Not sure what steps to take. Please help

uncle_moidah

Needing some advice here..



I'm 26 years old from Edinburgh, earn 35K - 40K per year. I bought my first flat in the summer of 2010 for 129K, putting down a 25% deposit.



I have around 25K in my bank, i'm wondering what to do with it. I can make overpayments to my mortgage (maximum of 10%), or use the money to invest in another property.



I have spoken to my mortgage advisor and I can get a buy to let mortgage no problem. The flats that I have been looking have been around the 90K mark, they can rent out for around £450 per month. My mortgage would be just over £400 on a repayment basis. I know I will not make any real income off the flat, but in 25 years when the mortgage is paid I will see profit.



The flat that I live in just now, is a new build close to the city centre. Would rent out easily for £625 per month. I was wondering if I should use this as my buy to let flat instead? My mortgage for this flat is £500 per month.



Any thoughts, please help as I keep thinking about this!

hazyjo

Do you actually want to be a property investor/LL? I definitely wouldn't. Far too much hassle.

Are you currently living somewhere you'd want to live for the forseeable future? Why not just save then buy something to suit you that would do you long term. Maybe a freehold property, or something bigger? If you're happy where you are and don't need any more room, I'd just overpay on the mortgage. It was only last year you bought - without appearing too nosy(!), did you not have the £25k when you bought? Not saying you should have spent more on your flat, just that if you want to 'invest' in property now, maybe you should have just bought something bigger/more expensive to start with.

Wouldn't have really thought the market was right to 'invest' in right now, seeing as we're in a recession...

Jx

princeofpounds

The returns in BTL are largely drive by gearing. If you don't understand what gearing is then you don't belong in property investment. Unfortunately most property investors don't get it either.

Property is an unusual asset class in that it is one of the few where ordinary people can access vast sums of debt to fund a purchase. It is this feature and no other that makes it the subject of such investment fascination by the man on the street.

Buy a property for 100, with 10% deposit, and watch it go up to 110. That's a 10% profit on capital invested (although probably much less in inflation-adjusted terms!).

But if you pay off the 90 mortgage you are left with 20 (minus interest costs). That's a 100% return on equity! You're rich! Money making machine!

Well, no. Because if the property had dropped to 90 you lost not 10% of your investment but every single last penny, plus interest costs.

Gearing amplifies returns and that is why doing BTL in a falling market is a quick way to lose a lot of money.

So consider how much of your personal wealth you want to gamble on the property market before you go buying even more exposure.

BitterAndTwisted

I read something about investment a while back which seemed to make sense and the gist of it was to never have all of it in the same commodity. A third should be in low-risk, low return and another in medium risk, medium return and the last in high-risk, high return. There's a reason why in business property is classed as a "fixed asset" in that it's not liquid, you can't turn it into money quickly or easily.

If that £25k is your only savings I certainly wouldn't recommend that you sink it all into another property. Being a landlord is not a simple or trouble-free way of investing. I'd definitely consider using some of those savings to over-pay your mortgage

Got a decent pension going yet?

Marvel1

The only advice I can give is before becoming a landlord, read up the rights of both landlord and tenets.

Jenniefour

princeofpounds wrote: »

The returns in BTL are largely drive by gearing. If you don't understand what gearing is then you don't belong in property investment. Unfortunately most property investors don't get it either.

Property is an unusual asset class in that it is one of the few where ordinary people can access vast sums of debt to fund a purchase. It is this feature and no other that makes it the subject of such investment fascination by the man on the street.

Buy a property for 100, with 10% deposit, and watch it go up to 110. That's a 10% profit on capital invested (although probably much less in inflation-adjusted terms!).

But if you pay off the 90 mortgage you are left with 20 (minus interest costs). That's a 100% return on equity! You're rich! Money making machine!

Well, no. Because if the property had dropped to 90 you lost not 10% of your investment but every single last penny, plus interest costs.

Gearing amplifies returns and that is why doing BTL in a falling market is a quick way to lose a lot of money.

So consider how much of your personal wealth you want to gamble on the property market before you go buying even more exposure.

Absolutely excellent advice. Staggers me that there are still some amateur investors straining at the leash to get into the BTL market, when the prevailing view seems to be that property is on the slide down.

All I would add to your comments is the other excellent point made above by BitterandTwisted - that the downside to gearing in a falling market is that property - unlike some assets - is not liquid either.

BTL's as investment right now best left to those who do it on a professional business basis and know the nature of the animal they're dealing with and have the resources behind them to ride the market.

Estate agent said to me 2 months ago that very few professional property investors are buying right now. With good reason.

uncle_moidah

Thank you all for your advice. I am a complete amateur and have no real property experience. I would love to learn how to become a successful landlord, something I could see myself being good at and also have a good second income.

I was a little wary about the recession and house prices falling!

I will look into making some overpayments to my mortgage.

Would I be best doing this rather than putting my money into a savings account?

I have no other debts.

I have paid into a works pension (final salary) since I was 17.

VfM4meplse

uncle_moidah wrote: »

Thank you all for your advice. I am a complete amateur and have no real property experience. I would love to learn how to become a successful landlord, something I could see myself being good at and also have a good second income.

I was a little wary about the recession and house prices falling!

I will look into making some overpayments to my mortgage.

Would I be best doing this rather than putting my money into a savings account?

I have no other debts.

I have paid into a works pension (final salary) since I was 17.

I assume you have made the most of your ISA entitlement this year? 2011/12 is not too far away so I would keep some back to invest on 6th April.

As you seem to be good at saving, have you thought about an offset mortgage? This will put you on a fastrack to owning your home outright!

PPPingu

Have you considered an absolute return fund? seems fairly low risk (from my unknowledgeable persepctive)

uncle_moidah

Yes, I have maxed out my ISA this year, I will keep money back for 2011/2012 though.

Is it beneficial to pay the full £5100 to my ISA on the 6th of April?

I'm not sure what an offset mortgage is? I am on a fixed rate repayment mortgage just now, that is due to end spring 2012.

Pingu - absolute return fund. Again, no idea what this is, i'll need to do my research!

Thank you all for your response!

CloudCuckooLand

What about putting some in a Share ISA ?

Eggs and basket, and all that.