Help please! Thinking of buy-to-let...

Mics_chick

Situation is not totally straightforward but I'll try to keep it as simple as possible. Please ask any questions if something isn't clear.

My OH still has a share in the house he lived in with his ex-wife - she still lives there but doesn't want to move unless she really has to. My OH is ok with this because the house would need alot of work to get it in a saleable condition and neither of them has had any money for this. She can't buy him out because she's living on a pension now (she's alot older than he is). So we thought a possible solution is to take out a buy-to-let mortgage so that she can pay rent instead of the mortgage. We think this would be about the same amount of money per month so she wouldn't be paying any more and she can live more comfortably because her equity has been released from the house and she doesn't have to worry about maintenance. My OH would take out enough on the mortgage to sort out the property - to make it more comfortable in the short term and more saleable in the long term.

We'd like some advice because we're not sure what we're getting into and want to be sure of pros and cons before we take it any further.

Doozergirl

The reason you take out a BTL is because it works financially. You need to work out whether the rent your partner will get from his ex will actually provide income or be even more of a burden. There's hardly anywhere in the country that fits the bill. If a years rent comes in at 6% or less of the total value of the house then it's a complete liability, not an asset at all.

You can sell a house in any condition; in fact 'broken' houses when advertised through an EA seem to fetch more than they would if you spent money on work!

I'd break the ties. Sell up, allow her to release equity and rent somewhere decent.

Only buy an investment property when it makes financial sense, not when you're trying to find a way out.

silvercar

The ex-wife would have to agree to sell her half the property to him. She may feel insecure in this, especially as he would then be her landlord. She would have to have some security to know that he couldn't boot her out with 2 months notice. Giving her the right to remain there as a tenant would make the mortgage lender unhappy, as they would not be able to reposess.

Mics_chick

His ex-wife has already agreed to this as she gets what see wants most of all to stay put... She also gets a good amount of cash to invest to supplement her pension or spend on luxuries she can't currently afford. And finally the house is going to get put right/updated so it will be more comfortable for her to live in. They have a very amicable relationship and he's been fair to her all along cos that's the sort of person he is...

The house is worth approx £140,000 but as it's 3-bedroomed the rent will be about £550-£600 per month so it passes the 6% test.

It seems easier because it would be an almighty battle to get her to move at all and that's after he's managed to force her to sell - if he can? We can't afford the legal costs that would incur and don't need the equity he has in the house other than a relatively small amount to sort out the inside of the house. This investment will increase the value of the house and he has a sitting tenant willing to stay until she needs to move into a nursing home (or she dies - not a pleasant thought but a possibility).

We've thought long and hard about this and thinking of it as a sort of pension for later on. Just not sure what tax implications it would have or whether it would affect child tax credit or anything.

Doozergirl

Mics_chick wrote:

The house is worth approx £140,000 but as it's 3-bedroomed the rent will be about £550-£600 per month so it passes the 6% test.

It doesn't at all It comes in a t 5.1% even with a best case scenario of £600pcm.

Frankly, your partner will be subsidising his ex to live in the house. That's no investment. We can't all really expect house prices to rise continuously and therefore the 'pension' idea is a complete gamble. You're better off leaving things as they are. There isn't a great deal of point in doing the house up now if it has to be done again when it does get sold.

I believe he can force her to sell the house, but I have no experience of this myself.

Mics_chick

OK my maths isn't what it should be but where does the 6% rule come from anyway - why does anyone invest in property to let?

lynzpower

Mics_chick wrote:

OK my maths isn't what it should be but where does the 6% rule come from anyway - why does anyone invest in property to let?

I believe the 6% rule is started by the banks. the issue for us as MSErs is you can get 5.odd with the money sat in the bank, you need to make sure that house is doing more for you than a bog standard bank account.

Why does anyone invest in buy to let
1`) they dont reealise they can make more money in the bank
2) they bought property which was much cheaper ie auction or otherwise thus giving higher yield

silvercar

why do people invest:

for future house growth;
because they already own the property and don't want to sell;
buying property for the kids to have in the future;
see a good proposition;
because the tax liability from selling is too great;
because they can't sell and can't afford it to be empty.

Mics_chick

silvercar wrote:

why do people invest:

for future house growth;
because they already own the property and don't want to sell;
buying property for the kids to have in the future;
see a good proposition;
because the tax liability from selling is too great;
because they can't sell and can't afford it to be empty.

Thanks SilverCar at last a post that doesn't make me feel like this whole idea is stupid Stupid STUPID!!

The rental income will cover the mortgage payments that we'll be making so effectively we won't be paying anything out on a monthly basis.
My OH owns a share of the property and doesn't want to sell partly because he'll have to pay tax.
The market is slow where the house is situated and don't think it will sell in its current state because not only are there unfinished jobs but it's very old-fashioned. They had the place valued by several estate agents and they all said it would be difficult to sell in its current state and if it was brought up-to-date not only would it sell quicker but it would fetch a higher price.
Although his ex is retired, it's likely she'll live there for another 10 years so we think that the value of the house will have risen as well in that time.
Since we mentioned this idea to her - she is all for it because she'd rather have money to spend now in her retirement than leave it behind to her son who she's never got on with!
She looked into equity release but that's a right rip-off and her estate could end up owing them money!!!

sm9ai

If your happy with it then go for it.

But you would be helping out the ex-wife. Nothing wrong with that, more people should be generous.

As an investment point of view its pretty poor.

silvercar

We bought our rental property to complete our house chain. our return is 5% and that is gross, after we allow for costs and agents fees etc it is probably slightly under 4.5%.

As long as we cover our costs on it then we are happy. we bought it so that we could actually move house and end the prolonged aggravation of the housing chain. Now we live in the house we want; if we are slightly subsidising our tenant then so be it. Sometimes its not the money on paper but living the life you want to live. If it costs us an extra £1000 over the whole year it will have been worth it.