Is this a good investment purchase?

chrishar

I am thinking of buying a two bedroom leasehold flat which is a relatively low price due to the lease having 63 years left to run.
The figures I have worked out are:
Property price £135,000
Deposit £27,000
Mortgage £108,000 (repayment to compensate for the expiring lease) £630 a month @ 5% (possibly can get a lower rate, that's just a guide)
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. There are no service charges and only a small ground rent under the existing lease terms.
The long term plan is to retire in 25 years once the mortgage is paid and live off the rental income. By the same time my own residence will be fully paid for as well.
As I am currently 35 it will mean I retire at 60, and the lease won't run out until I'm 98 - so should see me out.
In my area demand is always high and it should rent out easily.
The only thing I can see wrong with this is that I wont have an asset to pass on to my kids, but I already have my house I live in to do that. This purchase would solely be for an income.
Am I missing anything else or this is a good idea for a retirement income or could I use the £27k better elsewhere? If I bought a longer lease property for the same price I'd only get a one bedroom which would rent for only £650.
Thanks
Chris

xoAmyox

Would you be able to get a mortgage on a property with such a short lease?

If so, is your deposit going to be enough? Most buy-to-let mortgage providers will require a minimum of 25%. Please note, that a normal residential mortgage will not be appropriate.

Do the terms of the lease allow you to rent it out? If so, this may come with conditions and/or charges.

You say there are no service charges, so are you prepared for a large bill if the roof needed replacing, or any number of other major works were planned?

chrishar

I was told by a mortgage broker I'd need 20% deposit and a 125% rent compared with mortgage. I will use repayment so any decrease in value is more than met by the capital repayments. Renting isn't a problem there are several other flats rented out in the same block. It's a ground floor and I think only the first floor flats have responsibility for the roof.

kingstreet

Typically, you'll need 25% deposit. There are a couple of 80% offers around, but the rates aren't great.

You'll need the rental income to be 125% of the monthly mortgage interest, assuming a rate of perhaps 6%.

With 63 years left on the lease, you'll also be restricted on the lender pool open to you for that reason.

Suarez

I'm no expert but it seems a waste of a lease to not pay for a lease extension. Have you asked how much it would cost? And what value would the property be with a lease extension?

chrishar

Hi I can only afford the deposit for flat this size, as I said if I was to buy something without a lease issue I could only get a one bedroom or studio flat which wouldn't give me as much rent income. So I wouldn't be able to afford to extend it anyway. If I did require 25% deposit I would struggle also. Maybe it's not as good investment after all.

kingstreet

Does the broker offering 80% know the lease is so short?

The lender willing to do one, may not be willing to do the other.

chrishar

yes the broker said its not too short to cause a problem. apparently its more of a problem when its under 60. once ive got the mortgage and paying it then i dont have to re-mortgage i can just leave it on the SVR for the remaining term.

Swafe

As above, you will pay extra %age on the interest (which remember, could still rise in a few years time) meaning you are probably going to pay a fair whack in just interest alone.

You will get money back but this depends how much you can occupy it, you are probably working on a 100% rental rate but in truth you might not get someone straight away, you might get people who dont pay, or it sit empty between tennants that needs to be factored in, plus the additional stress this will bring unless you want to pay a 10% management fee which will eat into your returns.

Talking about eating into your returns have you thought about the tax side of things? Your 35 so Im guessing your working and therefore will have used up your tax free allowance, so will pay a minimum of 20%, and possibly knock you into the 40% tax bracket which will reduce your projected yields massively.

I would steer well clear, unless you know exactly what your doing, a smaller freehold property would be a smarter move, lower repayments as youll get a mortgage from anyone, and at a good rate, maybe less returns but thatll be offset by the fact that when your 65 and want to retire and dont want to be a landlord you can flog it off - where a house with a 40 year lease will be worth considerably less.