Investing in buy to let... repaying mortgages?

solidpro

...................

bris

You hope to make 4k in two years, are you serious, 4k is peanuts and without repairs, tax and void periods.


You can forget about that, in 2 years you are more likely to be down 4k than up.

solidpro

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.

Primarily, we will be covered by rent guarantee insurance for a certain period.

Beyond that obvious answer, we've purposely chosen properties in desirable areas which are hopefully becoming more desirable due to outside investment or scarcity of any more properties becoming available, with few or none competing alternative properties currently available to let. Used past 'already let' prices to get estimates for income and lowered them to conservative estimates to estimate the return.

Have a large buffer of capital in the new company to cover times if there is no tenant or a problem with one. I've been told expecting 1 months void a year is a good idea if you're a reasonable competant landlord at managing your lettings.

Have paid a large deposit so that if the worst comes to the worst, they can be sold for 25% less than bought for and still not be in debt.

Have setup a limited company to protect myself and other companies against litigation or debt with existing processes in place like book keeping, ability to direct debit tenants directly and people around me who can help with the process.

Have alternative income so I have no necessity for income from this business for many years.

The mortgage lender is looking for the income to be >125% of the mortgage cost, presumably to simplify how they determine if my proposed mortgage makes sense and whether I am likely to fail. These two come in at 175% of the mortgage cost.

I'm guessing the newer >135% calculation is on personal mortgages only due to the lower tax relief on the rental income, meaning and therefore individuals with BTL arrangements are seeing their expected profits going down...

Etc.

solidpro

You can forget about that, in 2 years you are more likely to be down 4k than up.

Yeah I have accepted I may make a loss in the first 2 years because I presume I know nothing about BTL and therefore should assume I haven't got a clue what I'm doing. in 2 years I probably will have a clue and can probably make it work a lot better after that.

tax

What tax does a company pay on breakeven? If you'd said 'accountancy fees, letting fees, landlord's insurance, my time in dealing with problems' then that'd make more sense to me... Maybe you're suggesting that we'd be liable for tax changes on the rental income introduced in April 2016 and again in 2017 which affects private individuals? Which we're not.

I've worked out the 'yield' for both properties is 4%. Maybe my profit calculation is out, or everyone has assumed that my calculations is based on an interest only mortgage more commonly associated with buy-to-let mortgages? This is a repayment mortgage.

silvercar

You've turned defensive in your replies, whereas your initial post was more open.

People are only pointing out pitfalls.

For what its worth, I've done very similar to what you are planning but with a lot lower mortgage LTV. Also invested through a company, though in my case the tax advantages were more compelling.

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

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

The bank told me they would require the LTV to reduce significantly after 5 years. So either the profits generated would need to be used to reduce the mortgages (rather than repay your loans) or the properties increase in value. Your bank may be different and the fact you have repayment mortgages will make this easier.

One risk factor not mentioned is rent values; if rents fall your £200 a month profit will fall.

Don't obsess on the tax issue, whether the investment makes sense is all important.

tlc678910

solidpro wrote: »

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.

Hi OP,
Don't forget this model was doing brilliantly for a lot of people (particularly remortgaging on rising equity to fund the next deposit) until the recession hit. Then when tenants defaulted on their rent, landlords with multiple properties that could not pay had their mortgages called in by their lenders and were made bancrupt.

I appreciate each of your properties has a hefty deposit but you will have tenants in place and cannot sell quickly or easily. Banks don't necessarily allow you the time you need to sell and release capital but repossess. I believe they can call in all of your mortgages with very little notice if they choose to. You need plenty of liquid cash if you have multiple properties.

I would say exercise caution. Don't try to get as many properties and mortgages as you can in record time - you will leave your self exposed in a down turn. Nor do you have to stick at the two properties over time but strike a balance with buying property but keeping lots (and lots) of liquid cash so if tenants start defaulting, mortgage rates rise, or whatever, your business doesn't collapse.

p.s. my house (Newquay, Cornwall) is worth at least 10K less than we paid in 2007.

Good luck with your plans
Tlc

solidpro

You've turned defensive in your replies, whereas your initial post was more open.
People are only pointing out pitfalls.

I appreciate that, and the flip on this that you can't see is that I spent another 5 hours reading about advice and experience yesterday on topics raised here.

Also invested through a company, though in my case the tax advantages were more compelling.

- can you elaborate, why, on that?

I would say exercise caution. Don't try to get as many properties and mortgages as you can in record time - you will leave your self exposed in a down turn. Nor do you have to stick at the two properties over time but strike a balance with buying property but keeping lots (and lots) of liquid cash so if tenants start defaulting, mortgage rates rise, or whatever, your business doesn't collapse.

Ok that's fair enough and thanks for your post - and somewhat close to my original question. If it makes more sense to only have 1 property and pay that down in 5 years (which is actually feasible in 2) then I can do that instead of as quickly as possible getting deposits on new places. If I pay off the mortgage on the first place, owning it and 'keeping' the rental. Or maybe the 'balance' is having a small mortgage on it, to use as the deposit on another?

solidpro

I'm kinda coming to the conclusion I can't trust a lot of what I've read if it's more than a year old and I can't trust a lot of what i've read about the recent changes in taxation (aside from stamp duty) as that relates to individuals, not companies....

I'll remind everyone that a company will be able to claim mortgage interest in full whereas this is being removed for individually owned properties where the individual is a higher rate taxpayer.

I've basically amended my plan down to 1 property, with a higher deposit, returning higher monthly profit and less risk if there is a downturn in rent or value - with the aim of building up a larger reserve, quicker, for unexpected challenges, such as being vacant, repairs or litigation.

In 2-3 years, this first property will paid off via loan from inter-company loan and I'll then remortgage at 25% Mortgage with a view to using that as a deposit on the second place.

Ideally in 5-10 years the resale of a property which is largely outright owned, or the higher profit each month on more than one rent should be able to repay the inter-company loan within that 10 years.

The yield will only have increased since adjustment to the plan yesterday.

Cakeguts

What is the market in tenants that you are aiming at? Past rent levels are not what you need to look at. What you need to look at is speed of letting. Let agreed in less than a week is what you want. You can research this on Rightmove.

A desirable property in a desirable area is no good if it isn't right kind of property for a rental and for the market for rentals in that area. It isn't as simple as a good area where property is in short supply and where people like to buy. Rental properties are not quite the same as owner occupier properties. If you buy somewhere to live you make choices and compromises. Tenants are less likely to be interested in compromises. What they are interested in is close to shops and transport and value for money.

solidpro

It isn't as simple as a good area where property is in short supply and where people like to buy.

....but it's hardly irrelevant. I didn't know Rightmove did that - and will check now.

It's city centre, 2 minutes from a very popular beach, a national capital for insurances company headquarters, 1 minute from the city bus and train station and 75 mins from central london.