Buy to Let Questions

Byrneand_2

Hi there,

I'm considering buying a buy-to-let property with my brother. This will be the first b2l property either of us will of bought and so are a little apprehensive about making the step. I was wondering if anyone has any advice regarding the pitfalls of this.

To give you an idea of the property where looking at:

3 bed room house.
Close to a hospital.
£140-150k
£25k deposit.
Rental income £650 pm.
No stamp duty < £150k

One of the main thing we can't decide upon is whether to buy off plan on a new development or buy a house approximately 10 years old on a neighbouring estate. The older houses are approximately £5k cheaper.

We both have our own houses with about 70% ltv and are aged under 30.

Does anyone have any help or advice regarding buy-to-let and the unseen costs/pitfalls.

Thanks!!

clutton_2

new build flats for BTL are often difficult to make a good profit on - monthly management charges are often very high on new blocks - check out what these Might be, although developers will often say they dont know till the management company is set up at completion.

Older property already has an established market rental - new builds dont, and deveopers always always over-estimate the rental they tell you a flat will achieve on completeion. Ask 2/3/4/ local lettings agents for their views on rentals before making a choice.

3 separate individual nurses may make your house iinto a HMO (house in multiple occupation) -= check out with your local council HMO unit if this is the case or not, as councils are interpeting the new 2005 Housing Act in weird and wonderful individualisitic ways !

if you do this, join National Landlords Association - there is a lot to learn - good luck

silvercar

£140-150k
£25k deposit.
Rental income £650 pm.

On those figures you may find it hard to get a BTL mortgage.

BTL mortgages require at least 15% deposit AND the rental to exceed the mortgage interest by 25-30%. As I found out only last week, they do this rental calculation at rates other than the rate they are offering.

Interest payments on a £115k mortgage at 5.75% would be £551. So would require a rental income of £688-716 pcm.

I would suggest seeing a mortgage advisor to track down a deal that will work with your figures.

clutton_2

For £650 rent @ 6% mortgage interest payments, a lender would not lend you much more than £117k in my view on a BTL mortgage - that is with 15% deposit paid - and that is according to my criteria. BUT, each persons personal circumstances produce different offers of a mortgage product, so my advice would be to talk to a mortgage broker (who is NOT) connected to the estate agent.

A £150k house needs £22500 deposit - does this help ?

Jim_B_3

Here are my back of cigarette packet calculations; I stand ready to be corrected on all points!

You're looking at 5.6% yield before tax. If you're paying tax on the rental income at basic rate, that becomes about 4.5%.

Take into account voids, maintenance, agency fees and all the rest of it and that goes further down. If the monthly repayment on the mortgage exceeds your yield (I'd guess it would, to be honest, but it obviously depends on the interest rate on your mortgage), you're losing money each month. The only way this BTL would be profitable is if you can see a way to increase the rent significantly, or you can suck up these losses until such time as you sell the property for a huge profit that covers all your costs and these losses.

If you go for the first route, best of luck finding tenants willing to pay above market rate. If you go for the second route, how sure are you that the value of the property will go up? If you think it's going to ramp up enough to cover your losses, and you can afford to suck up those losses for a few years, go for it. If you think the value will hold steady or drop, don't get involved; stick your deposit cash into a more reliable investment. A bog standard savings account will give around 5% before tax.

As a rule of thumb, new builds are at greater risk of dropping in value than old houses.

On a more general note, are you thinking of this as you should be? You and your brother are effectively thinking of starting a business together; a business providing rental accomodation. The fact that you're asking strangers on the internet for their opinion suggests that you might not be thinking of it as a hard business decision. I know I sound harsh, but this is money we're talking about. Lots of it. I wouldn't be doing you any favours by sugarcoating it.

(Edited for spelling)

ahorrando

"You're looking at 5.6% yield before tax. If you're paying tax on the rental income at basic rate, that becomes about 4.5%. "
Hi Jim B; please remember that he will be able to offset the interest paid on the mortgage against the Tax. So, IO will be 100% mortgage payment against the income from the property....they are younger than 30 so they can keep the property for 25 yrs and sell.

Byrneand_2

Thanks for your posts- they've been really handy and have raised some good points.

1.) Variability of rent - properties in the area are currently renting for £650 pm so my thoughts are that if it were a brand new property it would be a fair bet to rent out for that price if not at a slight premium. Although I grew up close to the area, I currently donot live in the city and so see a new property <15years old as being a stronger balance for paying a premium on the property set against the hassle of repairs and maintenance. Does anyone have suggestions for costs you would expect to incur within 10 years of a property being built (excluding cosmetic and furniture)?

2.) I've been quoted a mortgage rate of 5.25% fixed for 3 years so I thought that was roughly £525 a month (based on £120k). From what I believe a surveyor will review the rental potential at 1.25% repayments so ~£655 a month. - Silvercar - you say they use rates other than that quoted in the deal, do you happen to know what rates they do use? Does anyone know what happens if the rent does not meet the repayment do they:

a.) Take in your potential to repay
or b.) Make you put down more deposit to make the calculations balance?


3.) HMO criteria - just checked and the property would be classed as a HMO but would not require a license. New I needed to check out but wasn't sure where thanks! Does anyone know if its worth joining the Landlords Association? what are the main benefits?

4.) As you point out we are both young and so view the property as a long term investment (> 10-15 years) as oposed to an investment in equities or bonds. We could both cope (although obviously not ideal!) with paying £250 pm were the property unoccupied. Jim B, we are both professionals and would take an investment decision lightly and so try to cover all the variables - hence why where asking the advice of others who are more experienced! With this in mind we would be looking to offset most of the Schedule A profit with the interest payments. Further we where expecting an average growth of 2.5% per annum (over larger periods with potential for upside). Although this is not as great as the 5% we could get in a savings account, we feel the risk would be offset due to the leveraging and compounding effect. Is anyone aware of other items we can offest against any profit - e.g. solicitors fees, insurances, travelling expenses to the property?

Thanks again everyone for their help and advise!

regularsaver1

i thought stamp duty was £125k plus?

Byrneand_2

Apparently it some type of development area so its > £150k.

Bit of a cheeky bonus when we found that out!

clutton_2

""Does anyone know if its worth joining the Landlords Association? what are the main benefits?"" - if you are going to let this property out yourself, you need to know a heck of a lof of stuff !! even if you get a letting agent, you need to know a lot of stuff in my view !!

i joined NLA primarily to get cheaper insurances, and i saved the first years joining fee by the savings i got on the cheaper insurance premiums which i paid because i was a member of this professional body. You get a magazine on a regular basis, access to a fabulous free legal helpline if you get into problems with letting agents/and/or tenants, and i would not be without them !!! Lots of free tenant application forms, guarantor forms, various Section Notices under the housing acts etc etc. worth its weight in gold.

my view of undervaluation is that this ""Make you put down more deposit to make the calculations balance?"" this what happens

HMO regs can be found on your council's website - you will need to have hard wired smoke alarms etc etc

You need to register it as soon as you buy it - otherwise £20k fines ensure !!!


you certainly sound as if you have done a great deal of research on this, and are thinking it thru very clearly - good luck.

Jim_B_3

10-15 years would expose you rather harshly to a house price crash (hush my mouth!) if such a thing were to happen...

we are both professionals and would take an investment decision lightly

I hope you meant to say "wouldn't take an investment decision lightly"!