A possible progressive loophole in landlording - what am I getting wrong?

[TrenterPercenter]

Ok so this is really only for people that are criminally bored....you've been warned.

So my partner and I are thinking about channelling any disposal income we have into overpaying the mortgage.  Looking at the benefits of this it appears a very sensible thing to do as the savings in interest alone are huge due to the compounded decrease in the owed amount.

This got me thinking, getting your outstanding debt down quite some time before your term is up (say 10 years) will see a lot of people with lots of equity, most still drawing a wage, with very low mortgage payments to make.  Now if you chose to buy another home to live in then because of your overpayments you would effectively be able to charge significantly below market rates in rent to the tenant.  This would allow them to save and get on the housing ladder themselves etc..whilst paying still paying off the remainder of the mortgage on a property.  When it is paid off then the low rent would then used to overpay any new mortgage of the landlord.

There are number of advantages to this; firstly it screws the banks they receive less blood money in interest across the terms of both mortgages and likely any new mortgage from the renter due to them having been able to save a bigger deposit and have more cash.  Secondly it removes the burden of interest from people that can least afford it to those that can in a modest fashion that still hold advantages for those lucky enough to have smaller mortgages in there 40s-50s, thirdly it gives renters a much better quality of life at a time they likely have less income, also did I mention it screws the banks?

I think you could policy this, it would kind of be a means tested rent cap for owners but not based on overall value of the house but the actual cost to the owner.  Inherit a house you can't charge market rents and gain all that unearned cash, you can still get a reasonable amount that is relative to your outgoings, maxing out interest free mortgages so you can charge renters more money, fine but you'll be making less money regardless as you still have to pay the actual mortgage and you'll have to survive doing that in a market where other better properties will be cheaper.

Anyway bit of brain fart but I didn't know if this had ever been proposed and what glaring problems I might have missed.  You could sell this under some responsible ownership garb and make it culturally desirable to be doing your bit as a middle class equity rich homeowner (which would naturally lead to pressure further up the chain).

[touchingcloth]

With the plan involving a second home, wouldn't capital gains be a potential glaring problem, and cause you to have to factor that into what rent you could afford to charge?

[TrenterPercenter]

With the plan involving a second home, wouldn't capital gains be a potential glaring problem, and cause you to have to factor that into what rent you could afford to charge?

Doesn't capital gains only come in when you sell or dispose of an asset? The owner of the original house is just acquiring a second.

EDIT: ah see what you mean but there is less money being created here so this would be less of problem and more of an advantage to this system.  In fact capital gains is a good vehicle to work with this as allowances could be tacked to "profits".

However you would want high capital gains taxes and inheritance taxes on these things as there is still the problem of the asset when it does got sold  (this is just the same problem we have now though).

[katzenjammer]

There are loads of problems with this, you still have costs like insurance, maintenance and a mortgage to cover, what will you do when those go up? Go to your tenants and put the rent up?  What happens if interests rates go up to 10%? You will have to put the rent up a lot, more than rental value for the area probably. What happens if your tenants aren't so nice and stop paying or smash the place up?

And yes, capital gains tax will be a problem at some point. Once you start letting a house out it is 'tainted' and even if you account for it now you have no idea what the liability will be ten years down the line, tax laws change all the time.

If you want to be nice you could just sell your first house at below market rate. Or you could give your buyers a mortgage.

[Johnny Yesno]

Anyway bit of brain fart but I didn't know if this had ever been proposed and what glaring problems I might have missed.

Two problems: (1) It assumes the banks are the only problem and not landlords; (2) It does nothing to solve the fundamental problem of there being a shortage of housing.

[Dr Rock]

you would effectively be able to charge significantly below market rates in rent to the tenant.

Nobody will do this

[shoulders]

A rather glaring problem here is that if every home owner buys a 2nd home, whether they deliberately undercharge rent or not, reduces the available housing stock to first time buyers which in turn inflates the value of the remaining properties for sale which in turn increases the distance between their savings and the money they need for a deposit.

There is also the problem that most people would never do this except in efforts to advantage themselves or their families and close friends (Dr Rock has effectively summed it up above).

There is no progressive loophole in anything reliant on individual goodwill and altruism vs personal gain/human nature.

No thanks. Build council houses, punitively tax ownership of 3 or more properties.

[Johnny Yesno]

There are loads of problems with this, you still have costs like insurance, maintenance and a mortgage to cover, what will you do when those go up? Go to your tenants and put the rent up?  What happens if interests rates go up to 10%? You will have to put the rent up a lot, more than rental value for the area probably. What happens if your tenants aren't so nice and stop paying or smash the place up?

I'm not sure how this is different from the way things are now.

If you want to be nice you could just sell your first house at below market rate. Or you could give your buyers a mortgage.

However, yes, not adding to the pressure on supply by becoming a landlord would be the most helpful course of action.

[TrenterPercenter]

Two problems: (1) It assumes the banks are the only problem and not landlords; (2) It does nothing to solve the fundamental problem of there being a shortage of housing.

Agreed these problems still exist but they are not going anywhere.

[TrenterPercenter]

Nobody will do this

Yes. This the biggy but as with JYN point above there is no appetite for people increase housing stock, lots of people are dependent on house prices having hocked themselves to banks with their equity to survive.  This is the reality of any large housing correction I'm afraid (and why people are happy to sustain them).

[shoulders]

Yes. This the biggy but as with JYN point above there is no appetite for people increase housing stock, lots of people are dependent on house prices having hocked themselves to banks with heir equity to survive.  This is the reality of any large housing correction I'm afraid (and why people are happy to sustain them).

Hang on, you can't dismiss one proposal (which would actually work) on account of lack of appetite while proposing something that literally will never happen (but actually wouldn't work even if it did). Well, you can, but it would be duncelike.

[Johnny Yesno]

Agreed these problems still exist but they are not going anywhere.

In that case, I'm not sure why you are asking. The Doc summed it up. Are you thinking about government policy or are you thinking about what a rare ethically-minded individual can do in a broken system where second homes are largely purchased in order maximise unearned income?

[TrenterPercenter]

There are loads of problems with this, you still have costs like insurance, maintenance and a mortgage to cover, what will you do when those go up? Go to your tenants and put the rent up?  What happens if interests rates go up to 10%? You will have to put the rent up a lot, more than rental value for the area probably. What happens if your tenants aren't so nice and stop paying or smash the place up?

None of these problem don't already exist also the interest doesn't mater because that is already factored into your payments i.e. you would be able to charge more in rent at that point.

And yes, capital gains tax will be a problem at some point. Once you start letting a house out it is 'tainted' and even if you account for it now you have no idea what the liability will be ten years down the line, tax laws change all the time.

Not bothered about this, I'm not upset about people people that selling assets paying a lot of tax on them; we need more tax on assets.

If you want to be nice you could just sell your first house at below market rate. Or you could give your buyers a mortgage.

Not about being nice it is about how to help people that are being crushed by landlords who can charge whatever they like in rents despite their actual costs being very low.

[TrenterPercenter]

No thanks. Build council houses, punitively tax ownership of 3 or more properties.

Yeah, here is a thought, why not do both it isn't either or and reality is that a mass of people are going to end up with lots of equity and their ability to charge whatever they like in rents.

You are effectively arguing against rent controls (which is weird).

[TrenterPercenter]

Hang on, you can't dismiss one proposal (which would actually work) on account of lack of appetite while proposing something that literally will never happen (but actually wouldn't work even if it did). Well, you can, but it would be duncelike.

I think you need to read things again.  No dismissal was made.

You might have noticed that the market correction hasn't happened because the banks wouldn't let it happen (this is the advantage of "fiat") and let's say it did what do you think happens? lots of people lose their houses and rich people and banks buy them all.

[TrenterPercenter]

In that case, I'm not sure why you are asking. The Doc summed it up. Are you thinking about government policy or are you thinking about what a rare ethically-minded individual can do in a broken system where second homes are largely purchased in order maximise unearned income?

Well both but mainly government policy that would be acceptable to the majority.

[Johnny Yesno]

Well both but mainly government policy that would be acceptable to the majority.

Sorry, I see I overlooked that you did mention a means-tested cap.

Couldn't we just have rent controls tied to the cost of living and median earnings instead?

[touchingcloth]

I think you should ask yourself who the beneficiary of the proposal in the OP actually is. It feels a little like it's mainly for the home owner's benefit as they get to bask in the glow of doing something unquestionably and hugely nice for the family who gets to rent their house at well below market rates.

Given that at its core the idea is about using the equity in your home for a social good, I feel like that would probably be better achieved by doing something like selling up and donating some of the released equity, or else redirecting the amount that your monthly payments would have been for the remainder of the term to donations instead. The donations could go to charities or groups campaigning for changes to housing policy - you wouldn't be able to see the direct impact as clearly as providing low rent to a single family, but it would probably make the more effective use of the money, c.f. how making cash donations to foodbanks is more effective than food parcels.

[TrenterPercenter]

Sorry, I see I overlooked that you did mention a means-tested cap.

Yep I've just gone a long way around saying a rent-cap but means-tested against the owner actual landlord costs.  If you are paying £150 pm on a mortgage but charging £900 market rent you are making serious amounts of cash out of your tenants relative to the actual cost of the property to you.

Couldn't we just have rent controls tied to the cost of living and median earnings instead?

Yes but that would still work pretty well for people that have very little to pay on their mortgage.

[touchingcloth]

not based on overall value of the house but the actual cost to the owner

And something tells me that that ^ would be open to abuse by cunts, depending on how the policy was structured. Like how Starbucks bought beans from their own subsidiaries to "negate" their profits, you'd need to work out how to stop someone charging themselves £600pcm for cleaning and maintenance costs.

[Jasha]

Robbing Peter to pay Paul

[TrenterPercenter]

I think you should ask yourself who the beneficiary of the proposal in the OP actually is. It feels a little like it's mainly for the home owner's benefit as they get to bask in the glow of doing something unquestionably and hugely nice for the family who gets to rent their house at well below market rates.

I think the family who rents below market rates is the main beneficiary relatively, sure if you want to compare feeling nice and fuzzy with not having to pay extorsionate rents then I'm happy with this.  Homeowners get to feel warm and fuzzy and renters get to eat suits me.

Given that at its core the idea is about using the equity in your home for a social good, I feel like that would probably be better achieved by doing something like selling up and donating some of the released equity, or else redirecting the amount that your monthly payments would have been for the remainder of the term to donations instead. The donations could go to charities or groups campaigning for changes to housing policy - you wouldn't be able to see the direct impact as clearly as providing low rent to a single family, but it would probably make the more effective use of the money, c.f. how making cash donations to foodbanks is more effective than food parcels.

Not sure this works I'm afraid. I think I'd prefer government policy reducing the amount of money a lucky few can make out of those that are less fortunate than a windfall payment to a charity.  Also sustaining foodbanks (something I do anyway) isn't a solution it is damage mitigation - the big problem is people money they could use to feed themselves is being hoovered up in rents by people that don't need it and banks.

[TrenterPercenter]

Robbing Peter to pay Paul

How so Jasha?

[TrenterPercenter]

And something tells me that that ^ would be open to abuse by cunts, depending on how the policy was structured. Like how Starbucks bought beans from their own subsidiaries to "negate" their profits, you'd need to work out how to stop someone charging themselves £600pcm for cleaning and maintenance costs.

It is tied to the mortgage payments.  You could have a ground rent and then if there were "extras" this could then actually be empowering for tenants as they could prove these separate elements were not provided and the landlord was not just swindling the tenant but the government (and the Queen gawd bless her!).

[katzenjammer]

None of these problem don't already exist also the interest doesn't mater because that is already factored into your payments i.e. you would be able to charge more in rent at that point.

The thing is in a 'normal' arrangement profit = rent - costs. The landlord is gambling the costs won't exceed the rent and can use the profit as a buffer to absorb variations. You won't be able to do that.

In theory interest rates could change every month. Are your tenants going to accept monthly rent changes? I don't know the exact rules but I think there are limits in the frequency and amount of rent increases allowed, and you may need to issue them a new AST each time.

Like I said before, you could just give them a mortgage. Charge 0%

[The Dog]

Two problems: (1) It assumes the banks are the only problem and not landlords; (2) It does nothing to solve the fundamental problem of there being a shortage of housing.

The fundamental issue is an excess of demand from landlords backed by walls of money from banks. Shortage of housing is a laughably weak attempt at an excuse from the industry.

[Johnny Yesno]

The fundamental issue is an excess of demand from landlords backed by walls of money from banks. Shortage of housing is a laughably weak attempt at an excuse from the industry.

Perhaps I should have said 'shortage of available or affordable housing' for there definitely is that.

[Johnny Yesno]

Yep I've just gone a long way around saying a rent-cap but means-tested against the owner actual landlord costs.  If you are paying £150 pm on a mortgage but charging £900 market rent you are making serious amounts of cash out of your tenants relative to the actual cost of the property to you.

Yes but that would still work pretty well for people that have very little to pay on their mortgage.

I think I'm envisaging widespread rent controls where a load of landlords don't find it particularly profitable any more.

[TrenterPercenter]

The thing is in a 'normal' arrangement profit = rent - costs. The landlord is gambling the costs won't exceed the rent and can use the profit as a buffer to absorb variations. You won't be able to do that.

But there are degrees - in fact I think this whole landlords as strivers myth is something that needs looking at if you are paying £130 pm on your mortgage and charging renter £900 pm that is a serious mark up that is 9k extra year a markup of nearly 700%. That is the reality in the current system.  The "gambling" comes from landlords then using this disposable income to invest further then relate these cost back to the renter - this is the problems and I've seen it with my own eyes many times from friends that do this kind of thing.

In theory interest rates could change every month. Are your tenants going to accept monthly rent changes? I don't know the exact rules but I think there are limits in the frequency and amount of rent increases allowed, and you may need to issue them a new AST each time.

This is a good point but not that much of a big deal you could easily factor this in as a reasonable range in fluctuations for tracker mortgages to account for this.  You could offer renters the same offer as home owners of fixed or tracked rents if you really wanted to and it's a bit of software aways from being reality.

Like I said before, you could just give them a mortgage. Charge 0%

Sorry I've not really understood this; do you mean just give someone your house? If so this is missing the point a) people are more likely to accept some relativistic caps on rents as it only effects your ability to make mega monies of renters rather than remove all incentives for having houses as assets (if we are going to treat houses as assets, which we do and isn't going anywhere soon) b) the advantages and savings for the landlord (once you get past the greed bit) actually come in part from the compounded impact of debt reduction on banks interest rates and yes this does lend itself to sense of duty that if you paid off you mortgage quickly you can help others out by not ripping off renters by pretending you are still paying full  for your property.

Giving someone a house just sounds like the usual "go on then give all you money away schtick" I'm trying to come up with idea that are structural improvements not based on individual philanthropy so it needs to be appealing enough to a sense of fairness whilst allowing people to keep some of their greedy practices.  Of course those people flipping houses and living off other peoples misery will hate it but you could emboldened a group of responsible ethical homeowners with equity to vote for and create some movement in an area that nothing is ever happening in because the systems is self-sustaining.
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[MojoJojo]

Buy charging below market rent, you're effectively giving money away. I don't think there is anything wrong with what you are proposing, but it's just giving money away to people who can't afford a house in a slightly complicated fashion. There are probably more tax efficient ways of doing it.