BTL - Is it really worthwhile?

Alex92_2

Hi there,

I will try and keep this as short and as simple as possible so I dont bore any of you.

Is BTL really worthwhile?

I have read a couple of books on BTL and originally always planned on "making my money" in BTL property for a few years now. I am 21 years old and have £50K in savings. I still live at home with my Dad and pay £250 a month rent to him. However, recently, he proposed the idea of putting my name on the house and my "rent" going directly to contributing towards the mortgage. That way on paper I will have a "residental mortgage" and a home and therefore will be much easier for me to get a BTL Mortgage (I know how hard they are to get if you dont already have a residential mortgage).

Anyway, I have been researching all the costs and tax issues (what you can and cant claim back on) and I am starting to ask myself if it is really worth it?

The way I see it is, to work out the "True Net Yield" of a property, you will need to have the Total Annual Rent (e.g. £18,000) minus the yearly running costs (£2,000) =£16,000 divided by the price of property (£250,000) which leaves you with 0.064 - 6.4% yield. This isnt taking into account that it is more than likely at least one month will be void, so will probably knock it down to 5.8% or around there. (excluding one month at £1500 for void periods)

But what a lot of people neglect to say in these books is the total amount that you will receive if you left your money splashed around in several banks, getting an average of say, 3% interest a year, £1500 PA / £125PC ex VAT deductions.

However, If I was getting a £250K place with a 20% deposit of £50K, and had a 4% fixed mortgage over 40 years, that would be £666.67 interest only and £835.88 repayment. If I wanted to calculate (roughly) the rent, as 125% of mortgage, then that would give me £1043.75.

Remove £835.88 (repayment mortgage) from £1043.75 and you are left with £207.87, then you have the following;

• Letting Agents fee
• Ground Rent/Service Charges (If leasehold)
• Insurance Premiums
• Replacements of fixtures/furnishings
• General Maintenance (inc. annual gas inspection)
• Energy Performance Certificates (EPC)
• Deposit Protection
• Advertising/Marketing
• Legal Expenses
• Surveying prior to initial purchase
• Stamp Duty after initial purchase
• Phone calls/Travel/Stationary with tenants
• Membership to Landlord organisations
• TIME (most important for me)
• Mortgage Arrangement Fee's (usually min of £500)

Now for the sake of my own personal time ALONE, £207.87 would be completely worthless for me. For the amount of hassle and risk, I would rather just leave it dotted around in bank accounts and focus my time on trying to improve my main salary.

The only reasoning I can see for making any sort of money from BTL property would be if;



You had access to a huge amount of funds and could get the mortgage rate down very low (by decreasing interest and increasing deposit - less to borrow) Or the obvious one -Capital Growth on property or Rents increasing.


If I chose to do Interest only mortgage, I wouldnt be paying off any of the property and if the property price increased, I would only get Increased percentage on the £50K, which wouldnt been as dramatic as the whole £250K.


I really dont know what to do. Sorry for the rant. I find it helps me clear my thoughts if I just type out everything and see what happens



Would it not be better for me to invest in something like Vanguard Life Strategy 80, increasing pension payments, or even just keeping it ISAs/Easy Access accounts until I can build up more of a deposit?

I really dont know what to do. My head feels like it's going to explode. I feel a bit like a sitting duck with having £50K savings in the bank earning measly interest. I feel like it should and could be doing something more productive.


Thanks for reading.

Alex92_2

Fully aware BTL isnt a "get rich quick" scheme. Just trying to figure out what would be best to do with money. Ideally I'd like to have around 5-10 BTL properties and get a nice little monthly income from it to add to my main income, but have it fully managed by letting agents. Then when I come around to retiring, I can either sell off the properties or live off the rent/pension incomes.

00ec25

whilst yield is a useful measure you cannot really compare it with the return on a cash investment such as a savings account as the latter has no capital potential

also bear in mind that your real rate of return is with reference to the fact that you have invested 50k so the net rental profit you make should be compared to the return on 50k in another form of investment which as you say if compared to 50k at bank interest rates will be beaten by a BTL if you pick the right one.

BTL is high risk compared to cash savings so is not a good comparison anyway. If looking at alternatives to BTL for rate of return you need to look at an investment vehicle which is more risky than cash savings eg: corporate bonds, equities, peer to peer lending etc

Alex92_2

Thanks for the reply.

I was using easy access bank accounts as a "worst case scenerio" for an ultra safe comparison.

I guess if I look at stocks and shares then I have the risk of losing ALL of my money, where as with property, I will never lose everything, I understand negative equity - but say I bought a house for £250K in cash outright, it is very rare it is going to drop £250K in price.

Would you think its a good idea for me to buy my own property first and learn some more about it. I am aiming for 50% deposit on my first property, as the amount im borrowing will be less and the interest rates will also be less. My girlfriend will also move in and pay 50% on everything except deposit, which will make things much cheaper too.

I think that maybe the best idea for now. With my salary, I will still be able to save up quickly if my outgoings for the property/living are under say £1000.

Thrugelmir

Alex92 wrote: »

Ideally I'd like to have around 5-10 BTL properties

How do you intend to scale up i.e. raise the capital to buy the properties and also to generate the cash (after tax) to repay the mortgages.

bitsandpieces

If you get a BTL property with a £50k deposit + mortgage it's a leveraged investment. This means that changes to the capital value of your property can have more pronounced impact - if you buy a £200k property then a 25% increase in capital will value your money while a 25% decrease will write off your entire deposit. This means that risk and potential reward are both increased.

How much is left on your Dad's mortgage compared to equity in the property? Not sure what current lending criteria is like, but you might struggle to get a BTL mortgage if you're seen as overstretched on your residential mortgage (and think carefully about 'going on the mortgage' - this will mean you become part owner of the house and become liable for the whole mortgage, with all that entails).

Have you looked at how long you would need to save for in order to buy a BTL property for cash in a cheaper part of the country? That could be something else to think about - though may be too conservative if you're planning on building a BTL business to generate lots of income.

dell12

It's a fair point. BTL isn't the cash cow many people think it is.

Working in property however I do know abit about it.

Certainly in London over the last 20-30 years average annual BTL returns have been around 10%. This is comprised of around 4% in rental return and 6% in capital growth - something which you've not included in your calculations.

anselld

You should not be deducting the repayment mortgage amount as it includes a significant amount of repayment of capital which distorts any comparison with other investments.

houseimprover

I'm a BTL'er (by circumstance, not really choice)......its not all its cracked up to be and the only reason I stay in it is my mortgage on my BTL is 1.49% and my tenant is as secure as it gets.

As soon as the tenant leaves or my mortgage starts rising I am out of there.

King_Nidge

out of interest why doyou say that?

Alex92_2

Thrugelmir wrote: »

How do you intend to scale up i.e. raise the capital to buy the properties and also to generate the cash (after tax) to repay the mortgages.

Will be able to buy properties using money/savings from my main salary. Will be able to repay the mortgages with my salary and wouldnt stretch myself, so that if all the properties were void, i'd still be able to pay for them comfortably from salary alone - not relying on the rent from tennants. However, the chances that every property would be void at the same time would be rare to say the least.

bitsandpieces wrote: »

If you get a BTL property with a £50k deposit + mortgage it's a leveraged investment. This means that changes to the capital value of your property can have more pronounced impact - if you buy a £200k property then a 25% increase in capital will value your money while a 25% decrease will write off your entire deposit. This means that risk and potential reward are both increased.

How much is left on your Dad's mortgage compared to equity in the property? Not sure what current lending criteria is like, but you might struggle to get a BTL mortgage if you're seen as overstretched on your residential mortgage (and think carefully about 'going on the mortgage' - this will mean you become part owner of the house and become liable for the whole mortgage, with all that entails).

Have you looked at how long you would need to save for in order to buy a BTL property for cash in a cheaper part of the country? That could be something else to think about - though may be too conservative if you're planning on building a BTL business to generate lots of income.

I think there is about £200K left on his mortgage and the value of property is just over £1m. I'm not saying that I pay for his entire mortgage, but would contribute my rent towards the mortgage to make up the totla payment. His job is extremely secure, so there is no way if he got sacked I would be left to pay the whole mortgage. It would never come to that.
I briefly toyed with the idea of looking at a cheaper part of the country, but I dont feel comfortable in buying a property for letting that is that far away and in an area that I knew nothing about. The only way I'd ever consider it, was that if it was a holiday home for my family and I could rent it out in peak season on a weekly basis. Something in West country on the beach perhaps, or somewhere abroad. The sole purpose of that wouldnt be to make money though.

houseimprover wrote: »

I'm a BTL'er (by circumstance, not really choice)......its not all its cracked up to be and the only reason I stay in it is my mortgage on my BTL is 1.49% and my tenant is as secure as it gets.

As soon as the tenant leaves or my mortgage starts rising I am out of there.

This is what im starting to think. I think when capital growth shot up loads in the 90s/00s it was worth it and everyone made a killing, but now it seems as though unless you have a LOT of money, it requires a hell of a lot of time to make not that much money.

I reckon that there will be more money in buying run down houses and doing them up and selling them, then relying on buying to let.

What is my other option though? Unless I put all my savings in my own house and once the mortgage has been paid off, sell it and move to somewhere bigger and keep trying to make money from capital growth alone.

It seems stupid to have £50K, £100K, £200K sitting in a highstreet bank or even ISA earning not much interest. The other options are though, when the funding for lending scheme finishes and interest rates pull up again, I could potentially be getting around 5-8% interest on £100K which would be helpful.

Perhaps I should start reading into Vanguard Life Stategy or increasing pension contributions?

Do you all think I should buy my own house first before a BTL property?

Thanks for all the help!