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tuk

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  1. Depends on the goal but if I had £3M I would be focussed on protecting it first and growing it second (and by protecting it, I would include in that that it should be able to keep up with inflation). I'd also want to keep things fairly simple. If £3M is the total investment pot, I might do something like invest a third in property, a third in stock market index funds and a third in cash or some kind of vehicle that can hedge against inflation. It wouldn't be quite as simple as that, but you get the idea. This would mean £1M for property. I'd use modest leverage, let's say 50% LTV, so I'd actually be buying £2M in property value. With this amount to invest, I wouldn't bother with small high yielding units, instead I'd look for hassle-free homes around £200k-£300k that can fetch a decent enough yield. 4-5% perhaps. I'd also buy a couple of commercial units in prime areas, maybe £500k each. They might fetch 6% at today's prices. This would end up being only 5-7 properties in total, but they'd be good ones. I'd try and spread them around a bit, maybe a couple in Manchester, a couple in Nottingham etc. Because interest rates are so high right now, I might look to make my first few purchases with cash, and then consider mortgaging them in a couple of years time if the situation has changed. I wouldn't be rushing in to invest it all right now, because there's a real chance of a severe recession/depression taking place. But equally I wouldn't want to sit on just cash for too long given the high levels on inflation, it's a tough situation right now! Now obviously I wouldn't suggest anyone follows this plan, but you just asked what I'd do with a fictional £3M
  2. You may as well engage with an accountant as I'm sure there will be many other questions you will have that are more complex than this one. With a £3M budget to work with, it'll be well worth a few hundred pounds on accountancy fees to get you good advice and up to speed quickly
  3. You'd pay the 3% SDLT surcharge for second homes (also applies to Ltd companies) on the full value and then 5% any value over £250k. The later having recently been increased from £125k So £7.5k for a £250k house and £11.5k for a £300k house https://www.gov.uk/stamp-duty-land-tax/residential-property-rates https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09835
  4. I'm not going to speculate on where prices are going but just wanted to point out that if you negotiate a different price then your existing mortgage offer might not be valid, so I suggest first checking this with the lender.
  5. Thanks David. I was beginning to come to the same conclusion myself so it's good to have your endorsement.
  6. Hello, I'm about to choose an accountant for to set up my first SPV, which I will use for my next investment and any further to that. I have narrowed it down to two accountancy companies, both of which I quite like. A) The first is a company of about 15 employees, but the owner handles most of the client relationships and tax advice himself. He seems very switched on and gave me a lot of advice on the phone for free when I first spoke to him. They are not property specific, although say that property investors make up nearly half their business and they have their own property investments. Cost ~£1,300/yr. B ) The second option is a property specific accountancy that branched out of a larger firm a few years ago. They would assign me an accountant who would manage my business and I would get 4 half-hour consultations with a year for tax advice, plus unlimited more general advice and technical support. They also have their own software for recording and tracking property finance and operation, which sounds quite useful. Cost ~£1,000/yr. My feeling is that A) might be a slightly more personal experience and possibly spot more opportunities to optimise drawing income from the company, but B ) is more tailored to the property investor so might spot more opportunities to operate more efficiently, plus the software sounds useful. I don't consider the difference in price that significant and would rather choose the better service. I feel like one of these probably is a better choice but I'm finding it difficult to evaluate which it is. I would appreciate your thoughts and advice! Thank you.
  7. I would say the general consensus on Property Hub is that it is very difficult to time investments around recessions and that speculatively putting an investment off until after a recession is not the optimal way to invest because that recession might never come. There are reasons to believe that a recession now would not hit property as hard as in 2008. On the other hand, interest rates might have to go up a lot. You need to decide for yourself whether you think now is a sensible time to invest. But putting it off forever is not great, and in absence of a strong conviction, the best time to invest is often "now". "Time in the market is better than timing the market"
  8. Interesting OK.. Is it possible that the stated liabilities are monies that you owe yourself by way of an initial loan you made to your company? And perhaps the assets are director's loans made from your company to yourself which is effectively a loan (asset) that your company owns? I would be interested to here from anyone else who is also skeptical about this. Thanks
  9. Hi @russellshire, Thanks for the article. I think this is an important point to consider for anyone wanting to manage risk in their investments. In order to put some numbers to risk, it is helpful to be able to put a number to a maximum anticipated drop in prices. I would quickly caution though that the best number to arrive at might not be the average price drop from a previous recession, because there was a large range between different properties in terms of how much their value dropped. Now turning to what might happen next, I think we are in uncharted waters! As a country and as a world, current debt levels are historically high and interest rates historically low. So the economic theory goes, a government can sustain as much debt as they want as long as the economy is growing at a higher rate than they are paying interest. For the last 14 years that has been easy because we've had negative real interest rates, so the economy doesn't even need to grow in real terms to exceed the interest rate. Meanwhile, the 30 years we've had of falling real interest rates have pumped up all asset prices including property, in both real terms and nominal terms. The situation seems stable then, as long as these real rates stay low. And on top of that, today we have better mortgage health as well (no silly 100% LTV mortgages like in 2007). Of course though, nothing is ever that easy and unfortunately we have a pandemic and major regional war causing inflation higher than we have seen in many of our lifetimes. What's interesting is I think a lot of people alive today don't appreciate the potential for high inflation to cause instability and major market disruptions.I include myself in that, I'm living through this for the first time like many others. I don't think inflation in itself is necessarily going to cause a crash, in theory rents and prices will rise. Interest rates will of course rise, but as long as real interest rates remain where they are today, rents and prices will simply keep up over the long run*. This would mean no concern for unencumbered property owners as everything will balance out and good news for leveraged investors who's mortgages get smaller in real terms. So I think an important question to grapple with is whether these negative real interest rates can be sustained. To shine some light on this I found data for the last time there was an inflation spike. Here I plot data from the worldbank.org showing that the inflation spike in the 1970s was followed by a rise in real interest rates and these high real rates were sustained around 5% for the next two decades while inflation was brought under control. That's 7% higher than the real interest rates of -2% we had last year!! An important differences between then and now is that real asset prices are much higher, so they have a long way to potentially fall. A common argument is that central banks cannot raise interest rates very much at the moment because governments are carrying a lot of debt. That makes sense but I'm not sure I am convinced. Sure they don't want to raise rates if they don't have to, but their job is literally to control inflation and raising real rates above zero the only tool they have to do this. What would be worse, governments getting crippled by debt repayments or inflation spiraling out of control? My point is that interest rates might have to rise a lot more than people are expecting. This is the opposite to what happened during the 2008 financial crisis and the opposite environment to which everyone is used to operating in. This is almost certainly going to mean real price decreases, I can envisage real prices reducing more than in 2008. But for the leveraged investor, that might not be a problem as long as nominal prices hold up (which is what people normally think of when thinking of the property market). I'm concerned about this but my prediction is not for a big crash, because central banks seem to be reacting slowly. And that leaves me worried about inflation... Things could get messy! Q: What do you think, is it bizarrely real interest rate changes that is going to control nominal prices? * I like to think of this relationship between interest rates and inflation like running on a treadmill. The speed of the treadmill is inflation and the speed you walk at is the nominal interest rate. Whether you are moving forward or backward on the treadmill is the real interest rate. A tread mill speed of 1mph (eg. 1%) is quite easy to keep up with, you just stroll along and all is fine. If you are going a bit too slow you have plenty of space to react before you fall off, by adjusting your speed (AKA the real interest rate). In real terms, life is stable. Up the speed a bit to 4mph (4%) and you have less time to react, but it's still pretty stable. Now up the speed a lot to 12mph (12%). You can still keep up with inflation here by running at 12% nominal interest rates, but it's a lot less stable, you don't have much time to react to mistakes. Up the interest rates too much and you'll crash into the front (recession), go too slowly and you'll fall off the back (spiraling inflation). The treadmill in my gym doesn't go above 12mph, but there's no reason inflation couldn't go higher and higher if it sets in and real rates don't tick up.
  10. Thank you both for your for replying so quickly. That's very helpful and I hadn't realised about the accountant's address, that sounds convenient. That's interesting. I thought one could just look up on, for example, companycheck.co.uk and see the reported total value of assets, liabilities and net value of the company. I've done this myself before to check out other people... Even without an accurate asset valuation, anyone in the know would realise that for every £300k of loans you have, you're likely to have at least £100k equity. What am I misunderstanding then, does one not have to report these figures publicly? And if that's the case, why can I see them for other people on companycheck.co.uk? Thanks again!
  11. I'm thinking that any future property I purchase should be in a Ltd company structure. The only thing I don't like is that anyone would be able to look my name up online and see that I own a property investment company and how much it is worth. I don't mind a lawyer being able to find what I own, I'm just not sure I'm comfortable with my friends and colleagues being able to look me up and say "ooh they're worth £X". Not least because they might not even understand what they're looking at, and possible think I'm far wealthier than I am 😆 Furthermore, there seems to be resentment towards landlords which other investors don't have to suffer. I don't suppose there is any practical way anyway around this..? Also, for the Ltd company's registered address, I was thinking of using a 'virtual trading address' such as those that UKpostbox offer, just so I don't have to give my home address to tenants. Is this something others are using? Thanks!
  12. Thanks for your further thoughts, Chris. This risk of inaction is interesting. Very easy to underestimate.
  13. Hi Chris and Barry, Thanks for the interesting thoughts here and sorry I did not reply to your previous message sooner, Chris. My response may come across as contrarian, but I am just trying broaden the discussion. I think I will always be sceptical about growth prospects while at the same time proceeding to invest with an expectation of some growth happening. By normal asset valuations methods (eg. using yield or net present value of future income), it is hard to imagine asset prices getting much higher in real terms without economic growth (see Antti Ilmanen's work for a good account of why). The only lever left to pull is loosening lending rules, but we know that is unlikely to end well. To counter this, I think the aging population is going to put pension pressure on asset prices, perhaps meaning yields settle at a lower level in the future. As for quantitative easing, it's hard to argue that this doesn't have an inflationary effect on asset prices since a lot of it goes straight into the bond market. I see this as a different mechanism to general inflation though, which in the immediate term takes more money from people's pockets so they have less to spend on mortgage repayments. In the long term one might expect it to balance out and people's wages rise to match. You ask a good question, Chris, whether I would come to a different conclusion if asking whether GBP will drop in value. I think my answer here is "yes, eventually". What I don't know is whether the effects of inflation will filter through fast enough to counter any plunges in real asset values that might take place along the way. If I have an investment horizon of 40 years, it would be easy to say that over that time frame, inflation, wages, interest rates etc will all balance out, but it would be prudent to have a plan that will not bankrupt me at any point in those 40 years during a period which might for a while be unbalanced. That's why I'm focussed on mitigating this risk. Beginning to take place now is a shift in policy making power from the baby-boomer generation to the millennial generation. The millennials look at the boomers and see that they have all the wealth, built over decades, largely by luck of the draw of falling interest rates and decent economic growth. At some point we will likely see new policy makers orchestrate a means to redistribute that wealth between generations. I don't know how that can be achieved smoothly but can imagine it might involve engineering a decline in real house prices. Do you have any thoughts on how this might play out? I am relatively early in my investment career, hence I am trying to identify these long term macro trends. Barry, I don't speak as someone in your fantastic position of having achieved financial independence, but my two cents would be that you should not put what you've already got at risk. It is standard practice for pension investments to de-risk as the investor approaches retirement and so I would apply this thought to a property portfolio as well. If you have enough income already, go and enjoy it. Don't put yourself in a position where you'll worry about it. I agree with Chris that housing is an essential need and so I personally don't worry about rental income vanishing (as long as the portfolio is somewhat diversified). What you might have guessed from reading my posts though is that I don't view the prosperity of the leveraged investor as an essential need and so we have to find a way to stay alive (avoid bankruptcy). The next few decades is quite likely to be different to the last few for investors of all kinds, and so I think a bit of caution on the leverage is prudent. How much LTV is 'safe'? I don't know, I started this discussion to try and help with that question. Lastly, I love Chris' point about the high risk option being not quitting your job, if you're already in a good position to do so. It's not a natural way to think, but I think there's a lot of sense in it when you weigh up life as a whole.
  14. Thanks to you both for your further thoughts. The point about being forced to sell as the main risk to avoid is a good one and was not how I was looking at it previously, so thanks for bringing that to my attention. I too value income above capital growth (you can see my scepticism on long-term future capital growth in this topic: Macro-economics and the risks to property investors - Interest rates - House prices ). An 8% gross yield is usually about when I think the net returns starts to look particularly appealing, if you assume low capital growth. It also, in light of your points about good income meaning you can cover your costs even if interest rates rise, provides a good buffer to rising costs. You make a good point though, Chris, about avoiding areas without fundamental strengths, and that makes 8% nigh on impossible at the moment, at least for a basic residential BTL strategy.
  15. Thanks for pointing that out. I have spoken to brokers who have told me 20-30% but not sure of the exact terms. If 100%, the concern is the same, just greater. Back to the consideration of negative equity, thanks also for the rest of your reply. I like your emphasis on negative equity only being a problem if one needs to sell or remortgage. I suppose that by staggering mortgage terms you will never be remortgaging everything all at once either. Even so, the prospect of a prolonged downturn would still be alarming (it happened in Japan, and in parts of the UK, it could happen again). I guess this is why it's important to stress test at high interest rates, in case you end up stuck on a variable rate not being able to remortgage. I also take your point about having unencumbered properties which I suppose falls into the category C) of the suggestions I gave in my original post. My reservation here, and also with having lower LTV across the portfolio, is that at reduces the yield of the portfolio as a whole. If an investor is buying property with a 7% ROI but backing each one up with an unencumbered property with ROI of 3%, then the overall return is 5%. My point being that the returns that make property so great only come with a large amount of leverage due to yields being so low in today's environment, so someone going down the road of property as their main investment vehicle would want those leveraged returns, otherwise why not just invest in stocks. (I'm also sceptical about future capital growth, as you can probably tell! But I acknowledge that can greatly boost total returns). It seems like overall the point you're making is that negative equity is extremely unlikely to be a problem an investor actually has to deal with, but that there's not much one can do to actually protect themself against the remote possibility other than reducing leverage. Would you agree? Anyone else have a view on this subject? Thanks.
  16. It's no secret that leveraged property investment has been very lucrative in recent decades, but people have been made bankrupt as well, especially in 2008. I'm trying to get to grips with how people with larger portfolios sleep at night with lots of mortgage debt to their name. Let's say I have one Buy-To-Let worth £200k with £150k debt against it and it's held in an SPV with a 20% personal guarantee (PG). The most I can lose personally is 20% of debt, so £30k. This isn't too scary, unless I've spent all my money it probably won't bankrupt me and it's not an insurmountable amount of money to rebuild. Anyone hoping to grow big though is going to one day end up with much more debt than this, perhaps they will end up with 20 of the same property, worth a total of £4M with £3M debt and the same 20% PG. Now they are personally liable for up to £600k! That's a much scarier amount. I can think of a few ways investors might justify these risks and I'd be interested to get your thoughts. A) prices will never fall more than 25% and so negative equity will never occur, and if the property needs remortaging at this price (which won't be possible without putting new money in because of the new value) then it can be easily sold to cover the debt. B ) before prices get anywhere near dropping by 25%, the government will step in to support the housing market C) The investor has sufficient other assets to cover any insolvency in their property portfolio I get the impression that a lot of people are either not thinking about this risk or thinking of A and B. In my eyes at the moment, only C is really that safe. If the properties are held personally or with a larger PG, then much more is at risk. As an investor grows their portfolio, they might be under the impression that they are unstoppable, but if they keep up a mortgage LTV of 75% across their portfolio, they are no more safe against bankruptcy than someone with a single property, and in fact have more to lose. Please let me know what you think, do you have a way to mitigate against these risks? Am I missing something? Thanks
  17. Thanks again David. I am now beginning to think that over the long term, the realistic ways to maintain a particular LTV across a portfolio (eg. 70%) would be to either: A ) sell properties (thus realising gains) and take out new debt against new properties, or B ) continually expand a portfolio, thus making it more likely to meet loan terms for refinancing because the money will be used for further acquisitions. Option A ) sounds expensive and I don't see how it's actually any less risky to lenders compared to just increasing LTV on an existing property. Option B ) is all well and good to a point, but there's an absolute limit on debt that I would be comfortable with, or I might want to use capital gains in property to fund different investments. If you have any further thoughts, I'd be interested to hear them.
  18. Thanks David, I hadn't thought about the terms of the loan, thanks. If equity is released through a loan I assume that would not be recorded as a profit, and so in which case a dividend cannot be issued on this? That would leave salary only. I am beginning to think that an SPV is an effective vehicle for continually building a portfolio, but once the desired portfolio size has been reached, how can one go about keeping a decent amount of leverage without adding more properties? (assuming value goes up, but there's no reasonable ground for increasing the loan size). If one was investing in their own name, they could just release some equity and use the money... Thanks again.
  19. While it seems common place to refinance properties owned in an SPV and use the proceeds to fund the deposit on further properties, what options are there to access that equity if one doesn't want to grow there property portfolio any further..? Since equity released by refinancing is not a profit, I imagine it is therefore impossible to extract the equity through dividends - one would instead have to sell a property and record a profit?? This seems like a significant drawback to me compared to owning property in my own name, considering that I don't intend to just forever buy more and more property... (but might want to buy enough to otherwise make an SPV worthwhile..) Looking forward to hearing what people have to say on this. Thanks in advance!
  20. Hi @mattd1, Those are some interesting observations. You are right that my 2% assumption seems lower than what most others are saying. 5% does seem like an often quoted figure and you have shown with the data that you processed that history has actually seen much higher increases than this. Let's think about what fundamentally drives changes in house prices. For this I am going to assume that people will pay as much as they can afford to pay. So what affects what one can afford to pay..? A ) Income (which on average is linked to economic activity) B ) Mortgage affordability (interest rates and maximum available LTV eg. Help to Buy etc.) C ) Speculation Let's ignore C because it's impossible to measure and I'll also assume that speculation can't take prices that far beyond what people can afford. If we only considered A, we'd expect house prices to follow economic growth: as people earn more they can afford to pay more for a house (remember economic growth includes inflation and real productivity growth). If we only considered B, we'd expect house prices to stay constant except for following changes in interest rates. When rates go down, people can afford more so prices can rise, and vica versa. If we combine A and B we will get a cumulative effect of both. I liked the graphs you produced so I looked to see if I could find data representing A) wage growth and B ) interest rates to see how they compared. https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/kgq2/qna https://www.publicfinance.co.uk/news/2017/11/interest-rates-rise-first-time-10-years It struck me how this simple explanation of what drives prices (A+B) fits very well if you look at the above graphs alongside your graphs. Now think about what the future might hold for A and B. For A, my guess is that real productivity growth in the UK will be lower than it has been in the past. This is now a 'fully' developed country and the graph shows that wage growth has been steadily slowing. For B, rates can't go any lower, and LTV can't really get much more generous. So B is either going to be a neutral or negative contribution to price growth going forwards. These expectations are why I think price growth will not be so high in the coming decades as it has been in previous decades. I've made some further estimates and assumptions to arrive at my 2% prediction but I'm not an expert and even for those who are, these things are hard to forecast. We can't know exactly what is going to happen, but I do think a more modest house price growth assumption is sensible, given the direction of these fundamental drivers. I think a lot of people just look at what has happened for the last several decades (which for many people alive today is their whole adult life) and assume that is the status quo, without thinking why it was like that in the first place. Ultimately, a strategy that depends on house price growth may have worked in the past and may work in the future, but it is not a strategy that is creating any value, it simply exploits a dependency on economic factors, which may or may not be similar in the future. Now, our economy has to keep growing somewhat, the system depends on it, so I think buy-to-let will continue to work - I just think that it will be with more modest growth than in the past. I actually still think buy-to-let is a good investment still, but it struck me that your very high income aspiration and growth expectation seemed like it might be unrealistic. As for development, maybe it has the potential for you to reach your goals. I've been researching development a lot myself lately and believe it has a lot of potential with the right approach. I hope that is of interest to you when thinking about your choices. Importantly, please feel free to disagree. Let me know what you think.
  21. Hi, I am not an experienced property investor but I have done a lot of research and thinking for my own aspirations, so here's my thoughts for you: 1) Firstly on your model, I know you've read my post on macro-economics and house prices, so you can probably guess I think your 6% assumption for price growth is very optimistic. In my models I use 2%. Because this is multiplied by mortgage leverage, whatever number you assume is going to make a massive difference to your predicted return, so be cautious and don't kid yourself. Also in the real world you have to wait a bit before your can realise the gain by remortgaging, so you can't compound the growth every single year (your model may or may not account for that). 2) Next, I suggest that if you're not already then you might want to start looking at what your returns will be post tax. Most property advice seems to ignore this which is fair enough since it will be different for different people. But you can calculate it for your own situation, and given the sums you're talking about you're going to have a lot of tax to pay! 3) You're in an amazing position already with what you've got but your >£300k annual income goal is extremely high even so. Do you really need that much income? You could invest your £1M in a variety of different passive investments quite quickly and probably get a comfortable 6% AFTER tax, so £60k. For most people that would be more than enough to stop working. For property investments, I think a total return of 5-8% return is achievable post tax for simple buy-to-lets, 10%+ for more active strategies (HMO, serviced accomdation etc, if you can make it work). If you really want to hit £300k income from property you're going to have to look to development. Development is a different business, the risks are bigger and its obviously not passive. But there are people who take it seriously and do get very rich from it. If you've not already come across John Howard, you might want to read some of his books and there's loads of videos on YouTube of him talking. 4) It's great that you've started by looking at what your goals are. Because your starting pot is so big, it will probably also be worth considering the even longer term. Do you want to build a legacy for your family's generational wealth or is your focus on maximizing your own income as quickly as possible? Of course you can achieve both, but what is more important to you? 5) If I had a million pounds to invest I would be looking to other investments as well as property to spread both my risk and my chances of gain, even if property was my main game. Remember, you and your wife can put £40k a year into an ISA between you and not be taxed at all on the gains. At least part of your consideration should go to protecting what you've already got.
  22. Hi, thanks for reading my post and sharing your thoughts! I think what the report I linked to made me realise is that at the point of rates being changed there is then a one off of response in house prices (which may in reality take months or years to be visible). Once the transition to different prices is complete, real prices will in theory then be stable at the new level until rates are moved again. For example, a base rate of 0% might support house prices at 8x average income, whereas base rate of 6% might support house prices at 4x average income. Each time the BoE changes interest rates, house prices will start moving towards their new sustainable level as an income multiple. But once reached, prices will remain at that income multiple until interest rates are changed again. ON TOP of this effect, we have wage growth, a part of which is inflation which, as you point out, is targeted at 2%. So in the very long run, we would expect prices to increase with wage growth and interest rate changes would probably balance out. Over the last 30 years though, there has been the effect that interest rates have been continually stepped down, meaning there has been a continual increase to the price to wage ratio. What might happen now as rates start rising, is that the house price to wage ratio is going to have to come down to a point that's sustainable at higher interest rates. This might be called "real" prices falling. The question I'm wondering is will inflation and wage growth be sufficiently high to stop nominal prices falling. As long as nominal prices don't fall, insolvency due to mortgage debt should not be a problem. You make an interesting point that, cycles aside, long term house price growth averages around 5%. For my understanding (presented above and in original post) to be consistent with this, it would mean that wage growth (including inflation) would have to have been about 5% as well over the long run. This doesn't sound unreasonable to me. Whether growth continues to be that strong going forward is another (not irrelevant) topic. I also agree with what you're saying on selection of location and property. For stock market investments, I'm of the opinion that it's foolish for retail investors to try to pick the best stocks, but for property investment I think the rules are a different, you can make a better or worse choice. You might be wrong, but you can give yourself a better than average chance of being right by choosing well.
  23. Hello, I'm looking for some advice around making offers on properties which may be suitable for conversion. I'm interested in converting commercial properties to residential but I'd also be interested in what people with purely residential development have to say. I've not bought a commercial property before and I'm wondering about the following actions and whether they would normally be conducted before making an offer or after an offer is accepted: - Appointing a planning consultant to advise on permitted development for change of use. - Appointing an architect and having them advise on the potential reconfiguration. - Engaging with contractors/builders for quotes or full tender process. I may be 90% sure that permitted development would be granted, have a good idea of what configuration might work and have a reasonable idea of what the development costs would be, but still not quite be willing to committing to buy it without being more sure about the project's viability. If I did all of the above before offering, that could cost thousands of pounds only to have my offer rejected. If I did all the above after an offer is accepted and it emerges that permitted development is less likely that I thought or the development cost is going to be a lot more than I thought, is it normal for a developer simply to pull out of the deal at that point? Not having done the whole process before, I'm keen to know how people de-risk this process. Looking forward to hearing what you have to say. Thanks in advance!
  24. I’d like to start a conversation about macro-economics and the effects that it might have on property investing. In particular, I’m going to challenge the notion that house prices always go up and highlight that the price rises which have been enjoyed by property investors for the past generation have been largely due to the steady decline in interest rates. Ultimately I’d like to find clarity on the question of whether property investment is still a good idea today and if so then is the same formula that worked previously still the best approach. I’ve tried to research this topic thoroughly but please do disagree with me and offer alternative ideas. What I say relates mostly to buy-to-let (BTL) investments that involve a mortgage. A) Let’s start with some fundamentals: property investors generate profit from two sources: rental income and capital growth. With rental yields where they are today (around 4-6% gross) it typically works out that the rental income is similar to the running cost of the property, and so the investor relies on capital growth to actually make profit. If you knew house prices were going to stay still for the next 30 years, would you still be interesting in BTL? B ) Having established that capital growth is important, let’s examine what causes it. For people to pay more for houses they have to be able to afford to pay more and this generally means one of two things: either they are earning more (wage growth) or they can access cheaper mortgages (interest rates falling). Rob & Rob have often talked about affordability on their podcast and explain how it’s this combination of wage and interest rate that determines what people can pay, not just how much they earn. Interest rates have been falling reasonably steadily now for several decades, meaning that year on year buyers have been able to afford bigger mortgages, pushing up house prices. This is demonstrated by the fact that, over this time, the house price-to-income ratio has increased substantially but the mortgage payment-to-income ratio has been relatively unchanged. A research paper by Victoria Monro of the Bank of England [1] estimated that over the past three decades about half of the housing price growth was due to wage growth and the rest due to falling interest rates. Therefore, if interest rates had not fallen, we would have seen half the price growth over the past three decades. C) So what happens next? Assuming interest rates will not go negative, two things can happen: either rates stay low or rates go up, and surely they will eventually go up. This means that investors will be relying on wage growth alone to push property prices higher and when rates do rise this will have an opposing effect as buyers are faced with higher mortgage payments. If rates slowly rise over the three decades back to the point they were 30 years ago, might we expect the roughly equal contributions of interest rate changes and wage growth to cancel out and house prices stay flat. D) Does this present risk to property investors? I’d really like to hear some opinions from you all. In my eyes there are some significant risks: If I were to purchase a BTL today and house prices stay flat, I might make a small or zero profit on the rental income. But this scenario is likely to occur as a result of interest rate rises, in which case my costs are going to go up and I could find myself in a scenario where I’m making a loss each year on running the property and there are no price rises to bail me out. If rates rise especially fast then house prices could even go down, but I’d be surprised if central banks would allow this to a significant extent. Any thoughts? E) Is there a particular strategy that could be safer? Please do make some suggestions. I for one have been wondering whether the era of capital growth is coming to and end and instead investors should be seeking to maximise rental income rather than capital growth. This would sustain a larger proportion of returns when the growth stops and give a stronger cushion as interest rates rise and increase the mortgage payments. Conclusion I’m proposing that rising interest rates over the coming years are likely to counter the effects of inflation and leave house prices standing still. This means that property investors no longer be able to rely on capital growth as part of their strategy. Furthermore, investors face a risk that their portfolios will no longer be viable with higher mortgage payments. Contrary to popular recommendation, higher income (lower capital growth potential) investments might be a safer bet for the next generation of investors. Ultimately, the central banks have control of the interest rate lever, will their decisions be likely to help or hinder investors? But what about the 18 Year Property Cycle?!? Aren’t we entering the boom phase?? Well I’ll be honest, I’m not sure I believe in the 18 year property cycle... it’s often easy to pick out a pattern when you go looking for one, that doesn’t mean it means anything. Perhaps the 18 year cycle has some validity resulting from human psychology and it certainly seems like people are expecting house prices to go up right now. But I believe there are larger forces at play – these people need to be able to afford it at the end of the day. We might see some more growth still, I’m not predicting a crash; new 95% mortgages could push the market a bit higher still as could wage growth. But otherwise the economic levers that inflate house prices don’t go any further, and eventually will start going back the other way. This won’t necessarily result in prices going down, if central banks decide to avoid that. But it could mean prices staying flat and costs going up, potentially rendering traditional BTL strategies unviable. Please feel free to agree, disagree and generally offer your thoughts on these fundamental issues. [1] Read abstract and see Table 3 from https://www.economic-policy.org/wp-content/uploads/2020/10/9100_UK-House-Prices-and-Decline-in-Risk-Free-Real-Interest.pdf
  25. It's not pre-pay, it's a normal meter with a digital screen to take meter readings from. The screen has stopped working so I'm told the boiler can't be serviced because a flow reading needs to be taken. The meter was only installed a couple of years ago
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