Buy-to-let when I only let myself?

B.Stadley

Hi all. I have been looking around these forums for a while and wanted to finally dip my toe in and see if I couldn’t get some advice on what best to do in my situation.

I live with my partner in rented London accommodation paying £950 per month total. I have been following the property market for a while now, watching prices and trends and trying to make sense of all the madness. I have also been talking property to whoever I can find who wants to talk about it – trying to immerse myself in the intricacies of how it all works. I have had some people on one hand telling me that I would be foolish to get into property at the moment and that the market is at a high, interest rates are too high and prices can only go one way. On the other hand there are a fair proportion of people telling me that whatever experts and trends might suggest, property over the last 20-30 years has quite consistently doubled in value every 7-8 years. They point to the fact that even with the slowing down of growth that we are currently witnessing, we are still heading for an 8% growth year – and 8% on £200,000 represents a much better deal than getting 5% or so from a savings account on just your deposit value.

I have thought long and hard about it all and can’t get past the fact that getting on the ladder, on whatever terms, seems to be the way forward. So, my question is– does it make sense to buy a property to let out when I am letting myself? I have only recently moved in with my partner and so we don’t feel ready yet to buy a place together to live in. As a first time buyer is it wishful thinking to expect a lender to give me a buy-to-let mortgage when I don’t have a mortgage history for a property of my own?

Finally, some numbers to quantify the above and maybe help people help me! I would be looking at a property in the region of £200,000 - £250,000 and can provide a deposit of my own of £35,000. From what I can see, best and case scenario in terms of repayments look to be between £715 and £929 – given that the type of property I am looking at is similar to the one I live in now then it would appear I would have no problem with tenants covering my repayments – in any case I am not necessarily interested in creating huge yields from this, more looking at it as a zero sum game where equity after x number of years is my return on investment.

Would be great if anyone could advise or comment!

B.Stadley

pcwilkins

B.Stadley wrote: »

They point to the fact that even with the slowing down of growth that we are currently witnessing, we are still heading for an 8% growth year – and 8% on £200,000 represents a much better deal than getting 5% or so from a savings account on just your deposit value.

The 8% growth would only pass into your hand if you bought the property outright. If you have to take a mortgage for a proportion of the cost you need to consider the cost of the borrowed money.

I.e. it would be stupid to borrow money on a 10% interest loan to buy an investment which gave you only 5% interest. Yes, your investment is growing, but you won't benefit.

Whether this is applicable in your case depends on what mortgage rate you can get and how much deposit you can afford.

I have thought long and hard about it all and can’t get past the fact that getting on the ladder, on whatever terms, seems to be the way forward.

Not necessarily. Don't forget that at the moment your savings are sitting there earning you interest --- effectively paying a proportion of your rent. If you buy a house then sure your rent payments are gone, but so has your savings interest, and on top of that your paying interest on your mortgage. To work out which is better you need to consider 4 factors: savings interest, rent payments, mortgage interest, and house price inflation. So "on whatever terms" is not quite true --- renting is better than a mortgage with 100% interest, for example.

So, my question is– does it make sense to buy a property to let out when I am letting myself?

Depends on the above four factors. If the rent payments would cover your mortgage and the value of the property rises, then your quids in. If you can't get tenants/rents fall/property value falls, then you might end up out of pocket.

I have only recently moved in with my partner and so we don’t feel ready yet to buy a place together to live in.

Well if you can manage to live together in a rented house then I don't see why you shouldn't manage in a bought house. My advice is if you don't love each other enough to make a solid commitment and get married then you shouldn't be living together anyway :rolleyes: but then I'm just an old-fashioned right-wing loony.

As a first time buyer is it wishful thinking to expect a lender to give me a buy-to-let mortgage when I don’t have a mortgage history for a property of my own?

As far as I know it shouldn't make any difference. If you can afford the repayments I don't think they will mind whether you have a property of your own or not --- the loan is secured on the property you are buying.

Finally, some numbers to quantify the above and maybe help people help me! I would be looking at a property in the region of £200,000 - £250,000 and can provide a deposit of my own of £35,000. From what I can see, best and case scenario in terms of repayments look to be between £715 and £929 – given that the type of property I am looking at is similar to the one I live in now then it would appear I would have no problem with tenants covering my repayments – in any case I am not necessarily interested in creating huge yields from this, more looking at it as a zero sum game where equity after x number of years is my return on investment.

A little simplistic. Your tenants may cover your repayments but have you considered the cost of maintenance/insurance/agency costs? What about when interest rates go up again? A small rise could soon mean your rental income wouldn't cover your mortgage.

Something I read fairly recently was that you shouldn't BTL on the assumption that the property value will rise. Some landlords are taking less rent than their mortgage payments and making up the shortfall themselves, assuming that the property will rise in value and they will get those shortfall payments back. Here it is:

Property website www.publicangel.com says recent increases in interest rates and further possible hikes could push some landlords over into the red with their mortgage payments.

In the race to increase portfolios, some landlords are subsidising the rents received with their own money to meet the increasing mortgage payments.

This method of property investment promoted by some “property gurus” will lead to financial ruin for many newbie investors.

Public Angel’s Nilesh Gohil said: “It angers me to listen to so called property gurus preaching to new investors that being out of pocket every month is a good solution to cashing in on long term capital gains in the future.

“Every savvy property investor should know that, in general, property investors should plan for a positive cash flow and not rely on capital gains. Any capital gains achieved should be considered as a bonus.”

Hope that helps,

Peter

pickles110564

As long as you can cover about three months payments a year when you have no tenant's and don't mind all the hastle and it is going to be a very long term investment go for it

Jonbvn

Most lenders have LTV of 75-85% on BTL mortages. On a 250k house, your 35k deposit may be too low.

Anyway, assume you can get the mortgage. So you borrow 215k:

Interest Per Year @7% = 215 x 70 = 15,050 (pricing in some IR rises)
This equates to GBP1254 per month, without any repayment of capital.

Most lenders require the rent to be at least 120% of the mortgage interest:
Req'd Rent = 1.2 x 1254 = 1505 per month.

Given the above, most lenders would not offer your a mortgage. Those that would will likely be "sub-prime", and they will offer you much higher rates than 7%.

You decide......

Snow_Dog

Even if you were more lucky and got a 6% deal on the mortgage, borrowing 215K@6% is still 12,900pa, ie £1075 per month.

Plus you would be losing £145 per month in interest on the £35K that you reckon to have earning 5%.

So cost of mortgage and lost interest = £1,220 per month

If you reckon on renting out this property at £950 per month, you then have to take off agents fees, 10%? Down to £855 per month revenue.

If you are lucky you might average one void month per year, averaged over the year £950/12=£79 per month down. Now down to £775 per month revenue.

Maintenance, there will always be something, lets be really conservative, £25 per month average. Down to £750 per month revenue.

So you will be subsidising your tenant to the tune of £1,220 - £750 = £470 per month.

Still you've always got the increase in the property value, however bear in mind purchase and sale transaction costs. At >£250K the stamp duty on purchase alone is £7,500. When you come to sell any profit is taxed as CGT (you dont want to really know how much this is).

Although lets face it, while you quote property values doubling every 7-8 years. Well its not exactly linear is it, 90-97 property values did not definately double, 98-05 they more than doubled, draw a conclusion.

So, its going to cost about £10K up front to buy, you will be subsidising your tenant by £500 per month, and potentially you are buying at one of the most expensive eras in history. Sounds foolproof.

B.Stadley

Ok, thanks very much for everyone's comments (uneccesary sarcasm aside...). I think for now I am going to sit tight and see what happens. I am managing to put away a fair amount of money each month, so once I can break that deposit barrier where I wouldn't have to subsidise I may take the plunge - in the meantime I will be able to monitor the market and see where these increasing prices and interest rates take us to...

Brian.