Buy to let - how does it all work?

Jet

I'm at a bit of a cross roads in my life and one of my possible options is to stay in the house I'm in now and be mortgage free in the next 2 - 3 years.

I'm then thinking about the possibility of buying a property with a view to letting it out. Howwever, I think it is likely I would need a large chunk of capital before doing so?? A 1 bedroom flat in this town would sell for around £145,000 and rent for around £450 - 500 and the same in the nearest major town would sell for around £190,000 and rent for around £600 - £700.

How do buy to let mortgages work and will I need huge deposits? Obviously I will be in a position to remortgage my current home to raise that deposit but is that the way to go?

The other factor is that I currently have quite a low income (single parent working part time) and I wonder if that would affect my chances of getting a buy to let mortgage.

Of course, there is the current uncertainty with the housing market and interest rates and wondered what your thoughts are.

I'd really appreciate your thoughts.

Jonesya

Forget it!

You've answered your own question:
1 bed flat, £145k, renting for £500/month or £6k/year

So you're getting a yield of just (6000/145000)*100 = 4.1% before you've even considered maintenance/agency fees/void periods etc.

Bank of England Interest rates are now 5.75%, I haven't looked at BTL mortgages but I expect you'd be looking at rates of at least 6.5% probably far higher given the credit crunch we're going through at the moment.

So for a BTL interest only mortgage at 6.5%, which is a generous assumption:

£145000 * 0.065 *(1/12) = £785/month mortgage payment (interest only!)

So you would have to pay out at least £285 (£785-£500) of your own money to cover the mortgage interest payments. You mention you're on a low income, could you really afford to pay that out every month? Could you afford to cover the full mortgage payment during periods when the property was without a tenant?

How do you see this investment making you a profit? Are you relying on the greater fool theory - eg. a greater fool will come along a pay even more to buy the property from you? What if you couldn't sell it for what you paid and were stuck with it?

Jet

Thanks for the reply. Much as I suspected then, unless I have a huge chunk of capital to put down, it's not an investment that could work for me. Too much risk and not enough lee way in my monthly incomings to make it a comfortable risk.

As for ther greater fool theory - I wasn't actually looking to make a profit month by month - just a long term investment which assumes the housing market will continue to rise.

[Deleted User]

It works like this you first have a labotamy, then go and see a labotamised finance advisor that takes lots of luvvly commision. You are then on the road to losing money, happy hunting my friend.

dunstonh

unless I have a huge chunk of capital to put down, it's not an investment that could work for me.

Its not going to work then either. The rental yield is less than a savings account so why take the risks when there is no reward.

As for ther greater fool theory - I wasn't actually looking to make a profit month by month - just a long term investment which assumes the housing market will continue to rise.

How long is long? In the last property crash, in East Anglia it took just over 11 years to break even if you had bought just before the crash (Nationwide has a site which gives you long term averages).

If you look at the US, they are suffering property price drops at this time. Everything that has happened to the US over the last 2 years has come here. Whilst there is no guarantee it will happen, it doesnt look good if you have mortgaged buy to lets for the short term (unless you are a builder or good at spotting a bargain - which a number of experienced landlords are).

Debt_Free_Chick

In terms of any potential capital appreciation, it's worth remembering the amount of interest you shell out on the mortgage!

Jet

Thanks to the people who replied who didn't treat me like a total idiot. I never said I knew the answer - I was asking how buy to let works. Obviously other people do make a success of it and as Martin says "there's no such thing as a stupid question".

Elliesmum

Hi Jet

This is how I understand it, but I'm no expert! It's very similar to a normal mortgage but of course your deposit needs to be bigger (certainly more than 5% I think). You will pay a higher rate interest on the loan - usually between .5 and 1% more than a standard mortgage but of course this is probably due to change with all the movement there is on interest rates at the moment.

I also understand you have to let your property through a recognised letting agent (I don't just think you can rent to your mate with an agreement written on a back of a fag packet - if you see what I mean!). I think this is the bank protecting it's investment by ensuring all the legal documentation is in place that is involved in letting a property.

I think I also read somewhere (but again I could be wrong) that you have to prove you have done sufficient research into the letting prices in the area that you wish to buy to ensure that your *rental* price is realistic and of market value.

HTH's

EM xx

A_Nice_Englishman

Starting a property rental business is like starting up any other business. You need a business plan.

Do void periods, bad debts, repairs, redecoration, legal fees,insurance, agents fees, costs of evicting bad tenants, rises in interest rates to, say, 8% and possible falls in property values figure in your business plan?

Have you considered that landlords who bought years ago at much lower prices will be able to undecut you and still make more profit?

Are you familiar with the 50 Acts of Parliament and 70 sets of regulations which may apply? Did you know you can be held responsible for the anti-social behaviour of your tenants?

Then you need to look at the taxation side. Any profit you make will be taxed at your highest rate of income tax and if you make a profit when you sell you will have to pay Capital Gains Tax. though there may be reliefs.


Oh, and by the way, I rented a new build flat until recently. My landlady made a loss every month. The rent was high for the area but still didn't cover the mortgage interest.