On The Morality of a Property Ladder

[Mickey]

When Im not trawling RMweb or other sites of interest I spend my time doing a bit of DIY-related things to improve a couple of houses with a view to renting them out...Nice steady income and capital growth etc....

 

However I had a local estate agent round recently and was somewhat amazed that the new kitchen, bathroom and general "stuff" i have done at #2 house could have increased its value by about ??15k.... So thats looking like ??12k profit for 3 months work...unless im missing something about this, it seems almost wrong to make so much money for so little effort....anybody wanna salve my conscience??

[DonBradley]

That's not all profit. You have to allow for your ideas, inspiration, design, labour and quality.

Thats expenditure!

Because you are worth it!

[skipepsi]

When Im not trawling RMweb or other sites of interest I spend my time doing a bit of DIY-related things to improve a couple of houses with a view to renting them out...Nice steady income and capital growth etc....

 

However I had a local estate agent round recently and was somewhat amazed that the new kitchen, bathroom and general "stuff" i have done at #2 house could have increased its value by about ??15k.... So thats looking like ??12k profit for 3 months work...unless im missing something about this, it seems almost wrong to make so much money for so little effort....anybody wanna salve my conscience??

 

Add in the hours you have spent doing the work @ ??20 an hour and you might find the profit is less, then add in legal bills and interest payments and I suspect that you might find about a 10% return on your capital. You used to be able to get that from bankers.

[Mickey]

I did knock 3 grand off the value to cover some costs of selling and my time is free cos i was doing it up to rent and that was "costed" at ??450 per month income....

 

I've got a couple of friends that are landlords/developers so I do kinda know there is a lot of money in the game, but it shocked me just how much is possible

 

Anyway just writing that down seems to have silenced my puritanical/union man streak so onwards n upwards as they say

[skipepsi]

Not valuing your time as part of the balance sheet might mean more with a more complex job, but a landlord with morals can only be a good thing.

[Kenton]

Nice steady income and capital growth etc....

one bad tenant will soon dispell that comfortable myth

However I had a local estate agent round recently and was somewhat amazed that the new kitchen, bathroom and general "stuff" i have done at #2 house could have increased its value by about ??15k....

Hah! Estate Agents!

get 3 valuations - not none of them will be close.

 

My personal view on bathrooms, kitchens and other decorative "improvements" is that all they do is "clean/spruce" up a property - they are usually the first thing to be replaced after moving, either that or they are price limiting as you have to factor in the replacement. One person's idea of a nice kitchen is not my wife's - even if it is only the colour scheme.

[Oldddudders]

However I had a local estate agent round recently and was somewhat amazed that the new kitchen, bathroom and general "stuff" i have done at #2 house could have increased its value by about ??15k.... So thats looking like ??12k profit for 3 months work...unless im missing something about this, it seems almost wrong to make so much money for so little effort....anybody wanna salve my conscience??

The market is entirely intelligent, so your efforts are not robbing anyone. Yes, it would be nice if a detached house in a nice place still cost the ??6,500 my parents paid in 1965 in Surrey - but my Dad's salary wasn't at C21 levels. When Deb and I left the UK in 2004, just before the property market slump, we sold our 1887 pokey semi-detached country cottage for ??295k, more than 6 times what we'd paid 21 years before. We had put some effort into selling it, and that included redecoration and a new kitchen & conservatory, getting the driveway resurfaced etc. Agents said we had got it "bang on" - and that's the point. Your efforts have made the place attractive, which gives it a better chance in an uncertain marketplace. Letting can be a bit harrowing - even reasonable tenants may take less care as renters than they might in their own owned property - but if it gives you an income for more spend on your hobby, then that's great!

[Kenton]

The market is entirely intelligent, so your efforts are not robbing anyone. Yes, it would be nice if a detached house in a nice place still cost the ??6,500 my parents paid in 1965 in Surrey - but my Dad's salary wasn't at C21 levels.

But the problem with property is that the prices have now become overinflated - driven by shortage and the increased desire (driven by the apparent price?) to be homeowners rather than renters.

 

In 1965 houses were being built at a much higher rate than they are now and the population demanding a new house was considerably smaller. Most people rented or "lived-with-parents". Council owned housing was commonplace and with the inner city regeneration was on the increase.

 

In 1965 a new house was a much lower multiple of the average salary than it is today. Even into the 1970's a multiple as low as 4 times the annual salary of a professional salary (eg Dr) would be sufficient to purchase a substantial property. Since the property inflation in the last 3 decades it is more like 6 or even 10 times.

 

Even though most salaries are now at a standstill (even decreasing due to inflation) the property values are still increasing (though by nowhere near the insane multiples seen prior to the "credit-crunch".

 

The other big change in property is the increase in small family units. The developers capitalise on this by only providing smaller properties (boxes) (units) for people to live in. A house aspired to in suburban Surrey in 1965 would have been the typical 3/4 bed, 2 reception, + bath + garage + garden. What is available now for the equivalent buyer is a cramped 2 bed, 1 reception + shower room + parking space + flower pot.

[oggy1953]

If you are going to rent out the properties be careful. My brother in law has 3 flats, 2 have defaulted on payments, one did a runner, and he has taken the other to court, cost him ??400 just to take it there, he has won, but no chance of getting the money. He has lost about 3 grand so far, and dreads to see what mess they have left behind. Guess i will be getting the paint pots out again.

[Pugsley]

The market is entirely intelligent, so your efforts are not robbing anyone.

I would counter that by saying that markets are not entirely intelligent - they are entirely irrational!

 

Of course people are being robbed by this - sold in to a life of debt servitude to acquire an overinflated asset because they've been convinced that it's the right thing to do. I have less problem with people who are working to make improvements to a house before selling, although that level of profit (if realised) works out to be equivalent to an income of ??48,000 per year, which seems a lot for not doing an awful lot.

[Pugsley]

But the problem with property is that the prices have now become overinflated - driven by shortage and the increased desire (driven by the apparent price?) to be homeowners rather than renters.

Prices have not become overinflated by 'shortages'. There are over 1 million empty properties in the UK. Also, if prices were driven by demand, rents should have followed suit - they haven't, growth in rents has pretty much tracked increases in wages.

 

What has overinflated prices has been lax lending standards, and banks lending to anybody who was prepared to lie on an application form to secure mortgages at higher and higher multiple of salary. It is this bubble mentality, and the mantra that 'property always goes up in value) which has caused this problem. Interest only mortgages are another element of the reasons, as is the exponential increase in the money supply (although this is inextricably linked to the liar loans already mentioned).

 

 

The other big change in property is the increase in small family units. The developers capitalise on this by only providing smaller properties (boxes) (units) for people to live in. A house aspired to in suburban Surrey in 1965 would have been the typical 3/4 bed, 2 reception, + bath + garage + garden. What is available now for the equivalent buyer is a cramped 2 bed, 1 reception + shower room + parking space + flower pot.

It goes to show how much poorer we all are today thanks to globalisation - where before a house in Surrey, as you mention, could be aspired to on 3+1x a professional family income, it now takes dual income to buy a Redrow slavebox. And still, the BBC (and others) take great delight when announcing that house prices are up, yet when other essentials such as food and petrol are up, then this is very bad. They are all things we need (OK, petrol is questionable but food and shelter) so they should all be as reasonably priced as possible, IMO.

 

High real estate costs suck money that could be spent in the wider economy into the coffers of banks and those fortunate to already own it. It also destroys industrial competitiveness - higher cost = higher wages = outsourced manufacturing. It also distorts investment of capital.

[Kenton]

There are over 1 million empty properties in the UK.

Ah, but none of them where anyone wants to live - or can find suitable employment - or has suitable infrastructure (schools, entertainment, uncongested (any) transport links ...)

 

Very few choose to buy a property on an urban sink estate or at the top of a rotting 60's concrete sky-rise/urban jungle. Even the councils prefer to board these up rather than to regenerate/improve/let them. Who can blame them, when investing large amounts of tax-payers money on capital items that will then later be sold off undervalue to the tenants.

 

Much of the rental market is kept low - simply because of affordability and the fact that many rents are in effect paid by government subsidy. To rent has always been cheaper than to borrow to buy (and so it should be)

[Pugsley]

Ah, but none of them where anyone wants to live - or can find suitable employment - or has suitable infrastructure (schools, entertainment, uncongested (any) transport links ...)

Not in all cases - there are at least two reasonable quality houses that I know of within a couple of miles of me that have been empty for some time, one that can't be far off a year. Multiply this by the number of mid to large sized towns in the UK and you have a fair number that aren't as you describe.

 

Very few choose to buy a property on an urban sink estate or at the top of a rotting 60's concrete sky-rise/urban jungle. Even the councils prefer to board these up rather than to regenerate/improve/let them. Who can blame them, when investing large amounts of tax-payers money on capital items that will then later be sold off undervalue to the tenants.

Completely agree with you on that point, let alone the abstraction of funds to central government from housing stock sales....

 

Much of the rental market is kept low - simply because of affordability and the fact that many rents are in effect paid by government subsidy. To rent has always been cheaper than to borrow to buy (and so it should be)

I would counter that housing allowance actually provides a floor for rents, rather than holding them down. For instance, I believe that it is no coincidence that the rent that I'm paying for my house is exactly the same as the LHA rate.

 

I'm not sure that it has always been more expensive to buy than to rent - certainly in the '90's it was cheaper to buy than to rent. Why should it be cheaper to rent than to buy? If I have a problem with the house, the landlord comes and sorts it out and bears the cost of that, on that basis should it not be more expensive to rent than to buy? Essentially you are living in a 'managed' property, and would expect to pay some kind of premium for that service above the cost of acquisition as I don't have to cover any potentially costly repairs - there's reduced risk on my part.

 

However, if I own the house and the boiler expires tomorrow, I have to cover the (potentially large) cost of that myself, therefore I'd want a reduced monthly spend on the basis that I was carrying more risk.

 

So, it makes no sense, to me, that buying is more expensive than renting, although I am glad that someone lets me live in their depreciating asset for far less than the cost of acquisition, and carries the can should it need expensive repairs.

[Russ (mines a pint)]

I'm not sure that it has always been more expensive to buy than to rent - certainly in the '90's it was cheaper to buy than to rent. Why should it be cheaper to rent than to buy? If I have a problem with the house, the landlord comes and sorts it out and bears the cost of that, on that basis should it not be more expensive to rent than to buy? Essentially you are living in a 'managed' property, and would expect to pay some kind of premium for that service above the cost of acquisition as I don't have to cover any potentially costly repairs - there's reduced risk on my part.

 

Certainly not the case in our area, people are paying about ??400-??600 a month in rent for starter homes my mortgatge is just under ??300 pm so rental is quite alot dearer -nearly double in fact

[Kenton]

Certainly not the case in our area, people are paying about ??400-??600 a month in rent for starter homes my mortgatge is just under ??300 pm so rental is quite alot dearer -nearly double in fact

But are you not missing the point made earlier that the renter (by way of the rent) is paying for the upkeep of the property and "fixtures", tax on the rental income and the costs of making that property available. All you are comparing it with is your payments to the bank for the loan that you have taken out.

 

Of course at the end of 25 years you own the property - the renter has no capital invested.

[Pugsley]

Certainly not the case in our area, people are paying about ??400-??600 a month in rent for starter homes my mortgatge is just under ??300 pm so rental is quite alot dearer -nearly double in fact

It always was more sensible up north I guess that depends upon what year you bought and whether your mortgage is fixed or variable rate, repayment or interest only (I persoanlly can't understand IO mortgages - it's no more than renting from the bank whilst covering repairs). It also depends on what happens with interest rates.

 

I agree though, buying should be cheaper than renting, for the reasons I've already outlined.

[Pugsley]

But are you not missing the point made earlier that the renter (by way of the rent) is paying for the upkeep of the property and "fixtures", tax on the rental income and the costs of making that property available. All you are comparing it with is your payments to the bank for the loan that you have taken out.

 

Of course at the end of 25 years you own the property - the renter has no capital invested.

I must admit, I thought that was the exact point that Russ was making - his mortgage cost is less than the cost of renting, which is as it should be.

 

Conversely, I am in the situation where it would cost me nearly twice what I'm paying in rent to buy the house I'm living in - this does not make sense!

[Taz]

Conversely, I am in the situation where it would cost me nearly twice what I'm paying in rent to buy the house I'm living in - this does not make sense!

 

Except from the point of view that in 25 years you would have paid the mortgage off, but if renting you will have the ongoing expense for the rest of your life.

Given current projected lifespans you could look at it as investing for the future

[Pugsley]

Nah, end up with nothing at retirement and let the state worry about it currently seems to be the best way of handling things

 

I think I'd prefer to save the balance between the two and buy outright, after all 25 years is a very long time to try and predict what's going to happen - I'm struggling to predict what's going to happen in the next two years, let alone that!

 

I'm happy to stay renting for a while yet and see what happens

[298]

I must admit, I thought that was the exact point that Russ was making - his mortgage cost is less than the cost of renting, which is as it should be.

 

Conversely, I am in the situation where it would cost me nearly twice what I'm paying in rent to buy the house I'm living in - this does not make sense!

 

12 years ago I brought a flat, and 5 years on sold it for twice what I paid. Yet the average rental cost for such a property has only gone from ??400 to ??500. The mortgage and maintenance was less than the rent, but now it obviously exceeds it. I wish we'd kept the flat as an investment as the income would have covered the costs, but sold it in 2003 as the equity in it was far too tempting to invest.

 

I feel sorry for anyone who can't get their foot on the property ladder, as the days of being able to buy a choice of quality properties at a reasonable 2.5x the average salary are well and truly over. One day those capilatist pigs would have had their day...

[Ian J.]

Don't forget there are also the twin problems of: too many properties that had previously been available to buy having been bought up by landlords with 'buy to let' mortgages, meaning there are fewer homes available for sale than there really should be; and then there's the somewhat smaller but not insignificant problem in non-city areas of second homes sitting empty for many months of the year just so that someone with more money than sense can have the odd weekend or few weeks holiday away from their respective city...

[Penlan]

........and then there's the somewhat smaller but not insignificant problem in non-city areas of second homes sitting empty for many months of the year just so that someone with more money than sense can have the odd weekend or few weeks holiday away from their respective city...

Agh, into my territory now (I live in a Village in West Cornwall) - The trouble with the term 2nd Home Owners is it is difficult to get exact figures from the Authorities. We have a number of 2nd Homes in the village, I've seen a quoted figure of 200+, but once you start to look at the houses listed, more than 60% belong to owners in the village which are either Holiday lets, rented out, usually on short term lets (6 - 12 months), or 'reserved' for family. The others (say 25%) belong to people within a 30 mile radius, 5% East Cornwall & Devon and the remaining 10% have addresses beyond Devon. The other problem with the 2nd home owners description is when does that become a Property Portfolio (some people in the village have 4 or more properties....).

 

I'm also aware of people who buy/rent property to 'store' their excess belongings, 2nd home, maybe.

 

Some second homes are in fact retirement properties, the owners have let them in the past, now lost their jobs or retired and have moved into their '2nd Home' selling their former main residence up country - this normally means they have pension/income from outside the County that they then spend locally.

 

The argument I put forward to the Cornish people down here who moan there's nothing for the youngsters to buy is that if when they had sold their properties - which invariably need a bit more than a few grand to put right* - they had put a coda on the sale that it can only be sold to a local of at least 6 years residency and knocked 50k GBP off then there would not be the shortage - this is countered with rage about market forces. I then ask what have they done with these 'vast' profits from the sale of the crappy property, built some replacements B)

 

Re.* above - A couple bought a house to live in in the village. Start made by removing old old wall cabinets in kitchen, this 'released' the wall plaster, which exposed the first floor joist going into the wall, which they basically didn't because they had rotted away at the ends, which meant up came the first floor flooring, the plaster above now had little to rest on and came down, revealing roof timbers and wall plates that must have been floating...... So with a bare shell and the new owners renting a property in the village, there was plenty of work to be done. They have just finished after a year rebuilding the property.

 

On this latter point I would add it's the incomers who spend the money on property improvements etc, I think the village would look a lot less clean etc if it was just left to the locals.

 

What we do have in the village is a number of builders, craftsmen, plumbers, electricians and decorators who never leave the village for work......

 

Penlan

[PGN]

Markets generally find their own level; and a well-installed kitchen is definitely worth paying for.

 

If I were to buy one of the houses that you've fitted out, I would be able to take a good look and satisfy myself that teh fittings were well installed.

 

If I were to buy a similar house without the fittings, I shoudl then have to pay the cost of the fittings, and find a suitable tradesman to fit them, and pay his charges. If I were new to the area (as many people are) I might have to run the risk that I ended up hiring a duff workman. Then there's teh inconvenience and the possible delay; not to mention the possible headache of payment disputes etc.

 

Buyign your house, I don't have any of that to worry about. I can see it, and know it is good. That is worth paying for. And if the amount that I am prepared to pay for it represents a good return to you for doing it ... well, that's how markets work. If there is a shortage of good people doin gthese things, then the prices people will be prepared to pay go up ... and more people are encouraged to enter that particular market seeking "a piece of the action". Some of them will be good, and so the balance between supply and demand will be adjusted, and prices will gradually come down.

 

Make hay while the sun's shining, mate!

[Russ (mines a pint)]

I must admit, I thought that was the exact point that Russ was making - his mortgage cost is less than the cost of renting, which is as it should be.

 

Conversely, I am in the situation where it would cost me nearly twice what I'm paying in rent to buy the house I'm living in - this does not make sense!

That was indeed what I meant- as I thought we'd already done the bit Kenton was mentioning. As to being sensible up North, we are finding that we seem have a 'mini-boom' in our locale as our area has become very popular with asians who are mostly cash buyers or have a very substantial deposit, this also happened to a friend in an area of Bradford, they want the whole street!! - we actually have had an offer tabled at ??8k above our initial asking (as we wanted to move quickly) and yet more viewings- its not all doom & gloom!

 

a bit wierd really as apart from painting everything neutral we havent really done much else, though the kitchen is new-ish it was done with cheap bankrupt stock and it shows in a few places!

[Pugsley]

Markets generally find their own level

Unless the market is rigged....