to buy cash to let

coriana

I have an opportunity to buy a property at current market value (yes I am aware this may well fall) with an existing tenant who has been there 5 years and intends to be there for 10 more....recently retired and widowed lady. Obviously her circumstances may change but what risks are there in considering this property? I would be buying cash so would be looking at 6% return, less tax per annum which is bettrer than the banks now... thoughts please...

Incisor

What kind of tenancy is it? For what you are considering, do you appreciate that 'current market value' implies 'with vacant possession' - ie that you should be looking at the appropriate 'current market value with sitting tenant' according to the type of tenancy.

poppysarah

6% return for all that work? And the chance that she could die within hours of you committing yourself, and then all the hassle of a new tenant. Etc etc.

ManAtHome

Up to a month ago you could easily get over 6% for term savings (1-5 years) with little chance of capital loss and no effort/botheration factors - seems a bit strange to go for 6% now..?

coriana

Buy price £120km rent of £600 pcm = £7,200 (less tax & management fees) income per annum - is that so bad - I have no interest on maortgage as would be buying cash!? More info: Tenancy agreement until Spring next year but both can give 2 months notice (which current owner will if owner occupier wishes to buy) Part of the rent is paid by housing association, lady is in her late 50's so unlikely to die soon and known as a good tidy tenant, surely that has to account for something? Price is based on vacant posession, was on marklet for £160k about 4 months ago, reduced to £140 about month ago, landlord despaerate to sell as other business going down the tubes (apparently!) I am looking at a 5-10 year plan...

dgl1001

You are forgeting on-going management and purchase costs - which will eat into your return. Prices will fall next year and so you should be looking to purchase at an even cheaper price. By making this a cash purchase your are risking evrything with little return - all eggs in one basket, therefore I would seriously consider a mortgage of up to 50%

coriana

Can you explain why a mortgage on part would be of benefit? I understand you can claim interest on a mortgage as a "cost" and therefore it is tax deductable but then I will have set up costs / fee etc as well?

dgl1001

Because there is downward pressure on prices, it would be better to use debt finance to reduce the risk. if you purchase at £120k (100% cash) and prices fall another 20% you would be down £24k. If you mortgaged say 50% and prices fell 20% then you would only be down £14k with £60k elsewhere earning money. While it may seem a good deal reduced from £160k to £120, you should be looking for a 50% discount from the peak. A 6% return on an asset in a falling market is not a good return. in addition, you will need to consider buildings insurance, downward pressure on rents and a sum for ongoing maintenance p.a. (carpets, minor works, boilers breaking etc etc).