taking the leap into Buy to Let

[ComPropSolicitor]

I have managed to save a relatively substantial sum. I have been thinking about buying a low value rental property in the city where I live. Now, when I say low value I am talking circa £40,000.00 which in my home city gets you a two/three bedroomed terrace house not too far from the university. This would rent for circa £400.00 a month (I think).

My question is I have roughly half the amount that I need - is it worth the risk in taking out a second mortgage to enter this market? or, should I save the whole amount and do It in 4 or 5 more years time so that I can take the leap without a mortgage.

The aim would be to build up a portfolio over time.

 

[Gordon - Commercial Finance]

If your heart is set on buy-to-let, then buy two for £40,000 each, using a standard 75% BTL product, and then you get £800pcm, less your mortgage payments (between £300 and £350 a month I reckon, although someone who does BTLs might know better).

You ask if its worth the risk in taking out a second mortgage....I would say absolutely yes, as there is very little risk in a mortgage. It has brick and mortar security.
What I would ask is whether its worth the hassle. I just recently got out of buy to let, having been a landlord since I turned 18 (I'm now 32). Particularly now with new rules around tax and deductions, its far more hassle than it was worth to me. Your call though.

In a nutshell, if you're going for it, then definitely use leverage so that your £20k goes a lot further and earns you more.

 

[ComPropSolicitor]

Hassle? I am sure there is some. But, I would effectively just be sitting on two rental assets and set up a bank account for the Company that would own them with the mortgage coming out when due and the rest of the excess being saved until there was enough to fund the purchase of more. I do not plan quite my job or anything.

Nor - do I plan on going anywhere near the houses. I would be getting a management company to do it for me. Presumably, this does somewhat limit involvement? They arrange the collection of rent and telephone calls from the tenants, etc.

Appreciate it is not as simple as I am making it sound.

 

[mattk]

The other thing worth checking is whether the houses at the very bottom of the market have experienced any capital appreciation over the last 10 years.

A nice rental income is one thing, but the real value in BTL is when the value of the houses themselves increases.

 

[Gordon - Commercial Finance]

I would be getting a management company to do it for me. Presumably, this does somewhat limit involvement? They arrange the collection of rent and telephone calls from the tenants, etc.

Yes you would think so...but really it doesn't.
I always used a management company and paid them 12% a month, but really the only benefit I found to that (versus self management) is that they have opening hours. Saves me getting calls on my mobile at 8pm on a Saturday night about leaky washing machines.
They help find tenants, and they collect your money for you, and they chase up payments if they're late, but you're still involved in everything. They can't spend your money without checking with you, so if a tenant gets in touch with them saying something needs fixed, then they have to come to you anyway....
They don't do anything without your go ahead so really its just a messaging service and a middle-man.

 

[ComPropSolicitor]

The other thing worth checking is whether the houses at the very bottom of the market have experienced any capital appreciation over the last 10 years.

A nice rental income is one thing, but the real value in BTL is when the value of the houses themselves increases.

Yeah - valid point. I suspect, the answer is no. But, the money is being made by them paying off the mortgage and thus buying you more equity in the house (plus, holding over any gains). The idea would be to continue to invest in them until there is 10 or so and until there is a decent supplemental income that can support or fund retirement.

 

[ComPropSolicitor]

Yes you would think so...but really it doesn't.
I always used a management company and paid them 12% a month, but really the only benefit I found to that (versus self management) is that they have opening hours. Saves me getting calls on my mobile at 8pm on a Saturday night about leaky washing machines.
They help find tenants, and they collect your money for you, and they chase up payments if they're late, but you're still involved in everything. They can't spend your money without checking with you, so if a tenant gets in touch with them saying something needs fixed, then they have to come to you anyway....
They don't do anything without your go ahead so really its just a messaging service and a middle-man.

How many did you have then? Its hard thinking of ways to protect and grow your investments. I have done many different forms to be honest. Stock markets, matched betting (which has just about the best return of anything) however, they require constant effort and input.

Are you doing anything else with your money now you are out?

 

[Mark T Jones]

Appreciate it is not as simple as I am making it sound.

No. In reality it is really very simple - right up the point where it isn't.

Managing agents vary massively, but even the best are somewhat limited in their scope.

The legal system is slightly skewed in favour of the tenant, hence with a bad tenant you can go a long way backwards.

That said, as a long game, and if you aren't dependent on the rental income each month it can still be a fairly solid investment

 

[Gordon - Commercial Finance]

How many did you have then? Its hard thinking of ways to protect and grow your investments. I have done many different forms to be honest. Stock markets, matched betting (which has just about the best return of anything) however, they require constant effort and input.

Are you doing anything else with your money now you are out?

Most I ever had at the one time was 4. Sold them all off gradually over about 2 years.

I've done a lot of different things too. I have done stock markets with mixed success. I reckon I don't have the time to do the necessary investigation into a company to be able to invest with confidence. And I have a finance degree too....
I've done matched betting too and experienced extremely good returns. I still make good money using algorithms that I designed for football betting, and I pick horses with a pretty good success rate, and I've dabbled in betfair exchange trading. Exchange trading would be a good way to employ your money but for me I would need to be at it full time.

I'm looking to replace my BTL investments with some property development. House flips, maybe a ground up house build or two. I don't currently have the cash to do that too effectively at the moment (and nor do you), so I'm just investing all my time and a little of my money into my business.

Do you have a mortgage on your own home? Overpaying your mortgage generally gives the best returns available. Often 20% yield, when a good BTL will yield 10% nowadays.

Do what you feel comfortable doing - I'm perhaps a little jaded about being a landlord....

 

[Gordon - Commercial Finance]

The legal system is slightly skewed in favour of the tenant, hence with a bad tenant you can go a long way backwards.

Can I offer you a correction:
The legal system is massively skewed in favour of the tenant

 

[ComPropSolicitor]

Yes, I concur. My aim, however, is to get properties in student areas, where, I can rent out the rooms as opposed to the Property (in the correct manner or course) doing this has higher returns and also ensures that vacant possession will be obtained when they have to go home at the end of the year - and, that rent is forthcoming as typically its via student loans.

Appreciate, that they might not take that good a care of the place - but, the income from the same can be used to offset any damage.

 

[Gordon - Commercial Finance]

If you are planning to rent to students then check carefully the terms of any mortgage you get. I've seen a BTL mortgage in the past that specifically forbid renting to students. Bizarre, but worth bearing in mind.

 

[mattk]

Have you factored in to your calculations that students often only want to rent for 8 months of the year - leaving your either having to find very short term tenants or four blank months per year?

 

[Opinion87]

Do any of the experienced BTL'ers on here have a spreadsheet they'd be willing to share or link to for calculating all the various factors involved? There are plenty online, some a lot more complicated than others.

 

[CVRO]

One point you will also need to consider is the regulation around houses of multiplw occupancy as, if I'm not mistaken, you require a specific licence for that.

 

[billmccallum1957]

Yes, I concur. My aim, however, is to get properties in student areas, where, I can rent out the rooms as opposed to the Property (in the correct manner or course) doing this has higher returns and also ensures that vacant possession will be obtained when they have to go home at the end of the year - and, that rent is forthcoming as typically its via student loans.

Appreciate, that they might not take that good a care of the place - but, the income from the same can be used to offset any damage.

Letting out "rooms" means getting into HMO issues, one would assume you know this.

 

[UKSBD]

Bear in mind the extra stamp duty and also the fact that if you do buy a second property, if you sell your main residence and buy a new property it may cost you an extra 3% (depending on what is classed as main residence)

 

[Stedurham]

No stamp duty on properties under 40k, if you are looking at hmo properties depending on how many rooms you want to rent you need to completely refurb property needing fire doors, mains smoke alarms etc. Best to just do normal buy to let. There’s a few not many that will lend on properties valuing at 40k this way you can get 3, but that’s about all Mortage you will get on property at 40k after than need to value at 50 minimum. Mortgage would be about 75/80 a month plus agent fees you should be able to pay about 8 percent. I’ve got enough and now just doing refurbs and selling more money less hassle and can comfortably do 3 a year while still working.
Have got loads of spreadsheets send me e mail address and I will send them over when in office in morning, they are on excel

 

[Stedurham]

Wouldn’t worry about main residence I’ve just sold my house and buying another and there’s no additional stamp duty as it’s my main residence to live in

 

[Redd]

I wouldn’t recommend an agent. I used one to find me the tenant (in the end I ended up finding my own one on gumtree) but as said above they generally are just a middle man for communication. We have met all our applicants for our property and almost created a relationship with them and touch wood never had a problem.

 

[Newchodge]

Have you factored in to your calculations that students often only want to rent for 8 months of the year - leaving your either having to find very short term tenants or four blank months per year?

Every student let I have seen requires 12 months' rent, even if occupancy is only 8 months.

 

[matlob]

Someone said above there is no stamp duty to pay on 40k purchase but I think you will have to pay 3%.

 

[ComPropSolicitor]

The aim would be to set up a Company. The rules and regulations on SDLT are different for companies. I would also be negotiating below the SDLT threshold of £40,000.00. In any event never really understood the concern regarding SDLT for investment properties appreciate that on higher values it is a lot of money but at this level its like 3 or 4 months rent - which on a 20 year plan isn't a reason not to buy.

 

[Gordon - Commercial Finance]

I think you're spot on - can't imagine someone who wants £40k for their house being too bothered if you give them £39,999.

 

[Stedurham]

Yeah under 40k theres no stamp duty bought 2 this year, but at £39999
Not sure about limited company though, got meeting next week with accountants, but currently all done as sole trader and not convinced its better to do it in company. The lending charge is definatley higher

 

[Gordon - Commercial Finance]

Yeah under 40k theres no stamp duty bought 2 this year, but at £39999
Not sure about limited company though, got meeting next week with accountants, but currently all done as sole trader and not convinced its better to do it in company. The lending charge is definatley higher

It has always seemed to be the case that it becomes worth it to do it in an LTD when you have 4 or more. However I think its a bit different now as more of the mortgage is tax deductible for an LTD....or something like that.

 

[ComPropSolicitor]

Yeah under 40k theres no stamp duty bought 2 this year, but at £39999
Not sure about limited company though, got meeting next week with accountants, but currently all done as sole trader and not convinced its better to do it in company. The lending charge is definatley higher

As you may have seen (I'm a solicitor) there are key differences.

The main one from a legal perspective being personal protection. There have been instances before where people have died in rental properties. Now, there can be a claim against a Landlord personally if the property is owned in his own name in respect of any wrongdoing - whereas, the alternative is it being against the Company. The later is definitely preferable. Although, not absolute as some crimes can overreach the corporate veil such as corporate manslaughter (where directors can be found to be personally liable).

How have you funded the purchase of these houses btw if you don't mind me asking? did you simply save up a deposit and decide to take the plunge?

 

[Stedurham]

Hi I have had rentals and along side another business or 2 over the years made enough money to have deposits or buy our right. Last 2 I did just bought refurbed and sold.
I don't think I will be adding anymore rentals to portfolio as it stands, will be buying to refurb and sell
I would have to pay capital gains tax if I change the btl into a limited company this will far out weigh any savings I would make
As for someone dying all rentals have the requirement gas check every year, all rentals have had partial rewires or full and are kept to a good standard so not worrying about someone dying, not sure how this happened, must have been major wrong doing by landlord for that to happen. Nut pretty sure if limited company was at fault they would come after director anyway, so there may be financial protection, not convinced would make a difference, if criminal charges are brought. I however am not a solicitor so il take your work on that issue. But not something I will lose sleep over.

 

[Stedurham]

Limited company is the way accountants want me to go with future potential rentals if I do any, but they are telling me to borrow from limited company and set up another limited company to buy properties apparently more tax efficient. Not sure exactly how or full details till I see them

 

[Stedurham]

Like any other business the cost of the mortgage will be 100% deductible where as being a sole trader its not.
Guessing if you are buying houses for 40k though (Not sure what area you are in) that they will need work to be at a lettable state, so if you keep re investing you would pay tax for years anyway. That's why ive normally always bought 1/2 rentals a year so no tax bill, basically

 

[Stedurham]

Wouldn't pay tax for years lol

 

[ComPropSolicitor]

So what are we thinking about buying with a 25 deposit and 75 mortgage? worth the risk or is it better to sit on the cash and save more - I guess. during that time though that could have had a tenant in paying off the mortgage. As long as can afford the mortgage payments should it be empty.

 

[Stedurham]

A house at that level will be £75/80 Mortgage (Interest Only) Council tax £100 bit gas electric and water and insurance £35 so just over £200 empty. Rented should give you £250 a month profit. Truthfully depends on area, area is key. If areas not best tenants wont be and then its not worth hassle. Where abouts are you?

 

[Gordon - Commercial Finance]

If the rental market doesn't have the liquidity to give you confidence that your mortgage will be covered, then you shouldn't be buying it anyway.
75% mortgage is for sure the right way to go - make your money go a lot further.

 

[Stedurham]

With 40k you could almost get 3, if you can find them needing minimual if any work. That's £750 plus a month profit, You could buy another one every 2 years then every year with profit. Tax will be minimal as you will spend bits on properties they will sit empty for few months to start with. Then when you have 10 in theory that's £3/4k a month. However you will have to start buying houses that value at min 50K, only so many do 40k and they are very few now (Birmingham Midshire) do or did ive got 3 with them but they don't allow more than 3

 

[ComPropSolicitor]

I would only really be looking in good areas. Ones where there are students. The area is Hull and I know it well having been to university and stayed in that area for 3 years. I think I know what would rent and what would not. The question is one of scale. The aim would be to continue to save the rent and more money in savings so that I can buy more £250.00 a month doesn't sound like that much but times by 5 years its £15,000.00. Which is another deposit for another one. Which then would allow me to buy another after 2.5 years - and so on.

Before, I get to the point where I have a decent income stream.

 

[Stedurham]

This is exactly how I started, now though must admit I am in middle of totally changing everything. Example House In Gateshead bought 8 year ago for 50k spend 5k refurb makes over £300 a month has done for 8 years. Was valued at 70/75k 8 years ago, now they are selling for 75k 8years later
House in better area (Don't want to give away me best area) bought 60 refurb 8k, 5 years ago valued 80/85 make about £200 a month, did re mortage it at some point, Recently sold for 105k So compare 2
Gateshead 8 Years profit £28800 (there was period it was empty but only month here and there this is just a rough idea)
Better area 5 years rent 12600 Profit on property 25000 So total £37600 and 3 years less issue
Plus better house now sold made money, Gateshead rental will start costing money soon boiler, bathroom, kitchen repairs etc. So im guessing will spend 5/6k on it in next few years of not bit more

 

[AllUpHere]

With the figures mentioned in this thread, it's not so much taking the leap, as dipping a toe in and playing at BTL. There are so many better things to do with money than buy at the really scummy end of the property market. Even if they appreciate in value by 100 or even 200% over the period you own them, it would still have been a poor investment.

This is a business forum. Start a business and make that money work for you.

 

[Stedurham]

I may be wrong but check with council you may need a hmo license, around here you cant get one. They are maxed out no idea on hull. Students get a price per week, this includes gas, heating, water and council tax. On £400 a month you wont make anything, not worth doing in my opinion, but I Don't know hull, apart from one experience in branholme estate never again lol

 

[Stedurham]

All uphere got to disagree it is a business that I make good returns from, not sure how you can say its not? Ive rental income, propertys do go up and ive bought and sold 3 last year and made more money than most business make including my own business that turns over 750k a year. You have to start somewhere, you can grow quicker if you remortage every 6 months