Is this a good retirement idea?

chrishar

I am thinking of buying a leasehold flat which is a good price due to the lease being shorter than average. It has 63 years left.
The figures I have worked out are:
Property price £135,000
Deposit £27,000
Mortgage £108,000 (repayment-see below) £630 a month @ 5%
I will find the deposit by re-mortgaging the house I live in which has gone up in value since I bought it.
My idea is to buy the flat and rent it out for £850, which covers the mortgage and any extra I will put aside for repairs etc etc.
The long term plan is to retire in 25 years once my current mortgage and the new one ends.
I will hopefully have the house I live in paid for, plus the flat I buy paid for as well. At this point I can collect the whole rent to pay my bills and live comfortably.
As I am currently 35 it will mean I retire at 60, and the lease won't run out until I'm 98 if I make that lol.
I currently have no other retirement provision but I can't see that I'd need anything else if this idea works, and I think in this area (south east) the flat will always rent out in no time.
Why I am here is that it all sounds too simple, I feel like I am missing something, so I want to run it by those in the know on this forum and see if there are any flaws in my plan!
So, I would appreciate any replies and good and bad views on my idea! Thanks very much, Chris.

Rednax

You won't get a mortgage on a place with a lease of 63 years.

chrishar

What do you mean, I've already been offered one, once it's paid off it will still have 38 years left. I just need to know if the idea is solid or is there anything I'm missing.

mania112

Not a huge issue, the estate agent/solicitors will know this and will surely get it extended and this is not normally a problem to do.

Anyway, there is no substitute for a pension (in terms of a vehicle to prepare for and fund retirement)... if there was a substitute it would be an ISA.

I don't want to be too harsh against your plan (at least you're making one) but a retirement of one property is fraught with danger and not very tax efficient. Dangers include void periods and falls in property value (among others).

I suppose if you were to say 'I'm going to raise some money to pay into a pension by doing a Buy to Let' your plan is almost instantly perfect.

If you rent a place out for £850pm which costs you £600 in rent and maintenance you could/should put £250pm into a pension.

Rednax

If you look at your mortgage offer/survey it will state they will only lend you the money if the lease is above 70 years. However, as mania above says, hopefully you the can come to an agreement with the estate agent/owner that they renew the lease as part of the sale. Then your problem is solved.

Rednax

Although the owner will more than certainly want more money to include the lease renewal (it's cheaper for that reason after all) so you will have to budget that into your calculations.

SPnomore

chrishar wrote: »

Mortgage £108,000 (repayment-see below) £630 a month @ 5%
I will find the deposit by re-mortgaging the house I live in which has gone up in value since I bought it.
My idea is to buy the flat and rent it out for £850, which covers the mortgage and any extra I will put aside for repairs etc etc.

Is that after estate agency fees which could be 15% ongoing every month, plus admin fees then subtract tax, ground rent, insurance etc. Then count on a couple of months a year non-occupancy.

grey_gym_sock

i doubt that buying a property with a 63-year lease, and just letting the lease run down, is optimal. if buying such a property, it's probably better to get the lease extended (which costs a fair bit, hence the lower price).

your estimated gross rental yield is c. 7.5%, which is not bad but not brilliant. i don't feel that's high enough to compensate for (eventually) giving up your capital.

you may not care about giving up capital, so long as it lasts long enough to see you out. but it would be inflexible to end up holding a property with a very short lease (so a buyer couldn't get a mortgage). what if you wanted to sell it to fund a care home annuity, but couldn't because its value was too low? or just wanted to sell because being a landlord became too much hassle at age 80?

property can be a part of retirement provision. but all in property is poor diversification (though might be OK for ppl who are experts in the field). and all in one property is even more risky.

MEM62

It is not a bad plan providing that it is only part of your overall plan for funding your retirement. Having your entire retirement rely on a single investment is risky. You will need something in a pension or other investments also.

By the way, have you considered the fact that any rent you collect is subject to income tax? You can offset against mortgage interest but at the end of the day you will have a tax liability that will reduce the income that you receive from renting the property. You will, of course, also need to cover any vacant periods.

atush

I don't think it is a good plan, unless you also negotiate a new lease. As you won't be able to sell ont he property w/o one.

And you also don't have at 850 a month, eno0ugh wiggle room for fees, taxes, insurance and void periods so you; have to set cash aside for that.

Look for another flat, with a longer lease, that you can add value to. And save more in the mean time.

And open a pension too, as you ca n't retire on one rental property.

chrishar

I think it might be more hassle than it's worth. I don't like the idea of the lease becoming so short that I can't get rid of the place if I changed my mind. Is the whole leasehold arrangement a way of keeping landowners wealthy? I guess my idea goes against the way a buy to let should work, I will be opening myself up to more tax by using a repayment mortgage. Is it easy to compare putting the money into this property, with for example, putting the money into ISAs or other savings?