"Buying and renting property seemed so easy and I fancied a bit of glamour. So I bought two apartments in Leeds: one for myself and one to let. The rent didn't cover the mortgage and since the value had gone down I couldn't borrow any more. Looking back, I should have checked out market rents or prices with local agents. I keep asking myself how could I have been such a moron?"
Janie Dix is a 32 year old marketing consultant from Manchester. Three years ago, she bought two flats costing £300,000 with a 95 percent LTV mortgage. At the time, she thought that by 2008, her property portfolio would be worth £450,000. She has just sold both flats for £250,000 in an auction.
Poor Janie is a little off the mark here. Rather than checking out the rental market, she should have thought a little more about her expected rate of return. She put down £15,000, borrowed £285,000, and expected a capital gain of £150,000 in just three years. This poor deluded woman expected a 900 percent return on her investment in just 36 months. She expected to make a capital gain of about £4,200 a month simply because she went into an estate agent and a bank and sign a few documents.
Sadly, it just didn't happen for Janie. Instead of a huge return with negligble effort, she took on a mountain of trouble. However, I wouldn't be surprised if Janie couldn't put a number on her losses. She knows she lost her deposit and owes a further £35,000 in unpaid mortgage principle. However, she was almost certainly losing cash every month as her rental income didn't cover the mortgage and other costs.
Presumably, Janie is now bankrupt. With no prospect of clearing her debt, her speculative adventure has now become a banking problem. The bank lent out £285,000, and minus auction fees and other repossession costs, I reckon they got back perhaps £230,000. So, the bank made at least a 19-20 percent loss due to Janie's fancy for a "bit of glamour."
This kind of financial stupidity has consequences. Janie, to her credit, now recognises that. The UK banking sector, on the other hand, are only just beginning to understand how dangerous women like Janie could be.
8 comments:
You have too much sympathy for this loser.
hardly surprising. when i talk to my property owner friends, all smart well-educated folk, and discuss yield, and the relative cost of renting versus owning, they look at me like i have 2 heads.
take my scottish friend with a maths degree. he owns a property in edinburgh, which he bought about 3 years ago. it was bought for £145k and now might sell for £160k (personally i think this seems like a small return given we've just had the biggest housing bubble of all-time, making me think he overpaid at the time, but that's an aside).
i asked the other day how much he thought it would cost to rent that flat on the market today. the reply was ~£550/month. I pointed out that assuming a mortgage rate of 6%, the cost of a mortgage today for someone (on the full cost of £160k), would be £800/month. Didn't he think it might be worth selling since it seemed very overvalued?
Looked at me funny...I had to explain a number of times that this was the way to determine value (I repeat, he has a Maths degree!), but said he thought it wouldn't go down so would just keep it. You just can't tell some people!
I'll just repeat my call that the market is going 50% over the next several years...
Traderboy
I totally agree. Ideas such as return on equity are totally alien to our BTL friends. It all about cash flow and capital appreciation. The first is only a minor consideration, while the second is regarded as an absolute right.
Alice
This lady isn't even a big time BTLer and look at the trouble she got herself into.
Incredible....
Janie is a shocker.
Traderboy: "it was bought for £145k and now might sell for £160k (personally i think this seems like a small return given we've just had the biggest housing bubble of all-time, making me think he overpaid at the time, but that's an aside)."
Don't forget the system in Scotland is a closed bid auction. If you want to be sure to secure the property, it is necessary to bid significantly over the asking price. So there is a very good chance that your friend - fired up as he may have been with the idea of a property investment - may well have bid much higher than he needed in order to secure the purchase.
All that sounds just too familiar!The same thing is happening here in the US, while actually our housing bubble has already busted, and it's ugly here,very ugly.I hate to see the same thing happening over there,too!I did not know things are heading the same direction as over here.This is bad news for all of us!It looks like the whole world economy is going down the drains...
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