Buy to let - some beginner questions and advice needed

DarrenRS

I have some questions about buy-to-let. BTL is not something I have done before but I expect soon to lose my job and need to secure an alternative income for myself (due to unemployment it will be my only source of income). I expect to have around 120k available to me for BTL purposes. The questions I have are as follows:

1. I am looking to secure a low-level income of between £150 - £200 a week by investing approximately 120k in 1 or more BTL properties - is this expectation realistic?

2. What are the best parts of the country to do BTL with a budget of approximately 120k? (don't mind any part of the country). Note that I don't have any DIY skills so won't have the option of buying somewhere then doing it up.

3. Is it better to buy somewhere with tenants already in place? If so, how do I ensure the tenants are good paying tenants?

4. Is it better to buy one single property or 2 (or more) smaller places?

5. Is this the type of place I should be looking at? [sorry not allowed to post links - insert www. at the front] - rightmove.co.uk/property-for-sale/property-20286111.html - The house is 'sale by auction' (not something I have had previous experience of). How do house auctions work, or is that something better dealt with via a separate thread?

6. The above property has tenants already in place and it says they are paying £5,670 per year, which by my calculation equates to a 'yield' of 8.2% (according to the cost of the house) - have I calculated that correctly?

7. This smaller cheaper place looks even better with a yield of over 14% which looks too good to be true - what is the catch? [insert www. at the front] - rightmove.co.uk/property-for-sale/property-31859821.html - why is the rental yield so high on this cheaper place as compared to more expensive places?

8. The first property is 'sale by auction', is there any possibility of getting the house for less than the asking price, which would then presumably increase the yield? Or is that the 'starting price', and the house sells for more than that at auction?

9. Since I expect the rental income to be my only source of income, how can I guarantee the income? Is there some kind of 'insurance' available in case tenants don't pay the rent? If so, how much does insurance cost?

10. I am aware that there are some key responsibilities with being a BTL landlord e.g. a legal responsibility to ensure the gas boiler is properly serviced each year (is it just the gas boiler or other types of heating appliances, e.g. if the house does not have gas but just has electricity, are there any landlord legal responsibilities around that?). Also a responsibility to ensure tenant's deposit money is kept safe and secure. What are the other main legal responsibilities of being a BTL landlord?

11. What are the main pitfalls of doing BTL (e.g. what are the most common mistakes that are made)?

12. Is BTL something that someone in my position should be looking at, as a way to make a regular, guaranteed weekly income of £150+ a week from an investment of approximately 120k? Would an easier alternative be to buy somewhere with a spare room and then let out the spare room to a lodger (under the government's 'rent a room' scheme)?

Thanks

Werdnal

First of all you need to read this post:

http://forums.moneysavingexpert.com/showpost.php?p=41160642&postcount=12

There is no way to guarantee rental income, and infact BTL can bring you a lot of unexpected expense.

I would never buy a property already tenanted - you do not have the opportunity to vet and reference the tenants, and only have a vendor's word for it that they are reliable, good payers etc. You also do not know the terms of the tenancy and whether you can actually end it or evict the tenants should it be necessary.

I think trying to rely on BTL as your only source of income is a very risky idea and not something I would recommend. You need to keep a good contingency fund to cover unexpected repairs and maintenance to the property, and should only base your annual income on 10 months rent, as this allows for voids in lets and other loss of rent. You also need to register with HMRC as rental income is taxable.

DarrenRS

But if the property is blatantly advertised as being currently rented out for x amount of pounds per month (or year), surely that is the case?

Is there no opportunity to see the tenancy agreement beforehand? AST is a common rental agreement and runs for either 6 months or 1 year.

I would be unemployed so the only other option I would have for an income is JSA - not really an option.

Werdnal

DarrenRS wrote: »

I would be unemployed so the only other option I would have for an income is JSA - not really an option.

Not quite - the other option would be to get another job!


You can see ask to see the AST prior to the auction, but what if it is not a standard AST - it may be another form of tenancy, especially if the tenants have been there a long time.

Have you read the link I posted already? And all the links it contains? It is vital you understand all the information about letting and the legal obligations and cost implications. Buying the property is the easy bit - running it as an effective landlord, who complies with all the regulations is where the problems usually start!

Auction properties are usually listed as a "starting price" and tend to go for considerably more. You would also need to pay a commission on top. You may have the opportunity to view it before the auction, you may not. You will also need to complete the purchase within a very short timescale, so must have your capital available quickly.

Will you be buying it outright or will you have to borrow? Do you already have your own property/mortgage/rent to pay?

DarrenRS

I won't need to borrow, but will need to buy myself a small place to live as well (I am currently renting in an expensive part of the country)

holly_hobby

If you are investing your capital purely on the basis that it will provide your SOLE source of income - then I would really tread carefully, if you lose your tenants - you've lost your income (until of course you re-let - which may occur rapidly or take an age).

If you do take on a property with existing tenants, then I would have them sign a new AST of your own - and re-start the 6mth tenancy from your date of completion.

I would also not invest all your capital into property (at least whilst you are unemployed), as it is an ill-liquid asset and in todays market neither offers a quick disposal or guaranteed return (notwithstanding rental income), you therefore need to keep some capital back to also take account of the above & other associated and unexpected costs/repairs not covered by landlords insurance (which I consider essential).

Apart from maintenance etc, there are annual utility checks which all cost a fee, also securing their deposit under regs, the list goes on.

From an income tax aspect - you will have to make annual self assesment returns, so you shall have to register for this, and pay any tax due (on net rental income) via the same format.

Disposal leads to CGT on any gain realised - subject to adjustment by your personal annual cgt relief (if the property has never acted as your main residence pre disposal).

I would also suggest initially buying in an area that you are familiar with, and I would walk before you can run, and just initially buy 1 prop, until you get the hang of being a landlord and all it entails ... after all it might not be for you once you're in the thick of it.

The above are just some of the considerations you need to ponder - tread carefully !

Hope this helps

Holly

G_M

Auctions:
*You need to be familiar with how they work. Properties often go way above the guide price (but not always);
*you need to spend money before the auction on survey AND legals (especially to assess the tenancy), with no guarantee you will not be outbid;

Tenanted properties
* you don't get to choose or vet the tenants - reliable payers? Maybe that's why current landlord is selling!
* you CAN see/assess the tenancy agreement, but need to understand it
* you may find previous LL has skipped many things: gas certificate, deposit etc etc

Far better to buy a vacant property and select your own tenant (with care) and if appropriate your own agent (with even more care).

Given that some of your questions are basic and you admit to having limited knowledge, read my post as advised above AND read all the links within it.

Posting a few adhoc questions here is no substitute for fully understanding what you are getting into, however accurate the answers you get here to those questions.

It can be done, but treat it as a business. Research fully and then prepare a business plan and budget.

G_M

holly_hobby wrote: »

If you do take on a property with existing tenants, then I would have them sign a new AST of your own - and re-start the 6mth tenancy from your date of completion.

Holly

That asumes the tenants are willing to sign. They don't have to. They already have a perfectly valid tenancy agreement. You buy the ongoing tenancy as well as the property.

Werdnal

holly_hobby wrote: »

If you do take on a property with existing tenants, then I would have them sign a new AST of your own - and re-start the 6mth tenancy from your date of completion.

Sorry Holly but you are wrong here. When you buy a tenanted property, you take on all the existing terms and conditions of the existing tenancy and cannot force a tenant to sign a new agreement until their existing one expires. If their tenancy fixed term has already run out and they are on a periodic tenancy, they can choose to stay on that agreement. The only way change things would be to get them to leave by issuing notice and evict them - through the courts if necessary.

There are also other types of tenancy agreement, which are even more secure to the tenant, and you may find you cannot change any details at all. Assured tenancies and regulated tenancies for example, make it very difficult for the LL to change them, or even evict the tenant. Regulated tenancies can even automatically pass to a surviving relative if the current tenancy holder dies!

Read the section on types of tenancy here:

http://www.direct.gov.uk/en/HomeAndCommunity/Privaterenting/Tenancies/DG_189101

I would also question why the current LL is selling the property. Have they neglected their repair and maintenance obligations and let the place get run down and need money spent on it. If you buy it in a poor state, beware that all the costs of bringing it back to the correct letting standard will land in your lap!

holly_hobby

I'm not wrong about my own opinion - which is what my statment was, in that I would have them sign my own new AST - and which is why I wouldn't take on a tenanted property in the first place.

But I do appreciate why you have made the post for the OPs benefit.

H

G_M

holly_hobby wrote: »

I'm not wrong about my own opinion - which is what my statment was, in that I would have them sign my own new AST - and which is why I wouldn't take on a tenanted property in the first place.

But I do appreciate why you have made the post for the OPs benefit.

H

A sensible approach which we all seem to agree on. I think the misunderstanding comes from your wording:
" I would have them sign my own new AST " which implies you would make them sign - which we all agree is not possible.

Perhaps you mean: "I would prefer, or want, them to sign my own new AST ..."