Buy to let purchase options

Brummy93

Hi,

I have always wanted to invest more in property and I've been trying to work out the best option I have with investing into a buy to let but I'm not sure if I'm missing something...

I have the option of releasing some equity (£40k) from my home which would be the deposit for a buy to let (using 30k of it as the 25% deposit). I know that the tax relief in 2020 will be 0% so I'm just trying to work out the potential NET return and understand my options.

The type of properties I'm looking at have a monthly rental income of around £695. From that, the costs I would have would be £150 for the interest only mortgage, £137 for the increase of my home mortgage, agency fees (around 6%, so say £40) and then of course tax which would be around £262 after deducting the agency fee tax deduction. The net monthly figure I would be left with is potentially £106.

The other option is that I rent the property out as a company so that I only pay corporation tax which would leave the company with out £267, but then if I want to access the money myself (as a salary I assume) the monthly net figure works out to £106 also after paying 40% tax.

Am I missing something here? What would be the best option?

Any advice would be much appreciated!

quantumlobster

Sounds like a complicated, risky way to make £25 a week.

Mr.Generous

Look at the yield first, a 75k property paying £450 pcm v's a 100k property paying £650 which would you go for?

Expect some vacant property time when you have to pay utilities and council tax - maybe 2 months in 12, expect some repair and maintenance costs, figure out your insurance cost and your annual gas safety, your tenant finding and AST costs, some travel costs, cleaning costs etc and see what's left.

Brummy93

Certainly, there is the long term investment side of it in that I'm in it for capital gain/inflation.

Brummy93

Is there much benefit in trading as a limited company if I'm just going to releasing the money to myself anyway and face the 40% tax?

00ec25

Brummy93 wrote: »

Am I missing something here?

yes you are missing something, an understanding of tax !!!!

tax relief after 2020 will not be 0%. £262 tax is wrong

you do not take money out of a company as salary if your aim is tax efficiency

As you appear to already be a 40% tax payer I suggest you pay for tax advice before you make a monumental mistake

tlc678910

Hi,
In my opinion (but of course I have no crystal ball) it is a bad time to buy an investment property. Our property fell sharply in 2008 and is only just recovering its price paid now - nearly 11 years later. You are relying on house price inflation because there is precious little ongoing income in your numbers. With Brexit house price inflation is far from certain and drops are possible.

Spend some time saving towards the deposit while you wait to see how Brexit plays out in the housing market. If you buy a house (170k in our case) that immediately drops 30k like we did you might as well have set fire to your money.

I don’t regret buying our house but that was a home not a buy to let, and that is a completely different ball game with completely different factors to consider, like the comfort and security of having your own place and the fact we would have paid a similar rent so it made no odds difference that prices had fallen for the period while we didn’t need to move.

Also you have not factored non-paying tenants, void periods, repairs/maintenance/damage, insurance or gas safety tests into your financial model.

For higher rate tax payers, or people that become higher rate tax payers due to the rental income received, what will happen (I believe) is that mortgage interest paid will be counted as income and taxed at higher tax rate (40% ?) but a 20% credit will be given back on that amount. I think making it like being taxed 20% on this amount. In practice this could mean that even if you made no income because your expenses cancelled out your rental income you could have a tax bill to pay.

The larger the finance interest on the rental the more this will affect you. Some landlords with lots of highly mortgaged properties could be bankrupt by these changes especially if there is not the equity to sell them on, or they could not afford the capital gains tax bill of selling them on because they have extended their mortgages and don’t have that equity anymore - perhaps extended their borrowing as deposits for more mortgaged property. (Sorry slightly off topic there)

Tlc

Cash-Cows

It doesn't sound worth it when you could stick a £100 in a pension at a net cost of £60 if you're a higher rate tax payer.

Also seems risky taking money out of your home to invest in something that's far from guaranteed to make you money and could cost you. Can you cope with someone who doesn't pay you rent for six months and then trashes the place?

Cakeguts

To get £695 pcm with little or no voids you need to pay around £170k to £180k. You can pay less than this but you will get voids.

PhilE

Unless the value of the property is going up, it doesn't sound like a big investment. Best wait until the impact of Brexit unfolds.

getmore4less

Cakeguts wrote: »

To get £695 pcm with little or no voids you need to pay around £170k to £180k. You can pay less than this but you will get voids.

That is a massive leap suggesting that anything with a gross yield over 4.6%-4.9% will get more voids.