Rent out mortgaged home, live in part owned rental house.

Waste_not

Hi all, I posted a while back with a plan to move home/make money. Want to see if you guys think this might work, and give me some advice/help me see pitfalls of this plan.

I bought a 3 bedroom semi detached house in Northern Ireland for 1
£198000 in late 2007. It's now worth approx. £110000. Mortgage owed through ulster bank- about £116000. I earn about £35000 a yr. I part own a rental property with my dad, but kind of got a loan from him that's to be paid back through the eventual sale of this rental- so it doesn't really come into it.

I'm recently married and my wife will graduate uni this yr and hopefully become a teacher. Even if not I'm expecting r household income to increase by between £10 to £20000 depending on what job she gets.

We want to move home just to have a place which is 'ours' instead of 'mine'.

All together I have about £24000 in various savings (current account, saving for a new car account, investments- isa's etc). Some r making goodish returns eg. 6400 invested 3 yrs ago now up to 7771, others not- e.g 5000 just sitting in a current account.

Does this sound like a good plan:
Rent out my own home
Buy a 3 bed semi detached at auction- hopefully get it for £55000, require about £10000 to do it up eg. Put kitchen etc in (its a repossession and other similar houses in area suitably done up r selling at over £100000). Buy it along with my dad and his mate (both can be trusted)- so we all own a third each.
We worked out we cud get about £500 rent from it. Thinking- syphon of £100 to pay for repairs/rates etc. that leaves £400 divided by three- £133.33 per month for each of us. However as I would be renting, was thinking just I pay 500 minus 133.33.

Since I currently pay £515 per month mortgage on my current house - for next 35 yrs- currently at stv rate of 4.1% (bcuz of negative equity)- which wud b covered by the new renters, I cud pay extra off this mortgage (as I'm paying less for the new place I part own and am renting)- and save money by paying my existing mortgage of earlier.

I worked out that for my approx. £20k investment I wud get a return of about 6%. Plus the benefit of paying of my existing mortgage a bit earlier, and potential of getting (part of) a bargain house while the property market is low. As well as keeping wife happy by moving.

Does this sound good? Am I missing something really obvious?

I am willing to take a bit of a risk to make money- but not willing to be homeless.

Thanks in advance for your responses.

wwtrend

I appreciate that you and your wife would like a home of your own but if you can get a house at auction for £35K , require £10K for refurb and selling price is £100K there's £55 k profit in this property if you sell it straight on. Would it not be better to delay your own home plans for a few months, sell this property giving you, your dad and his friend around £17K each after legals etc which then gives you £37K to put towards another one. If you find another one at auction for £35K that only needs a 10K refurb and can borrow £8k from you Dad pay him back at £500 a month you will own you marital home outright after 16 months! Or better still, get another auction properties around the same because with a return of over 100% if these deals are available in your area get in now.. You could easily refurb 2/3 properties in a year so if you put your own homes off for a year and earmark the third one for your own home you'd have a chunk to pay off towards the mortgage of the one you're in at the moment or to put towards a deposit on another property. A word of caution though if you are not familiar with buying at auction as the catalogue price may not be the eventual price paid for at auction. You need to be familiar with the documents to spot any hidden problems, get the lawyer to check them out in advance if not, and to have seen the house to be sure of the refurb costs. One year wait and owning a home outright and a chunk of money to pay of the other mortgage or reinvest vs £133 a month would be an easy decision for me. Congratulations on your marriage though.

Waste_not

Thanks wwtrend- good idea! Though the profit is a little less, as the total cost of buying and doing house up is likely to be 60 to 65k. But that's still a 35k profit if sold for 100k.

It's not essential that I move into the 'rental' property, was just an idea, as had/have a 5 year plan to pay of the mortgage on my own home (basically using my wife's soon to be new found pay packet to substantially overpay mortgage- hopefully at over £2000 a month).

I think ur idea of buying then a quick sell is a good idea and ill pitch it to my dad and his friend. Even if I am wrong on the resale price (though I know new builds in the sane development are selling at 115k, repossessions- like the one I'm considering buying, slightly less- but still between 87 and 115k), at that point we cud just rent out and wait for a bit of a rise in the property market (at 65k for a nice area 3 bed house with 2 bathrooms and an ensuite I don't think the market will crash way below this value- it sold for 215k at height of market in 2007- that's why it's a repossession. A friend of mine lives right beside the house so knows why it was repossessed- basically the guy couldn't afford repayments due to property price crash. He gutted the house of kitchen, toilets, even the boiler before bank repossed- that's why it's going at auction so cheap. Apparently you can't get a mortgage without a kitchen.)

sandsni

Make sure you understand all that comes with being a LL before you take that route. A deposit protection scheme is due to come into force in NI this year, as is LL registration. How old is the house? If it's pre-1945 you'll need a certificate of fitness from Environmental Health. There's a bit of a glut of rental properties in NI at the minute, mainly due to people who have been unable to sell their houses choosing to rent them out instead. Is your house in an area of high demand for rentals? Could you afford void periods or a tenant getting into arrears? You will still be responsible for the structural maintenance of the property, so you have to budget for that too. Also, rates are payable even when the house is empty. The housingadviceni website has some basic information for private LLs regarding rights and responsibilities and LANI also have some useful info.
If you can handle being a LL, it definitely sounds like a good idea to buy a 2nd property now while prices are still reasonable, and it might give you time to "ride out" the drop in prices until you can sell your house for at least what you paid for it.

tim123456789

wwtrend wrote: »

I appreciate that you and your wife would like a home of your own but if you can get a house at auction for £35K , require £10K for refurb and selling price is £100K there's £55 k profit in this property if you sell it straight on.

And I would say that's a very big if.

Every man and his dog is looking for such bargains at auction and when they exist either they don't sell for 35K or there is some hidden thing wrong with then that means they cost a lot more than 10K to do up (or that 100K selling price is way way optimistic).

It is possible to buy-develop-sell properties for 50% profit but not at 35K purchase prices.

tim

Waste_not

The auction price is 40k, but were willing to go to about 55k. The house was built about 5 yrs ago- a new development. I have a friend who lives next door- they r good houses. The reason it's so cheap is because its a repossession and the previous tenant ripped out everything from fireplace to kitchen to boiler and toilets. There is no signs of water damage on house and electrics are fine. The house has generated a lot of incidents and may well go for 70 or 80k, but here's hoping it won't as the guide price at auction shouldn't be that far off (most properties sold at auction for this estate agents go for between 8 and 15k more than guide price/minimum price).

Done up this house could be a home as opposed to purely only a rental property- unlike most other properties I've seen at this prie range.

I didn't know about ll registration or deposit protection scheme so will have to look into that. My dad has a few rental properties and is relatively experienced in managing them, so I'm happy enough from that perspective. As for affording it if cant get it rented out for few months- as we would be buying it outright there'd b no mortgage to worry about. Only costs would be rates and general maintenance. With setting aside £100 a month from rental income purely to cover these costs and having home insurance should mean that the house will pay for itself and generate a profit of £130 per investor per month.

Only thing is- does anyone know about how willing banks are to consent to let (my own currently mortgaged house)? I am currently with ulster bank, but not tied into any 2 yr deals etc- I'm free to go to other lenders.

It's sounding like a good idea to me atm- either buy it and sell it on if can make a quick profit, if not, rent it out or live in it myself (while then renting out my current home).

Thanks guys. If you think of anymore potential pitfalls or good ideas- let me know!