Pulling the trigger on my first BTL

gagahouse

Purchase price : £215K - 4 bed terrace for student let
Deposit £53750 (25%)
Purchase costs / stamp duty / refurb £ 6250
Total purchase cost £60K

Rent inc bills £ 1800pcm
Mortgage (repayment) £930 (430int, 500 capital) - term 20yrs
Bills £200
Maintenance £100
Void provision £100 (but as there is shortage of student accommodation don't think this will be a factor but will provision anyway)
No agent fees, property is managed by partner who lives locally

Cash Margin : 1800-1330=470 per month

Tax payable@ 20%: 1800- (430+200+100)=1070 =214pm

Return = ((500 capital+ 470 cash margin)-214 tax)=756
756*12 = 9072 per annum
ROI = 9072/60000 = 15.12% net - not interested in gross yield, it's all about the return on capital employed for me

Idea is to make overpayments with cash margin to reduce term to 12/13yrs and own asset outright as eventual pension income vehicle. Not factoring any capital appreciation over term.

Tenants are already secured for next academic year, will have property by May latest giving me 3 months to add an additional bathroom - no problem financing that period myself

Wouldn't mind a critique from more experienced property investors - be brutal if you have to, all constructive criticism is welcomed - am well aware a student let actually requires some work for that kind of return!

somethingcorporate

Looks like the sums add up.

The £60k isn't really capital employed since some of it is sunk in terms of expenses (stamp duty) but you can offset against tax.

The real employed capital is the equity in the house, which is the £54k (and whatever you sink into the bathroom) giving you an even better return over the long term.

Pixie5740

Is it a repayment BTL mortgage that you have rather than an interest only BTL?

£100 for void periods seems very low. Will students still be renting the property over the summer months? £100 isn't even 1/4 of the monthly rent, what if one of the tenants doesn't pay their rent for a month or two?

gagahouse

Pixie5740 wrote: »

Is it a repayment BTL mortgage that you have rather than an interest only BTL?

£100 for void periods seems very low. Will students still be renting the property over the summer months? £100 isn't even 1/4 of the monthly rent, what if one of the tenants doesn't pay their rent for a month or two?

Yes it's a repayment mortgage. Students rent for 12 months, some landlords offer half rent for 2 of the summer months but that's the exception rather than the rule.

I won't let to a student unless they have a guarantor, again this is fairly standard as students have limited credit history and fund themselves via grants/student loan - I think if a student knows their parents / relative are on the hook for payment and the parents know this it is relatively self-policing - no guarantee mind but it's the best I can do to mitigate the risk

jjlandlord

Is the property an HMO, then?

somethingcorporate wrote: »

The £60k isn't really capital employed since some of it is sunk in terms of expenses (stamp duty) but you can offset against tax.

The real employed capital is the equity in the house, which is the £54k (and whatever you sink into the bathroom) giving you an even better return over the long term.

Costs of purchase, inc. stamp duty, are capitalised. They will be taken into account when computing capital gains at the time of disposal.

As such, it's not unreasonable to include these in capital employed metrics (and may in fact be the correct way).

Of course, since the mortgage is a repayment mortgage, the capital employed increases by £500 every month, so the £60k figure is really only correct at t=0. This means that the return will be decreasing.

Pixie5740

gagahouse wrote: »

Yes it's a repayment mortgage. Students rent for 12 months, some landlords offer half rent for 2 of the summer months but that's the exception rather than the rule.

I'm not sure where you get your £100 from. If you end up with a void period of 1 month that would be £1800 not £100. I know you say it's unlikely you'll get a void period but it's not impossible so make sure you have enough cash flow to cover such an eventuality.

gagahouse wrote: »

I won't let to a student unless they have a guarantor, again this is fairly standard as students have limited credit history and fund themselves via grants/student loan - I think if a student knows their parents / relative are on the hook for payment and the parents know this it is relatively self-policing - no guarantee mind but it's the best I can do to mitigate the risk

I know that it's common for students to have guarantors but the money from a guarantor isn't necessarily instant so again you need money to tide you over. Just because someone is related to the guarantor it doesn't mean they won't blow their money on the Annual University Skiing Trip (I know people who have done this) instead of paying the rent. Make sure that you execute the Deed of Guarantee correctly or having a guarantor will be completely pointless.

gagahouse

jjlandlord wrote: »

Is the property an HMO, then?



Costs of purchase, inc. stamp duty, are capitalised. They will be taken into account when computing capital gains at the time of disposal.

As such, it's not unreasonable to include these in capital employed metrics (and may in fact be the correct way).

Of course, since the mortgage is a repayment mortgage, the capital employed increases by £500 every month, so the £60k figure is really only correct at t=0. This means that the return will be decreasing.

Good point that the return declines as capital builds up but that's the main reason why I'm doing this, to build up an income producing asset for retirement.

HMO? - no it shouldn't be classed as one as there are less than 5 people and it's not got 3 storeys and is not in any of the borough's currently implementing Landlord Licensing

thanks to everyone that has replied so far - although I am convinced of the merits of the investments it always helps to have someone outside critique my plans and assumptions

Pixie5740

Yes, it sounds like it might be a HMO albeit one that doesn't require a licence.

Your home is probably an HMO if:

three or more unrelated people live there as at least 2 separate households – for example, 3 single people with their own rooms, or 2 couples each sharing a room
the people living there share basic amenities – for example, a kitchen and/or bathroom
An HMO could be:

a house split into separate bedsits
a shared house or flat, where the sharers are not members of the same family
a hostel
a bed-and-breakfast hotel that is not just for holidays
shared accommodation for students – although many halls of residence and other types of student accommodation owned by educational establishments are not classed as HMOs

See also:

http://england.shelter.org.uk/get_advice/private_renting/about_private_renting/houses_in_multiple_occupation

gagahouse

Pixie5740 wrote: »

I'm not sure where you get your £100 from. If you end up with a void period of 1 month that would be £1800 not £100. I know you say it's unlikely you'll get a void period but it's not impossible so make sure you have enough cash flow to cover such an eventuality.



I know that it's common for students to have guarantors but the money from a guarantor isn't necessarily instant so again you need money to tide you over. Just because someone is related to the guarantor it doesn't mean they won't blow their money on the Annual University Skiing Trip (I know people who have done this) instead of paying the rent. Make sure that you execute the Deed of Guarantee correctly or having a guarantor will be completely pointless.

I'm quite confident on voids as I know the area and the universities serving it well, the student lets tend to get taken up by January for academic year starting sept - however I have the cash to cover any voids for years If I have to and I would only need to cover the mortgage rather than the full rent

to clarify, it's 100 per month so 1200 per year provision

jjlandlord

If you let the rooms on an individual basis it will be an HMO, although it may not require a license.

It has consequences in terms of safety installations and other requirements, a summary of which are listed in the linked Pixie5740.

gagahouse

Pixie5740 wrote: »

Yes, it sounds like it might be a HMO albeit one that doesn't require a licence.

Your home is probably an HMO if:

three or more unrelated people live there as at least 2 separate households – for example, 3 single people with their own rooms, or 2 couples each sharing a room
the people living there share basic amenities – for example, a kitchen and/or bathroom
An HMO could be:

a house split into separate bedsits
a shared house or flat, where the sharers are not members of the same family
a hostel
a bed-and-breakfast hotel that is not just for holidays
shared accommodation for students – although many halls of residence and other types of student accommodation owned by educational establishments are not classed as HMOs

See also:

http://england.shelter.org.uk/get_advice/private_renting/about_private_renting/houses_in_multiple_occupation

Yes an unlicensed HMO

Extra responsibilities of HMO landlords
Landlords of HMOs must make sure that:

proper fire safety measures are in place – for licensed HMOs smoke detectors must be installed
annual gas safety checks are carried out
electrics are checked every 5 years
the property is not overcrowded
there are adequate cooking and washing facilities
communal areas and shared facilities are clean and in good repair
there are enough rubbish bins/bags

these are what I would see as my obligations anyway if I was renting to a family - as it's 4 bed I will always remain below the 5 person HMO licence threshold