BTL Numpty needing basic maths help

thefuzzbox

Hi,

This will probably be ample evidence that folk without a brain are getting involved in Buy to Let etc (and shouldn't), but I've been struggling for a while on some basic maths - and could use some help (and will probably cheer folk up at same time with my incompetence)

Today: Current House (A) Value 320K. Mortgage 80K. Equity 240K

Plan Part 1: Remortgage (for BTL) House A for 170K, so leaving Equity of 150K.

Plan Part 2: Buy House B for 270K, using deposit of 140K from remortgage (the other 30K to go on fees/duty/diy etc), plus port existing mortgage 80K, plus topup mortgage of 50K.

Where I think I am going wrong:

I work out I now have 150K equity in A and 140K equity in B - leaving me 290K. How have I ended up 50K up???

(Fast Fwd 1 year) - where it all goes belly up:

I sell House A for 320K, clearing mortgage, leaving me 150K.
My mortgages on B = 80K + 50K totalling 130K.
Clear this 130K with 150K from House A, leaving profit of 20K.
I now own a house worth 270K and have 20K left...50K more than when I started.

(background, I know this ignores sales costs/agent fees/repayments/variance in house values).

I know it's something obvious I am missing...and am hoping someone can help point it out.

theartfullodger

Don't go into b2l if you can't do sums.

Gwhiz

theartfullodger wrote: »

Don't go into b2l if you can't do sums.

This man speaks sense

thefuzzbox

in fairness, my first post had already acknowledged I was being a bit of a turnip. What may help slightly more than merely reinforcing the point would be to point out where my sums are wrong ?

Annisele

I can't follow your sums, so I'll give you my sums and see if that helps.

I think you start out with a mortgaged house worth £320k. You have a mortgage of £80k, and equity of £240k (£80k + £240k = £320k). So, your net position is that you have £240k worth of assets.

Now you borrow an additional £90k. So, you have a mortgage of £170k, £90k of cash, and £150k equity. Net position is still £240k of assets (£320k house + £90k cash - £170k mortgage = £240k).

Now you want to buy a house for £270k. You want to use £30k of your cash for [stuff], so you have £60k cash. I think you need to take out a mortgage for (£270k house value - £60k your cash), i.e. for £210k. Net position is now £210k of assets (£320k house + £270k house - £170k mortgage on first house - £210k mortgage on second house) - the £30k difference is because you spent some of it on [stuff].

I think that possibly you're trying to spend the money you borrowed against the first house on two different things? But I'm not sure!

princeofpounds

"Today: Current House (A) Value 320K. Mortgage 80K. Equity 240K"

OK

"Plan Part 1: Remortgage (for BTL) House A for 170K, so leaving Equity of 150K."

This gives you 90k of cash, offset with 90k of debt. Your cash plus equity now is still 240k, identical to the equity you had previously.

"Plan Part 2: Buy House B for 270K, using deposit of 140K from remortgage (the other 30K to go on fees/duty/diy etc), plus port existing mortgage 80K, plus topup mortgage of 50K."

Your mistake is that you did not raise 170k. By increasing your mortgage from 80k to 170k you raised only 90k of new equity.

Or alternative you did raise 170k of new money, but then the equity in your original house has fallen as far as 70k.

Dr PrinceofPounds prescribes a course in double entry bookkeeping.

thefuzzbox

Anniselle and PrinceofPounds - Thankyou very much indeed for your help. Feeling quite ashamed now (but much relieved).

princeofpounds

Actually you had some guts to ask. A lot of people jump into these sorts of things without realising they should even be doing any sums in the first place!

Just quickly, one sum you need to understand is that of gearing. That's using debt to amplify returns. Buy a house with a 10% deposit, prices go up 10% in a year, interest costs are 5% - your wealth has gone up by 50%!

The problem is that debt amplifies losses on the downside. If prices go down 10% then you would have lose ALL your equity AND still have to pay all the interest for the privilege.

That's the 20 second version anyway.

BTL is actually very little to do with houses, renting and being a landlord. The actual 'business' is largely financial. You'd think it was a bit out of the ordinary to borrow nine times your money to go and buy exposure to shares, but BTL is pretty much doing that but with property instead.

Annisele

P of P is right - no need to feel ashamed! (He's also right about the bookkeeping, but never mind that...).

You'd found yourself a problem that you could solve by posting on a website and having a couple of people chuck numbers at you. That sort of problem isn't one you need to be too worried about. Ask by all means, but don't worry.

If you look at some of the other problems people post on here, you'll see that it's *much* better to be a numpty before you buy than afterwards!

GDB2222

The real thing to watch out for is that the second house is being financed 100% from mortgages. Those are split between the two houses, but whatever you spend will be coming from increased loans.

Now, work out the rent on the new property, and ask whether it will cover the loan interest? Have you allowed for void periods in the BTL property, agent's fees, insurance, maintenance, bad debts? The simplest way to do that, as a rough rule of thumb, is to assume that you'll only keep 9 months rent each year to set against the loan interest. Now see whether you'll still be okay if interest rates go up by say 3%?