New property BTL, is it a good deal?

paddcomp

What are peoples opinions of starting a new BTL property in the current climate?

There's a new development next door to me with one house remaining that's been up for sale for nearly 12 months. I was hoping to offer the developer under what he's asking and if accepted I could buy a new 3 bed detached for £170K. Several other properties have been sold for less than the original asking price (well done nethouseprices).
I'd be looking to get a £130K mortgage, making up the deposit from cash investments (currently earning 10%).
Looking at rental prices in my area (NW England) most 3 bed properties can only achieve £695 p/m maximum. After agents fees / insurance I think I'll only just be able to cover an interest only mortgage.
This means that to make a profit I'd require an increase in property value every year for the next ten years (I'd be looking at a 7-10 year return).
The press tells us that property is still increasing, but as the developer is struggling to sell the house at this price when it's new, will I see a profit after tax in the 7-10 year time frame?

I'm tempted to leave my cash in ISAs, although this way I'm only gaining on the cash value not the full £170K property value.

dunstonh

new properties tend to be slightly over priced. Plus your rental income is only giving a rental yield of 4.9% before tax and charges/costs.

As a mortgaged buy to let is a high risk transaction is 4.9% really enough to justify that risk in a time of rising interest rates which is putting pressue on the house prices?

This means that to make a profit I'd require an increase in property value every year for the next ten years (I'd be looking at a 7-10 year return).

Pigs might fly. Sorry but 7-10 on property prices is unrealistic. Like any projection it may happen but a 10 year term isnt long enough (those that bought at the high point before the 91 property crash have only just hit surplus in the last few years).

The returns for the risk you are taking doesnt seem justified. To put that another way, would you borrow £130k and invest that on the stockmarket? That currently has greater potential than property and is outperforming it as well. The concept is identical though.

Alan_M_2

You'll find the following Financial Times Article interesting:-

http://www.ft.com/cms/s/3aa8be62-a7ef-11db-b448-0000779e2340.html

mark_casey

I think that if you want to start in buy to let you need to get in at a much lower price for first one and serioulsy think about 1 or 2 bed flats, as theese have the best growth potential .
you can see how much the mortgage would cost on the bbc site ( just search for mortgage calculator) then multiply the intrest only figure by 125% to see how much any leander would expect the rent to be.
if theese figure dont match then its a no go, not even with a barge pole.
house prices are realalistically expeected to rise by 2-4% a year and that would give a good return in the long run.
I can provide an excell speardsheet to work it out over a 22 year period if you enter the values you get via the mortgage calculator . so pm me and ill send it to you

Sisyphus

don't forget to factor in voids (periods between tenants with no rental income)
maintenance
reasonable wear and tear (can't count on deducting it from the tenants' deposit)
what do you do if your tenant defaults on the rent? how negligible do you feel the risk is?
letting agent fees?
with rental yields as they are at the moment, how confident are you that you will have a sufficient capial gain to offset all of the above?

mystic_trev

As far as I'm concerned there's only one way to look at BTL and that's for "Income" with long term growth as a bonus, that's how I looked at it when I bought ten years ago, and my opinion hasn't changed.

The reason this whole BTL Ponzi scheme is going to go "tits up" as because people think it's easy money - It ain't and things are changing. The current BTL investors are now subsidising their tenants (in many cases) by rents not covering mortgage payments.

If you want to take a punt on property going up in value, bet on it with either betfair, or take a "spread" with the likes of IG Index. You're less likely to get burnt, don't have to pay up front charges such as stamp duty, solicitors fees etc, and can move out of "your positions" quickly! You also don't pay CGT on your profits, if you make any.

paddcomp

Thanks for the feedback. I have had flats as rental properties in the past so I am aware of the pitfalls in being a landlord. When I had a house converted in to 2 flats the rental income was twice the mortgage outlay, but the capital gain was lower.

Financially it is as I thought, too higher risk! I can't see how so many people buy all of these BTL properties, I suppose if you're in a high rental area it makes it more viable. However I don't see rental returns keeping up with increases in purchase prices.

I am fairly risk averse and hence will leave my cash in ISAs, especially as the returns are pretty good currently.

sm9ai

mark_casey wrote:

1 or 2 bed flats, as theese have the best growth potential .

Funny, I would say they have the worst.

If you must do it then buy a house not a flat.