Greedy Landlords Part 2

 Labour continue to call Landlords greedy.

Let's do some basic calculations on who the winners and losers are.

Let's assume someone who is earning £50,000 per year (20% tax payer) decides to become  a landlord in order to save for the future and invest in property.  They have £25k saved as a deposit for the property.

Great Yarmouth looks a good place to invest.  Yields are 6.13% and property prices are such that it's possible to buy the property with the £25k deposit.

So a property is bought for £100k (plus a bunch of other costs eg stamp duty, conveyancing charges etc which are treated as capital). 

Purchase price:    £100,000

Deposit :            £25,000

Mortgage:            £75,000

BTL Mortgage rate from HSBC: 7.6% 

The property is let for £650 per month (£7,800 per year) = 7.8% yield - a very good yield.

There are annual costs for running the property:

Insurance:        £400

Gas safety:        £70

EICR:                £60

An agent is used to rent the property at 10% + VAT

Gross income:      £7,800

Agent Fees:            £936

Net Income:         £6,864

Less running costs of £530

Net Income:        £6,334

The mortgage cost per year is £5,700 (£75k @ 7.6% interest)

So there's a notional profit of £634 per year.

Now unforutnately our investor was in 20% tax bracket but the rental profit (income) of £6,334 has pushed them into the 40% tax bracket. So mortgage interest relief is tapered.

Here's how the tax man calculates it:

Profit   :     £6334 subject to tax at 40%

Tax due:    £2,533.60

Mortgage relief:    £5,700 *20% = £1,140

Tax due:    £1,393.60

If mortgage interest was 100% allowable (like any other business), the 40% rate tax due would be £253.60 leaving a profit for our investor of £380.40

So our investor has the following REAL costs:

Net Income:    £6334

Mortgage:        £5700

Tax:                £1393.60

LOSS of £759.60

Our investor is actually £759.60 worse off (per year) than if they had done NOTHING.

Had they put the £25k in the bank they could get 5.2% with Ulster bank easy access account.  That's £1,300 before tax. Or £780 after 40% tax.  Had the money been invested in an ISA that could be £1,300 with no tax.

So in reality our investor is £2000 worse off per year.

Now the property might increase in value.  However property price rises in 2024 are expected to 0.4% (below inflation).  This will not compensate for the trading loss. 

So who are the winners 

Tenant:        £7,800            LOSER

Bank:            £5,700         WINNER

Tax man:       £1393.60      WINNER

Agent:           £780            WINNER

Tax man:        £156            WINNER   (VAT on Agent fees)

Insurance

company:        £400            WINNER

Gas engineer:    £70            WINNER

EICR electrician   £60        WINNER

Investor        -£759.60        LOSER   (Overall loss on BTL)

Investor        -£1,300           LOSER (Opportunity loss on £25k desposit)

Everyone is a winner except the Landlord and the Tenant..... It looks like the banks and the tax man are the greedy ones here.  Not the Landlord.

The picture is actually worse then this.  To buy the property the investor would have to pay £3000 stamp duty (yet another tax).  Legal fees of about £1,500 so £4,500 of additional costs.  These are treated as CAPITAL and will only be reconsidered when the investor sells the property. 

Now lets assume our investor is not very financially savvy and keeps making a loss for 5 years. Inflation is running at 3% and property value grows at 1%.

Our investor sells the property for £104,000 in 5 years time

The purchase costs of £4500 are now allowable (adjusting for inflation the £4500 sunk CAPITAL is now worth £3983 so a hypothetical loss of £517)

The investor will also have to pay agent fees and legal fees to sell the property.  Lets say they are 1% and legal fees havent increased since purchasing it and are £1500. 

Overall this purchase has lost our investor £3,040 ignoring inflation.  Fortunately the property hasnt increased in value enough to trigger capital gains tax.

Over this 5 year period our investor has lost:

Operating losses:        £3,798

Capital losses:               £3,040

TOTAL                       £6,838

Opportunity Loss on interest:       £6,500

Our investor could  have  seen the £25,000 in savings grow to £31,500 by putting it in the bank however the cash position (ignoring the trading losses) is that the £25,000 is now only £21,960 after the disposal of the house.  This ignores inflation which makes the numbers worse.....

If you factor all losses in over the 5 year period our investor has lost nearly £7,000 ignoring inflation.  This assumes our Landlord hasnt incurred any maintenance costs on the property, the tenant paid their rent and there were no legal costs to evict the tenant.   In reality our investor has been very lucky. The NRLA in 2024 reported that 36% of tenants are in rent arrears.  In Q2/2024, 13,570 landlords were in mortgage arrears.  The number of landlords in mortgage arrears at the end of 2023 had increased by 124%. 

My personal perspective is that the growing exodus of landlords is set to cause a massive housing crisis.  Landlords left in the game will dramatically increase rents. We are already seeing 20+ applicants for every rental property that comes on the market. 

This is simple supply and demand.  Demand is growing whilst supply is dropping off. Tenants are chasing after fewer and fewer rental properties. Rents will rise as a result.

Welcome to the world of New Labour rhetoric - blame everyone except yourself.

Read part 1

Read part 3