First Time Buyer: Buy to Let?

As a would be first time buyer who can't afford to buy a house to live in (south east), I was particularly interested in the recent series of Location, Location, Location which specifically dealt with first time buyers.

On one episode they advised someone in a similar situation to me to continue renting in London, but buy a house to let out somewhere cheaper (in Lincoln I think) and use the profit over 5 years to then buy a house in London.

There were three points they failed to mention:

1. Mortgage lenders will only let you have 70% the value of the house (loan to value) if you are letting it out. So you need a 30% deposit.

2. Any gains in the house price will be eligible for capital gains tax as its not your primary residence.

3. You pay income tax on the rental income.

Firstly, not being an expert on the subject, are all of the above true?

Secondly, how easy is it to bend these rules? Whats to stop me buying the house and moving in for a month, then deciding to let it out? And when I come to sell up, can't I just move in a month or so before so I don't get hit on the capital gains tax?

I guess I'm trying to gauge whether this is something worth doing, or whether I should just continue saving until the prices drop in the south...

Replies

  • PalPal Forumite
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    LLL is a vehicle designed purely to make money for the production company rather than actually dish out any sensible advice to house buyers.
    There were three points they failed to mention:

    1. Mortgage lenders will only let you have 70% the value of the house (loan to value) if you are letting it out. So you need a 30% deposit.

    I think the figure is normally 85% so you need about a 15% deposit, although some lenders may be more flexible if you can prove that the financial risks are low. Do you have a 15% deposit?
    2. Any gains in the house price will be eligible for capital gains tax as its not your primary residence.

    Indeed, and there is no guarantee that you will make a gain. Making a capital loss then finding that you have problems renting the property out could bankrupt you.
    3. You pay income tax on the rental income.

    This is true, but you can offset the mortgage interest against the tax bill so the amount of tax you would pay would be fairly low, because the amount of actual income you make would also be fairly low.
    Firstly, not being an expert on the subject, are all of the above true?

    If you are not an expert on the subject then I suggest you read some books and teach yourself until you are. BTL is a business, and given housing markets at the moment, the potential costs if it goes wrong are very high. Once you are confident with what you are doing, you will have a much better idea about whether this idea would work or not.
    Secondly, how easy is it to bend these rules? Whats to stop me buying the house and moving in for a month, then deciding to let it out? And when I come to sell up, can't I just move in a month or so before so I don't get hit on the capital gains tax?

    You might want to try this, but learn the tax implications and speak to a tax adviser first. Don't do anything illegal. The Inland Revenue has rubber gloves and can put people in prison where Mr Big doesn't bother with rubber gloves.

    I am not sure house prices are going to fall significantly enough to make a difference in the short term. Even if they fall 20% that it still only the gain they made during 2003 and housing would still be very expensive compared to incomes.

    Finally, please please please stop watching Location Location Location. It only encourages the idiots who make and present it to carry on making these pathetic programmes. "Property chain" anyone?
  • lisyloolisyloo Forumite
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    Firstly, not being an expert on the subject, are all of the above true?

    1) I think it is higher than that - 85% springs to mind, but probably varies between lenders.
    But yes, you need a deposit and can't get high LTVs.

    2) Yes

    3) Not quite.
    You pay income tax on any "income" you get which is the "profit" fro the rental income.
    You can deduct mortgage interest, expenses and maintenenace.
    If you are clever then you can avoid a lot of this e.g. get the max interet only mortgage you can and maintain the property well.
    What I am talking about here is applying the law sensibly and within limits and is legal.
    Secondly, how easy is it to bend these rules? Whats to stop me buying the house and moving in for a month, then deciding to let it out? And when I come to sell up, can't I just move in a month or so before so I don't get hit on the capital gains tax?

    It's illegal.
    Tax evasion is considered a serious offence and the penalties are high.
    You might get away with it you ight not.
    If you don't then you could spend time is prison and I would have thought a conviction would rule you out of many jobs and perhaps financial transactions in the future.
    Basically not worth the risk.
    I guess I'm trying to gauge whether this is something worth doing, or whether I should just continue saving until the prices drop in the south...

    I don't know when this program came out and the timing is quite important.
    I would say that your view on what capital gains you can make is important (bear in mind that transactional costs for buying/selling houses are high so you need to make gains to make it worthwhile).

    Do you know the market up north?
    Do you want the hassle of being a landlord with a property not close by?
    It isn't like putting money in the bank - you have responsibility for repairs etc. so there is some considerable effort involved.

    Personally I don't think I'd like the idea of doing it remotely.
    What if there are problems and you can't find a good reliable agent.
    Are you going to find yourself travelling hundreds of miles on a weekend to do DIY jobs because you can't find a local plumber?

    My personal view is that prices in the North will rise for a while.
    Whether it is ong enough to make it worthwhile - in my view probably not.
    I don't think there is enough potential growth to cover the transactional costs and still make a profit.
  • If I can add my bit to this discussion,
    Firstly, when buying a BTL property you need a BTL mortgage, meaning banks dont work out loan to value percentages. They will look at how much rent you are likely to get, and they will work out how much they lend you based on this. i.e. if you buy a house with a rental value of £500 a month, most lenders want this to cover 130% of the mortgage interest payments. £500 would cover payments of around £380 per month. You would be able to get a mortgage where your interest is £380 or less per month.

    Secondly, trying to bend the rules is illegal as Lisyloo says and is not to be condoned.
    Tax evasion is illegal, Tax avoidance isnt. There are ways and means of avoiding CGT to varying degrees which I cannot recommend (i've never sold a house), but that are mostly totally legal. Get an accountant/tax specialist.

    A way to avoid paying CGT is not to sell. keep making the rental profits!

    There is a lot of advice I could give, but as I dont know your plans/circumstances I cant give it on here. Take advice, read forums from those in the business.

    Thirdly, as Lisy says, you pay tax on total profits made from renting, so yes, if you are looking to build a deposit up, then you will be paying tax (presuming your a tax payer).
    Anything I write is based on my opinion only. Before acting upon any advice from anyone on a forum further professional advice should be sought.
  • Buy to Let? Nowadays? I am at a loss to know how anyone can make the figures stack up.

    Consider this example:
    A £120 000 house in Swindon costs approx £700 amonth to service. Are there such houses that can be let for £700 pcm? I let as an HMO which adds another £280 - £300 a month to mortgage costs. I can just about break even on these figures but on an opportunity cost basis, I am losing 5.5% on capital invested.
  • bikerqueenbikerqueen Forumite
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    holy thread resurrection, batman. this thread is from 2004 mate.
  • Rabiddog_2Rabiddog_2 Forumite
    418 Posts
    LOL 2004? This Woman has probably already bought her house, had it increase in value and moved on. It all takes on a new meaning when you know its 4 years old...
    point 3 tho.. that's not illegal ie moving in and making the property your main residence ...possibly a very sensible way of avoiding CGT.
    tribuo veneratio ut alius quod they mos veneratio vos
  • PasturesNewPasturesNew Forumite
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    Rabiddog wrote: »
    LOL 2004? This Woman has probably already bought her house, had it increase in value and moved on. It all takes on a new meaning when you know its 4 years old...
    point 3 tho.. that's not illegal ie moving in and making the property your main residence ...possibly a very sensible way of avoiding CGT.
    Unless she went for the newbuild, in which case she's back with negative equity and a drugs den next door.
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