Investing in buy to let... repaying mortgages?

solidpro

Hi All.

Trying to get my head just 'settled' in the long term plan for investing in property and more or less thinking out loud here and wonder if I can have some viewpoints from existing people who run their own buy-to-let investments?

I've paid off my own house and decided to use some spare capital to invest in 2 x buy-to-let properties. I'm basically loaning my new ltd company £120,000 to put two £45,000 deposits down on £180k properties.

I have business mortgages arranged at 30 years on a fixed 2 year term and basically the two properties tenants cover all the monthly costs of the mortgage, service charges, ground rent, insurance and letting fees, leaving around £200 surplus each month. So the company may accumulate £4000 in 2 years if we get lucky a boiler doesn't fail etc.

So say I let the mortgages run their 2 years and I have to decide what to do at the end of the 24 month term.... With another £120,000 I will have to invest I could pay down another £60k from the mortgages I already have in order to increase the monthly profit (which would work out at about £20k per annum instead of £4k per annum), so the company can build up it's own capital reserves with the increase in income to either pay back my (large) director's loan, or simply buy more property with 25% deposits, which make a small amount each month and ride that for 25 years until it's paid off.....?

I always believed that 'mortgage' being the best investment you'll ever make to be an utter myth when it comes to the home you live in - because I could never get my head around that 24 year statement showing you'd paid in £15k (of hard grafted personal salary) over the year in repayments but you loan had gone down by about £5k.... but trying to get around that not being a myth when it comes to business (and all that money simply coming from other people!!)...? It simply *feels* again like if I pay down the balance on the 2 two I own within 5 years, then I'm not spending 20 further years giving £270,000 in interest to the bank.

Bottom line, is that I have a feeling the smart move would be to use the future capital as more deposits on more properties and leave the existing mortgages running for a few decades to get tenants in your property paying off your debts and using the sale of the occasional property which has (hopefully) grown in value to recover larger sums as time goes by - but is there anything to be said in using future capital to pay down and *own* real estate and keep all the income from them, over simply handing that money over to the bank for 25 years?

sorry for the long post. Hoping like minded individuals will have a sympathetic experience to share?

thanks!

Cash-Cows

£200pm on a £120k investment sounds poor, and you have assumed no boiler failure. Worse for you would be a tenant who doesn't pay and then smashes up the place. What then?

You said hopefully house prices will rise. What if they don't?

Is this eggs in one basket or do you have other investments?

I have to say, looking at your figures you've put me right off considering a BTL.

silvercar

It depends on a million things, but some thoughts:

a) have you chosen properties for good yields or capital growth? The more you have veered towards capital growth, the more it makes sense to buy more properties to capitalise on that growth.
b) it appears that you are thinking of investing more and more of your savings in property. Should your total worth be more diverse.
c) your business mortgages. Does the provider expect you to reduce the outstanding capital over time? (asking because I had a similar discussion with my business banking team and they did!)
d) your net profit of £200 a month seems small. I do wonder if it is worth the potential aggravation for such small figures.

Thrugelmir

solidpro wrote: »

I have business mortgages arranged at 30 years on a fixed 2 year term and basically the two properties tenants cover all the monthly costs of the mortgage, service charges, ground rent, insurance and letting fees, leaving around £200 surplus each month.

Soon be wiped out at higher levels of interest.

The surplus (profit) will be subject to Corporation tax.

What's the contingency plan if there's void periods or your tenants default.

economic

BTL for capital growth is not a good idea unless you know specific reason why the particular area or property will rise in value (eg extension to create more space). Otherwise it's a punt. Btl should be a business and as with any business cash flow is king ie you go for rental yield. I wouldn't buy any btl for a yield less then 6-7%.

Daniel54

The mortgage costs on your own home are offset by the imputed costs of renting that property .This tends to be good value - as long as you can afford the mortgage repayments, you end up at the end of the mortgage term owning and living in the property "rent" free ( other than maintenance costs etc).The Government is also generous enough not to apply any tax on the capital gain.Over time,inflation reduces the present value of the loan compared against increased earnings.

This makes a ton of sense even if the inflation adjusted value of the property is neutral or worse.You seem not to understand this.

Inflation is at an all time low at the moment, but it will return down the line

But you are investing in property as an asset class and must have taken professional legal and taxation advice before setting up this structure and surely have a business plan to reflect your aims ?

To ask this question suggests you don't understand your own business plan ,which is questionable if your rental yields after costs are as woeful as you set out

This is primarily a consumer forum and you may be better seeking views on a professional landlord forum where they are more attuned to the taxation of the incorporated structure you have decided to set up.

On the face of it,what you are doing doesn't make a whole lot of sense

Cakeguts

You have assumed that the properties will always have tenants and will not be empty. This is not sensible. For buy to let you have to be prepared for things to go wrong and when they go wrong they can go very wrong especially if you have bought the wrong property in the wrong area. Even with the right property in a good letting area you cannot assume that you will not have any periods where the property is empty and how are you going to pay the mortgage if the tenant stops paying the rent. Your income surplus per month is much too small. You cannot do buy to let on the cheap like this.

What I would suggest is that you do a lot of research into the area that you think you want to buy in and see if there are any tenants that want to live there are the level of rent that you think you want to charge. Then buy one property and see how that goes before you commit yourself any further.

solidpro

You said hopefully house prices will rise. What if they don't?

. You've got to start somewhere and you can say that same statement with almost any kind of investment. It's a long term plan and over 20-30 years have house prices ever fallen? The two properties I've bought both have shown large increases in values in both 5 and 15 year periods. Yeah, nearly everyone took a 7 year hit after 2007 but I'm looking at much longer term than desperately trying to cash out within 10 years at least.

I have to say, looking at your figures you've put me right off considering a BTL.

Nobody said it was easy. Nobody said it would be this hard.

The surplus (profit) will be subject to Corporation tax.

Deducting everything that's deductable though. Not a huge concern right now. Appreciate it's one of many concerns but I in the hierachy of worries, the amount of CT I will pay on a company which is expected to break even or make a loss for at least 2 years is not a concern.

have you chosen properties for good yields or capital growth?

I've chosen properties which return what myself and the mortgage lender consider safe annual returns to cover everything and with any luck and some savvy improvements will return a good increase in value over the next few years.

Should your total worth be more diverse.

I've always assumed you should spread your income 4 ways - cash, real estate, pension, investments. Unfortunately some years I can't do that split and have to spend more in moving forward (such as a 25% deposit on a property, which won't happen next year). Long term I'm expecting put a little into ISAs and to follow an investment portfolio that's a little over 50% in stocks and shares, and the rest in more cautious assets such as corporate and government fixed interest securities.

your business mortgages. Does the provider expect you to reduce the outstanding capital over time?

- I can ask, but what difference does it make?

your net profit of £200 a month seems small. I do wonder if it is worth the potential aggravation for such small figures.

I think it would seem small if you haven't factored in maintenance, voids in rent, various types of necessary insurance, legal costs, accountancy, and so on. As a starting point, I think it's a fair enough start. After spending a month pouring over residential housing, viewings I eventually decided that huge yields in the first year are not going to happen. Property prices seem at a high at the moment, and it was rare to find a single one which actually seemed to provide a buffer for the small things like landlord insurance, accounting fees and all the other smaller monthly costs. I ended up coming to the conclusion that if people are doing this, they're either much smarter and more patient and I, OR they start somewhere and build on that year on year. I'm guessing if I could get to having 10 tenants making £1000 profit per month, increasing each year as the interest comes down, gradually paying off mortgages over 20-30 years then at the end of it, I have a lot of property in my name and a much bigger retirement fund selling off property than I would if I did nothing.

Soon be wiped out at higher levels of interest.

Was told that 10 years ago. Was told that when I got my first mortgage at 4.99%. Lock it in for 3 years they said! never be lower!! It's hardly a factual comment, is it?

particular area or property will rise in value

. Such as city centre location with the entire block being redeveloped by the retail investors at the ground level, the next street being predestrianised and the adjoining block being redeveloped and smaller flats sold off at twice the price? Some of the reasons I chose.

HappyMJ

economic wrote: »

BTL for capital growth is not a good idea unless you know specific reason why the particular area or property will rise in value (eg extension to create more space). Otherwise it's a punt. Btl should be a business and as with any business cash flow is king ie you go for rental yield. I wouldn't buy any btl for a yield less then 6-7%.

That depends on what you're aiming for.

Some people pay income tax at 40% on rental yield yet would only pay 28% on capital gains so it would be better to have 3-4% gross rental yield and higher capital growth.

kinger101

Madness.................................

solidpro

I'm not really seeing a response to the question. More of a picking at the principle of why anyone would be silly enough to start a BTL business....

On one hand people are saying a mortgage is the best investment ever, which surely means put down as low a deposit as possible.

On the other hand people are saying that if you don't get more than 7% yield then don't even bother.

I hate to say this but a bigger mortgage means more interest means less yield. So surely a contradiction.

It seems everyone is just saying 'obviously you'd buy a house really cheap and rent it out for lots of money, obviously'. Seems more naive than someone starting a BTL business with no business plan.