Property Ladder

4th January 2007: It's That Time Of Year AgainSo it’s that time of year again. Our tenancy is coming to an end on the flat, and as we’ve finally got fed up with the crazy, deaf old lady who lives downstairs and likes to watch BBC News 24 at full volume at 5AM most days of the week, we’ll be moving out at the start of next month. We aren’t going too far this time, though, but that doesn’t mean we get to escape the many joys of moving. One of the best things about moving house, of course, is that you get to deal with everybody’s favourite people: Estate Agents.

One of my favourites this time was the lady who took us to see a flat a few streets away (in the wrong direction) from ours. Despite looking quite nice on the website, it turned out to be smaller, shabbier, significantly more expensive, less well located, and generally not as nice as our current place. When I queried the exorbitant rental price, the agent told us that it was “really good value for the area”, and that you “won’t find anything this cheap in the area”. Well, luckily, you can, and we did, and we’ll be moving into a much nicer flat in a couple of weeks. This also meant not having to pay her ridiculous fees–can anyone guess which agency she might have worked for if I say that they wanted to charge fees of the entirely ridiculous amount of £376, almost twice what most agents charge? (“Although unlike some agents we don’t charge fees per person”. Which is nice to know…)

Unfortunately, even though this means that we don’t have to deal with the agents to find a place any more, we do have to deal with the ones who are traipsing round our place on a daily basis trying to flog it off. This time we’ve been hit twice because they are trying to both let the property, and sell it on as an investment (presumably they don’t want to deal with another set of tenants moving out after a year because of the noise as well, but have on the other hand realised that there is a nice bit of recurring income to be had by finding someone else to take on ownership, and simply collecting the fees every time the tenants change). So we have twice as many people coming round to nose about our flat than we might normally have expected.

All of which is quite interesting, because I can see it advertised on both the rental and sales sides of their website (complete with marginally misleading photographs of the inside that they took the other week). Out of interest, I took the sale price and plugged it in to the Guardian’s mortgage repayments calculator, to see what the repayments would be, versus the rental income:

Assuming you end up paying the full asking price, and were looking at an 80% buy-to-let mortgage (apparently this is pretty standard), repayable over 25 years, at 6% (which I reckon is probably a pretty conservative estimate), then you’re looking at monthly mortgage payments of about £300 more than your rental income (assuming you can get the full rent that they are asking for). Add in the hefty service charges in our block (over £3k a year, according to one of the agents, which pays for things like 24-hour porterage and communal hot water and heating–benefits reaped by your tenants, but paid for by you) and you’re looking at a gap of at least £550 every month between your mortgage costs and potential rental income. Add in 3% stamp duty, and all your other upfront costs, as well as the agent fees if you want them to manage the rental property for you, and the cost other things like buildings insurance, not to mention other recurring costs, like refurbishing the property on an ongoing basis, and the fact that you can’t assume that there will always be tenants in there, and it all begins to look like less and less of a sound investment.

One other thing to consider, of course, is that this assumes that you have the 20% deposit you’d need to get that mortage, which in this case is a high 5-figure sum, so to properly compare any gains that you may end up making, you have to offset them against the returns you could have got by investing that money somewhere else–in the stock market say, or just by sticking it in a bank account for 25 years and letting compound interest work its magic. On the other hand, and I don’t know if they do this for buy-to-lets, but if you do manage to convince the bank to lend you 95% of the asking price, then you’re looking at paying something like a grand more than your rental income each month.

Perhaps you’re banking on capital gains, or maybe you just aren’t very good at maths and have been wowed by the promise of easy money in property investment, but I completely fail to understand why anyone would take on this “investment”.

Have I missed something?