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In the typical UK buy-to-let model, the renter pays more than the landlord's mortgage in rent. The only thing separating a buy-to-let landlord and their tenant

In the typical UK buy-to-let model, the renter pays more than the landlord's mortgage in rent. The only thing separating a buy-to-let landlord and their tenants is mortgage availability (i.e. Existing wealth and income multiples)

mafribe 10y ago
the renter pays more than And why is this a problem? The landlord takes on administrative hassle, and -- more importantly -- risk, for example - Can't rent out the property. - Property needs to undergo repair. - Tenants don't pay rent, destroy the property. - Liquidity risk: property is not as easy to sell as many other goods, in case of emergency. All of the above happen with a certain probability and that needs to be priced in. The last one is rarely a problem but the others are major considerations. And I have not even mentioned transaction costs for buying/selling a property, not to mention taxation. For these reasons, property typically doesn't have a good ROI, vis-a-vis e.g. investing in shares. A lot of property investors are naive, and would be better off investing in a passive index fund. So in many cases tenants get a good deal. In my experience buy-to-let is lucrative primarily when - Landlord has multiple properties, Economies of scale kicks in. - Landlord has relevant skills (plumber, electrician, or ... tax expert, lawyer) so he can get some jobs that need to be done substantially below market price. - Is physically close to the property, so can visit/check easily. - Has unusually low cost of capital (lower than bank-based mortgages). Ideally more than one of those. only thing separating The landlord has already proven financial stability, while the tenant typically hasn't. Many tenants tend to be young, e.g. students who are by-and-large not yet ready to take on the major responsibility of buying and maintaining a house. My heuristic for when you are ready to buy a property: > 10 years in a stable job, enough savings to put up 1/3 of the price up-front. After-tax income high enough so the mortgage can easily be paid. Good timing for a mortgage when you pay it off a bit before you stop earning (i.e. before retirement). Given a 25 year payment schedule and retirement at 65, age 35-40 would be a great time to get a mortage. Plenty of countries do quite well with mostly-rent based system. German Chancellor Merkel rents, for example.
- Nursie 10y ago
  Those with a good financial record thus get to crowd out the market and push up prices for those without the record (and mortgage). >>For these reasons, property typically doesn't have a good ROI, vis-a-vis e.g. investing in shares. Have you seen the UK property market recently? This seems a bizarre assertion given market patterns over the last 15-20 years.
  - mafribe 10y ago
    crowd out the market Which market? To a pretty good approximation, most people live in exactly one property. If they own more, they rent out the surplus. (Please don't What-About-XYZ me with exceptional cases like billionaires who own multiple properties and let them stand empty. Yes, that happens, but is marginal.) So the owner/renter fraction doesn't as such directly change the amount of available property. push up prices Rental prices are largely determined by two three things: (1) salary levels of the tenants, (2) what fraction of their salary tenants are willing to spend on their dwelling, and (3) supply/demand of housing. I doubt (1, 2) have changed all that much. The main problem in London is (3) because a lot more people moved to London that new housing was built. Neither have all that much to do with buying vs renting.
    - Nursie 10y ago
      >> So the owner/renter fraction doesn't as such directly change the amount of available property. It changes the prices of properties. When existing owners have much easier access to cheap credit than potential owner-occupiers, they compete with these folks and push prices up. There is more demand to purchase. Not more demand for properties to live in, but more demand to purchase. First time and young buyers get priced out. >> Rental prices I wasn't talking about rental prices, I was talking about purchase prices. The result is that instead of younger people paying a mortgage and gaining an asset over time, they are doing that for someone else.
      - mafribe 10y ago
        young buyers get priced out It's good that younger people can't easily buy property. They have a substantially higher risk of financial irresponsibility. As dwellings are pretty much the biggest financial investment we make in our lifetimes, care is warrented. Dwellings should be purchased only by those who are very likely to be able to afford this -- even in the event of unplanned and costly life events like illness, children, the dwelling needing costly and unexpected repair etc. That's why stable job with good career prospects, married with children, being able to afford substantial deposit, being older, are good heuristics for who should by property. Giving a mortgage to everyone encourages financial rectlessness, which lead to the financial crisis of 2007–2008.
pnutjam 10y ago
As a US Midwest renter, it's exactly the same over here, sadly.

mafribe 10y ago

the renter pays more than And why is this a problem? The landlord takes on administrative hassle, and -- more importantly -- risk, for example - Can't rent out the property. - Property needs to undergo repair. - Tenants don't pay rent, destroy the property. - Liquidity risk: property is not as easy to sell as many other goods, in case of emergency. All of the above happen with a certain probability and that needs to be priced in. The last one is rarely a problem but the others are major considerations. And I have not even mentioned transaction costs for buying/selling a property, not to mention taxation. For these reasons, property typically doesn't have a good ROI, vis-a-vis e.g. investing in shares. A lot of property investors are naive, and would be better off investing in a passive index fund. So in many cases tenants get a good deal. In my experience buy-to-let is lucrative primarily when - Landlord has multiple properties, Economies of scale kicks in. - Landlord has relevant skills (plumber, electrician, or ... tax expert, lawyer) so he can get some jobs that need to be done substantially below market price. - Is physically close to the property, so can visit/check easily. - Has unusually low cost of capital (lower than bank-based mortgages). Ideally more than one of those. only thing separating The landlord has already proven financial stability, while the tenant typically hasn't. Many tenants tend to be young, e.g. students who are by-and-large not yet ready to take on the major responsibility of buying and maintaining a house. My heuristic for when you are ready to buy a property: > 10 years in a stable job, enough savings to put up 1/3 of the price up-front. After-tax income high enough so the mortgage can easily be paid. Good timing for a mortgage when you pay it off a bit before you stop earning (i.e. before retirement). Given a 25 year payment schedule and retirement at 65, age 35-40 would be a great time to get a mortage. Plenty of countries do quite well with mostly-rent based system. German Chancellor Merkel rents, for example.

Nursie 10y ago
Those with a good financial record thus get to crowd out the market and push up prices for those without the record (and mortgage). >>For these reasons, property typically doesn't have a good ROI, vis-a-vis e.g. investing in shares. Have you seen the UK property market recently? This seems a bizarre assertion given market patterns over the last 15-20 years.
- mafribe 10y ago
  crowd out the market Which market? To a pretty good approximation, most people live in exactly one property. If they own more, they rent out the surplus. (Please don't What-About-XYZ me with exceptional cases like billionaires who own multiple properties and let them stand empty. Yes, that happens, but is marginal.) So the owner/renter fraction doesn't as such directly change the amount of available property. push up prices Rental prices are largely determined by two three things: (1) salary levels of the tenants, (2) what fraction of their salary tenants are willing to spend on their dwelling, and (3) supply/demand of housing. I doubt (1, 2) have changed all that much. The main problem in London is (3) because a lot more people moved to London that new housing was built. Neither have all that much to do with buying vs renting.
  - Nursie 10y ago
    >> So the owner/renter fraction doesn't as such directly change the amount of available property. It changes the prices of properties. When existing owners have much easier access to cheap credit than potential owner-occupiers, they compete with these folks and push prices up. There is more demand to purchase. Not more demand for properties to live in, but more demand to purchase. First time and young buyers get priced out. >> Rental prices I wasn't talking about rental prices, I was talking about purchase prices. The result is that instead of younger people paying a mortgage and gaining an asset over time, they are doing that for someone else.
    - mafribe 10y ago
      young buyers get priced out It's good that younger people can't easily buy property. They have a substantially higher risk of financial irresponsibility. As dwellings are pretty much the biggest financial investment we make in our lifetimes, care is warrented. Dwellings should be purchased only by those who are very likely to be able to afford this -- even in the event of unplanned and costly life events like illness, children, the dwelling needing costly and unexpected repair etc. That's why stable job with good career prospects, married with children, being able to afford substantial deposit, being older, are good heuristics for who should by property. Giving a mortgage to everyone encourages financial rectlessness, which lead to the financial crisis of 2007–2008.

pnutjam 10y ago

As a US Midwest renter, it's exactly the same over here, sadly.