Someone Tell Me Why This is a Bad Idea? BTL Quandary!

dmg24

I have a potential investment query, and I would quite like someone to talk me out of it! Here are the facts:

2 bed apartment (two storey block), two years old - for sale for £65K (repossession)
Original purchase price £121K (ouch)
Other apartments in the block let for £500pm
Cash buyer
Service charge £1100pa
Ground rent £25pa
Block is (to date) very well maintained

I am aware of the income tax implications (lower rate tax payer), and the insurance is covered in the service charge. I am also aware of the possibility of getting a nightmare tenant, but I live very close by, and I have friends that live in the block, so it will be difficult for anything to happen without me knowing about it! I would self manage, and I have someone that can do any minor works for no charge.

What am I missing in this scenario? Surely there must be more negatives?

clutton_2

what is tenant demand like in the area ?

have you tried putting an advert in locally for a tenant to see the response ?

and how much cash is in the maintainance sink fund for ongoing maintainance - this seems huge monthly charge for a small new build

are the developers organising the maintainance company ?

Doozergirl

The service charge is likely to go up as the building actually starts to need proper maintenance. It's an unquantifiable that you can't budget for properly.

dmg24

Thanks guys!

Demand is still good. My friend looked to rent on the development a few months back, and two apartments went before she could even look at them.

There is a fair amount going into the sinking fund, I can't recall amounts but I have access to the accounts (I live on the development) and it should cover anything other than major structural works (which I would hope will not be needed for a fair while yet).

The management company have been a nightmare in the past, but through my own problems I have built up a relationship that means I get things sorted quicker than most!

I think it is the unquantifiables that are putting me off. I would potentially only be looking at a medium term investment, but who knows what will happen to the housing market, or to my own circumstances (the latter being even more uncertain than the former)!

Thanks again, will keep pondering!

hearts

Buy it. Stop being wishy washy. ;-)

franklee

So after paying out the stated service charge you will be pulling in about 408pm.

As a yield on your investment of 65K that's about 7.5% before all the other costs. Costs being voids, tenant damage, routine repairs, tax, administration costs like paying for the tenancy agreement, legal and financial advice, buying and selling fees.

Can you estimate the above costs and post what you think that makes the net return?

This time last year you could get 7% in a savings account, obviously not any more but what rate can you get if fixed for a few years, I say that as obviously this is an investment that would last a few years.

dmg24

franklee wrote: »

So after paying out the stated service charge you will be pulling in about 408pm.

As a yield on your investment of 65K that's about 7.5% before all the other costs. Costs being voids, tenant damage, routine repairs, tax, administration costs like paying for the tenancy agreement, legal and financial advice, buying and selling fees.

Can you estimate the above costs and post what you think that makes the net return?

This time last year you could get 7% in a savings account, obviously not any more but what rate can you get if fixed for a few years, I say that as obviously this is an investment that would last a few years.

Thankfully I would have very few of the costs mentioned. I can sort all the legals myself, and maintenance wise I would only need to pay for materials. The others seem unquantifiable, and this is why I am being wishy washy!

I have done this before, but with somebody elses money. Feels very different when it is my own!

The savings rates available seem pretty poor, so I think the big issue is whether I want to tie up the money, and my own plans for the future.

Decisions, decisions!

poppysarah

Savings rates are poor. but house prices fell 17% in a year

sjcollett

It all depends on why you want to buy it anyway? what are you actually trying to achieve?

franklee

dmg24 wrote: »

Thankfully I would have very few of the costs mentioned. I can sort all the legals myself, and maintenance wise I would only need to pay for materials. The others seem unquantifiable, and this is why I am being wishy washy!

I have done this before, but with somebody elses money. Feels very different when it is my own!

The savings rates available seem pretty poor, so I think the big issue is whether I want to tie up the money, and my own plans for the future.

Decisions, decisions!

How long you want to tie up the money for is a big consideration. I wouldn't call buying a BTL a short term prospect especially with falling house prices. So how long are you thinking of holding?

I do agree the other costs are hard to quantify but even so worth having a stab at it, perhaps put a range in for each one. Then you can see how the risk vs reward works for you.

The big worry I'd have with a two year old apartment is that this is the sector marked out for the biggest falls. If there are repossessions (and there are like the one you may buy) then it does devalue the whole block in several ways. The price paid is on record. The to be repossessed person may fall behind with paying their share of the maintenance so that suffers, many get let out which may cause more wear and tear to the communal areas. OTOH as a small block yours may not suffer as much as the bigger blocks do, is the rest of the block fully occupied and in what proportion OO vs tenants. I also think that landlords are now one of the higher risk groups for defaulting and the age of your block does probably mean that many overpaid which again could mean negative equity and repossession looming for more flats there. Do you know why this particular one was repossessed?

If you really can't decide why not lob in a low offer see if they bite? That way your returns go up should you go ahead.

pineapple123

This looks like a good investment but not a quick gain.
You have to be prepared for all possibilities when being a landlord.
At the moment demand for rental has cooled and prices have dropped you have to consider this, also covering payments when having property void for months at a time.
You need yearly safety certificates and servicing.

The real questions are how long you want to tie your money up, affordability and future work, personal circumstances etc.

I think all property purchases are a great investment long term however short term are far more risky.
As previous poster said get for a good price and you reduce the risk.