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 ã850 per month. She's not sure whether the tenant or the landlord covers the flat's service charge (in her case ã50 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 ã650 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 ã750 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.
Re:One thing missing from your calculations...
nicholas on 2004-05-03T09:06:26
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 coming to him as "pension", so I don't think that he was intending to sell to cash in on his gain.
I'd read that some time ago banks had started stipulating that the rent must cover the mortgage - ie they'd had problems with people borrowing to buy property to rent at a "loss", where the landlord was subsidising the mortgage in the expectation of a payoff through a massive price rise. Which would mean that right now if you don't have your own capital, and don't lie to the bank, it's getting to the point where you won't be able to get a loan.
What was interesting to us (and my parents and my brother-in-law) - that right now prices have gone up sufficienty and rents down sufficiently that you can no longer enter the market in London and have your property break even.
