Thinking of buying a second property

ShaunT_2

Hi all.....I live in sunny cornwall :beer: ......have a 33k mortgage on the property I live in with approx. 130k equity.
My stepson is likely going to Plymouth uni next year but wants to live away from home......can't blame him really.
I've been looking at properties near the city centre to buy....so he can live in for the duration of the course and rent out or sell on after he has finished.
I've found a 1 bed studio appartment for £53k and similar properties rent out for £400/month.
On the positive side......property is cheap, new, low maintainance, keeps my stepsons expensives down, good rental return on size of outlay (would be difficult to get £800/month for a £100k property etc.).
On the negative side......can see a drop in the property market, don't want to really release any equity.
I'm looking for comments on whether this looks like a good investment and what would be the best way to finance it.
Cheers
Shaun

scrummy_mummy_2

Investigate a Buy-to-let mortgage.
They are a little bit more expensive than a PPI (Prime, Personal Residence) mortgage (by about 1%)
There are lots of different sorts...interest only might be a good idea, but you obviously have to have a plan for how you will pay off the equity once the loan completes! Taking this route would keep the initial 'costs' down for the relatively short period your son is in the flat. If, after 10 years of owning the property, you might decide to sell it and then (hopefully!) your sale price will pay off the outstanding capital and leave you a little bit...but you aint gonna get rich!...also, under current CGT (Capital Gains Tax rules) you will be liable for 40%tax on any profit made from selling the investment residence, although a gearing reduction (of huge complexity) is in operation. I don't even begin to understand it!
I plan on doing a simillar thing when my eldest son goes to Uni (he's only 10 at the minute) and I already own 3 other properties (locally) which I manage and rent out.
There will be (relatively small) additional costs like annual gas safety inspections, insurances etc that you will have to pay for, but you may wish to consider how you manage the property once your son moves out...a full service letting agency (one you pretty much just leave the keys with and they get on with it all) will charge you 7% to 15% of the gross rental income per calendar month so this will impact oon your figures....if you can afford to just put all rtental income aside to pay off the capital once an interest only loan needs repaying...it might be do-able.
DO NOT (in my opinion) draw down equity/remortgage your own home....keep your own home safe from investment risk otherwise, if it does all go wrong...you will loose your own home as well as any investment property. It's also an expensive way of doing it.
You will need a deposit for a buy to let mortgage. If you can't get the buy to let mortgage as a stand alone project in it's own right and make it largely work....don't do it at all.
Also, make sure your son pays at least some rent, otherwise you'll foot the bill for his entire uni stay.....all income will need to be declared to the Revenue and will be taxed as additional income on your tax return. Keep receipts so you make deductions from your tax liability.
(Try Mortgage Express...we have 2 Buy To Let mortgages with them) You could also try The Money Centre. They are independent financial advisors we have used and they can get really good deals. I have no interest in either companies other than I have their products and have received advice from them and have had no negative experiences.
Using equity from your own property is a VERY risky deal......BEWARE

whambamboo

doesn't sound unreasonable to me.... £4800/yr, minus voids and maintenance, say £4200. That's 7.9% yield which is quite reasonable. Prices are at historic highs at the moment. Let's say there's a 2% drop year-on-year for 3 years, so after 3 years 53,000 is worth £50k. So under that scenario you lose about £3k or so. Meanwhile you've probably made 3% YoY net after costs.

Seems to me your risk is fairly small, as the cost of the property is low, so there is much less risk than in buying a £200k property It's going to be cheaper to remortgage your own place, you should get very good rates with such a good LTV (less than 75%).

But, you really need to check your figures. Go and look at what you can get for £400/month. Visit it in person. Check that £400/month is realistic. Also, you need to look at voids - do students stay in the property all year round, or will they move out in the summer? How fast are places going? Check some places advertised 3 weeks ago. Are they still available or is there too much supply?

There are not any predictions of house price rises from any analysts, except max about 3-4%, and plenty of negative predictions, so there is a high risk that your asset will lose value, so you have to be sure about returns.

whambamboo

scrummy_mummy wrote:

Investigate a Buy-to-let mortgage.
They are a little bit more expensive than a PPI (Prime, Personal Residence) mortgage (by about 1%)
There are lots of different sorts...interest only might be a good idea, but you obviously have to have a plan for how you will pay off the equity once the loan completes! Taking this route would keep the initial 'costs' down for the relatively short period your son is in the flat. If, after 10 years of owning the property, you might decide to sell it and then (hopefully!) your sale price will pay off the outstanding capital and leave you a little bit...but you aint gonna get rich!...also, under current CGT (Capital Gains Tax rules) you will be liable for 40%tax on any profit made from selling the investment residence, although a gearing reduction (of huge complexity) is in operation. I don't even begin to understand it!
I plan on doing a simillar thing when my eldest son goes to Uni (he's only 10 at the minute) and I already own 3 other properties (locally) which I manage and rent out.
There will be (relatively small) additional costs like annual gas safety inspections, insurances etc that you will have to pay for, but you may wish to consider how you manage the property once your son moves out...a full service letting agency (one you pretty much just leave the keys with and they get on with it all) will charge you 7% to 15% of the gross rental income per calendar month so this will impact oon your figures....if you can afford to just put all rtental income aside to pay off the capital once an interest only loan needs repaying...it might be do-able.
DO NOT (in my opinion) draw down equity/remortgage your own home....keep your own home safe from investment risk otherwise, if it does all go wrong...you will loose your own home as well as any investment property. It's also an expensive way of doing it.
You will need a deposit for a buy to let mortgage. If you can't get the buy to let mortgage as a stand alone project in it's own right and make it largely work....don't do it at all.
Also, make sure your son pays at least some rent, otherwise you'll foot the bill for his entire uni stay.....all income will need to be declared to the Revenue and will be taxed as additional income on your tax return. Keep receipts so you make deductions from your tax liability.
(Try Mortgage Express...we have 2 Buy To Let mortgages with them) You could also try The Money Centre. They are independent financial advisors we have used and they can get really good deals. I have no interest in either companies other than I have their products and have received advice from them and have had no negative experiences.
Using equity from your own property is a VERY risky deal......BEWARE

It's not 'very' risky. It's as risky as his repayments are. If he can get a 25-year mortgage (depends on his age), an £88k mortage is £520/month on a repayment basis (I wouldn't worry about capital gains on a £53,000 house). That is not a huge amount of money. If he has a secure job then he should have no problems. If not, then will he struggle to pay £520? Maybe not...

The money-saving option is the lower rate on his own property.

lynzpower

One thing I would say is, having been to uni myself *fairly* recently

are you sue hed want to live alone for the duration of the course. LIving in Shared houses, picking who to live with (and who not!) and the parties, arguments, nicking each others bread and so forth was probably the most useful and enriching part of university life. He might not want to miss out on this....

Mrs_pbradley936

I posted this on another thread about Financial Advisors but some of it may by useful to you.

Well, I like to take notice of professionals in this area and do not begrudge them a fee. The last piece of advice I got I would have thought was illegal because it worked out so well. It concerned my son and letting him have the rental income from a flat (he was at university and not earning) which was in his name. He went to university in the South - we thought he was going to Nottingham and made plans on figures for housing there. The original plan was to buy a place and rent a couple of rooms (he would occupy one) and let the rent pay the mortgage. Anyway he ended up in the South so we could not afford a house there so IFA said we could adapt our plan and buy local (to us) then we pay the mortgage and let son have the rent. Rent was £550 a month and for us to give him that much would cost us a great deal more because we are tax payers. The money for his flat was raised by a mortgage on our house because we had no mortgage having recently paid it up. Have had the flat for 3 years, son has had £550 per month for all of that time PLUS about £30k in equity. I would never have thought of all that by myself!

scrummy_mummy_2

whambamboo wrote:

It's not 'very' risky. It's as risky as his repayments are. If he can get a 25-year mortgage (depends on his age), an £88k mortage is £520/month on a repayment basis (I wouldn't worry about capital gains on a £53,000 house). That is not a huge amount of money. If he has a secure job then he should have no problems. If not, then will he struggle to pay £520? Maybe not...

The money-saving option is the lower rate on his own property.

Any financial decision which puts your own home and security at risk is risky in my own opinion...mortgaging your own home to fund another falls into this category for me and is how these "Built yourself a property portfolio of £1million" schemes operate. If anything happens to my properties I only loose them and the money I have invested in them...not my own roof!
As with anything in life, the bigger the risk, the bigger the potential payoffs, but also the potential losses.
The original poster should be aware that remortgaging his own home because he as equity in it is not the only option to him and that he needs to consider his own personal comfort versus risks position before making a decision.
Buying a property is not the only factor to consider, how you manage it and finally how you get rid of it need to play a big part in your initial decision on how and what you buy....like a journey. You need to consider where you need to go before deciding how to get there and which route you need to take.
If he buys a flat for his son at £55,000 in his own name (cash form the money he has raised by remortgaging his own home) I wouldn't be so ready to dismiss the CGT on it because if he then sells in a relatively short time say 3 years when his son leaves Uni...the tax man will have him for around£22,000!!!! if he sells it for what he paid for it (40% of the gross profit on his asset! The gearing reduction is insignificant at this stage) At the minute you can't buy another home and transfer the 'investment' status....bad, but talk to Gordon about it! If you have a mortgage on it...Gordon can't have the cash! because you owe on it and this comes off your CGT exposure.
It may be slighty more EXPENSIVE to get a buy to let mortgage in the short term, but will give him more options in the future.
Money doesn't buy happiness...but it DOES give a person OPTIONS!!
Always keep your options as numerous as possible.
If the original poster doesn't have enough for a cash deposit...raise your mortgage by this amount and get a Buy to Let to cover the remainder.
I must include the caveat that the tax figures I have quoted are those I believe to be correct....please correct me if I'm wrong as it'll affect what I do with my own houses!

Mrs_pbradley936

Firstly, I made sure flat was in sons’ name because of Capital Gains Tax. Plan is for him the live in it anyway. We provided the funds for the purchase and solicitor drew up some sort of Trust Deed to say flat could never be mortgaged and lots of other things.

Secondly, if you have a portfolio of properties then it does not matter a jot which place the loan is on. In fact you can borrow on your own home and still get tax relief on any interest you are paying to finance other properties.

Mrs_pbradley936

Sorry hit the button too quickly, the advantage to us in putting mortgage on our home was the debt to loan ratio which gave us a much better interest rate.

CB1979_2

personally would agree with lynzpower, I would look into a 2 or 3 bed flat.

even better let him stay in halls for the first year whilst you look for a place then let him choose a couple of mates to share with in the 2nd, if the sums add up he'll live there rent free and they'll pay for the mortgage.

I bought a place in stoke for £22k (cash, my ex paid half in cash as well) in 2000 sold it for £82k in Jan this year, obviously i got the benefit of the boom, but also didn't waste £3k a year on rent. i bought this place with my ex so it cost me £30k to buy her out though, but still ended up with a nice profit.

RHemmings

CB1979 wrote:

personally would agree with lynzpower, I would look into a 2 or 3 bed flat.

even better let him stay in halls for the first year whilst you look for a place then let him choose a couple of mates to share with in the 2nd, if the sums add up he'll live there rent free and they'll pay for the mortgage.

I bought a place in stoke for £22k (cash, my ex paid half in cash as well) in 2000 sold it for £82k in Jan this year, obviously i got the benefit of the boom, but also didn't waste £3k a year on rent. i bought this place with my ex so it cost me £30k to buy her out though, but still ended up with a nice profit.

Did you buy another house when you sold the house? I'm asking because when you sold your house, you benefitted from the boom, but if you then had to buy another house, that may have wiped out your "benefit", or even worse.