Buy-to-Let Bubble?Written By: Mark Cooper on February 7, 2016 No Comment
A relative has just sold a two bedroom flat in a less desirable part of South London in order to help fund Care Home fees. The sale price achieved was an eye-watering £265,000, sold to the very first viewer, time being of the essence.
Money is cheap to borrow, in fact has never been cheaper in relation to buying residential property, however the amount of capital to be repaid over 20-30 years has never been higher – one fact leads to the other. So, as an investment how do the numbers look?
The current rental value of the above-mentioned flat, looking at similar properties on Zoopla, is £1,100 per month, that’s £13,200 per annum. The rental yield, ignoring all costs and charges is a neatly rounded 5% p.a.
But you simply cannot ignore all costs, including a complete refurbishment, insurance, inspections and safety certificates, Croydon Council’s new £750 Private Landlord Licence, any void periods where the property is not let, Council Tax payments during such periods, rent arrears, legal costs and, assuming a hands-on 24/7 responsibility for problems lacks appeal, a Letting Agent typically costing 15% of rental income.
The real yield then might be nearer to 3% p.a. On this final outcome Income Tax is still due at the highest rate the owner pays.
All of the above assumes there is no mortgage involved. I’m sorry, but it just does not stack-up as a sound investment unless we are to seriously believe that property prices will only ever go up, mortgage rates will remain static and the Government and Councils now feel they have extracted all of the tax they can from these sitting ducks? It’s a case of collective Pollyanna Syndrome, certainly for those borrowing to invest.
There is little doubt that those who bought property, or perhaps kept inherited property or a surplus flat at the begining of a relationship have benefitted hugely on paper from the extrordinary “emergency interest rate” fuelled rise in UK residential property prices and an unencumbered property bought today still yields more than most other investments, but to an impartial observer such as this one it all looks increasingly like a house of cards…..