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Journal of nicholas (3034)

Sunday May 02, 2004
05:30 PM

London house prices

[ #18589 ]

A friend of mine bought her 2 bedroom flat about 5 years ago, and is wondering about moving. One possibility she considered was renting out her existing flat, and buying somewhere new to live in. Finding a web site that could calculate repayments on "buy-to-let" mortgages, and with an idea of the sale and rental value of her flat based on adverts in the local paper, she did some sums.

The local paper showed flats like hers going for about £850 per month. She's not sure whether the tenant or the landlord covers the flat's service charge (in her case £50 per month), hence whether she pays it and it comes out of that figure, or the tenant pays it on top of that figure, but it's not that significant in what follows.

She assumed that she'd re-mortgage the flat to nearly all its current market value. For an interest-only mortgage (ie one where you never pay off any of the capital, and by implication the end-member of the mortgage range with the lowest repayments) she'd be paying out £650 per month. So most of the rent would already be going straight back out to the bank. Assuming that she used a management agency to run the letting, they'd be charging 10-15% commission, so she'd actually only be getting about £750 left from the rent monthly. And you can't rely on continuous occupancy, so she assumed that rent would only be coming in for 10 months out of 12. So effectively she's now making a loss, and that's before covering any routine maintenance. She concluded that it's not worth it for her. Which makes me think that while existing landlords will make money at the current ratio of rents to prices, new entrants buying in at today's prices can't. So this ought to mean that potential new entrants elect not to buy.

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  • The equity factor. Your friend would not just be making money on the rental of the property, but on its potential future value.

    Yes, this is a gamble. But it's why people get into the buy-to-rent game, because it's usually a gamble that pays off very very well (my mum is basing her retirement on it).
    • Yes, this is a gamble.

      Long term I'd expect it to always pay off, on the assumption that people will always need houses to live in. But right now it feels like a big gamble.

      I should have said that I'm aware that people are in this for the expected rise in the price of the property, which you benefit from even on an interest only mortgage. Someone I used to work for was expecting that by the time he retired the properties he owned would have paid off their mortgages, so that most of the rent would now be