great incentive to cash out when they planned a long term investment with all the ups and downs.

What about opportunity cost?

Noteb

hi, we bought our duplex 15months ago and found out today that it is valued at 10k less than we paid for it.
we bought as friends to get on the property ladder.. with a view to selling this year...
are we better off letting it out now? we are moving out regardless.

thanks

Scottie99

beeno67 wrote: »

I disagree. If you are renting and getting the average rent of 3% and your mortgage costs are 5% then the house must increase in value by at least 2% to break even. Add to that 1% running costs for the year means that the house must increase by 3% to break even. Stamp duty and costs should come in at about 5-6% depending on the value of the property.This means a 3% fall in property prices makes it better so sell. Capital gains tax is the real cost but even so when so many are so pessimistic about the property market I cannot see why more are not selling.

Property is a long term investment.......enough said!

beeno67

Scottie99 wrote: »

Property is a long term investment.......enough said!

I am sorry but this is one of those ridiculous answers people keep on coming out with. It seems to be the mantra of those with their heads in the sand. It implies people who disagree just don't understand property. I have made a large amount of money from investing in property but I was smart enough to sell last year.
The whole point of investment is making money. On average as I have said a few times rental incomes are 3% of market value of house. Interest rates are 5% and running costs are 1-2% of property value. This means that proprty prices have to rise 3-4% a year to break even. Property prices have already fallen 8% and it is reasonable to assume they will fall a total of 20% (and many people on this site think I am too conservative in my estimation of house price falls), in next couple of years. If you accept these figures that means that property prices will have to grow about 5% a year after that for the next 15 years for investors to break even, never mind make money. If you believe this is a good investment I think you are mad.
My whole reason for starting this post was to see if people still in property had some reason to believe in the property market. Quite frankly no one has given a reason. Their faith in the property market seems to be based on the fact that it has been so good for so long, when any idiot could make money, that it will continue into the future. Missing the whole point that it is because it has been so good for the last 10 years that it is unlikely to be good for the next 10 or even 20 years.