BTL doesnt stack up? (sanity check request)

Robwales

Hi

Longtime reader but first time poster...hope you don't mind me asking this

I have friends who are insistent that BTL is still great (they have 5-10 properties) and advocating me to do the same (with a £50k funds I have available).

However, I am a top rate 45% tax payer...and despite their insistence I don't see how the maths adds up..certainly not with the new tax relief rules impacting (and in full force in 2020, that I am using for my calcs)

Id greatly appreciate a review by someone more familiar with the BTL scene!

So - some background - £100 property, £50k deposit...in Wales so attracts 3% stamp duty (as additional property). Assuming £50k interest only mortgage.

Here are my initial Calcs:

Purchase price £100,000
deposit £50,000
mortgage £50,000
mortgage fee £150
Solicitors fees £1,000
Stamp duty £3,000
Surveys fees £500
initial refurb costs £1,500
TOTAL purchase COST £106,150

Annual Rental £6,600

Annual Mortgage interest only £1,500
Annual letting Contract fee £50
Annual Gas/ Elect Certs £100
Annual Maintenance fees £900

Taxable income £5,550 (rental minus maintenance?)
Tax @ 45% on income £2,497.50
2020 Relief (20% of interest) £300
Total tax bill £2,198

Annul costs £4,748 (tax bill + maintenance and other costs)
Net profit £1,853
ROI % of total purchase cost 1.7%

Questions
1. Do these numbers look about right? (don't worry about the purchase price and the rental rate - I know these are correct for the exact region in question - I appreciate they look out of whack for SE but trust me they are fine)

2. So what would be my annual net rtn...i have assume a calc of the net profit over the total purchase price...is this correct @ just 1.7%?!

3. It works for them i think (or at least better) as they are in the 20% tax bracket...and also they are looking at it historically without the new tax rules (i have applied the 2020 rule above as a worst case for me)?

All feedback much appreciate - especially as i know this is a repeated topic!

Many Thanks
RobWales

need_an_answer

To be perfectly honest to some extent I may agree with your friends,I to have a small number of properties and it provides an income for me.

Not huge but I've built up my portfolio of 6 over the last 6 years after finding myself with an inherited property. That helped enormously.


BUT


if this is your first venture into BTL with a capital investment of £50k its not going to give you a huge income so I would tread carefully.


Tax changes and additional stamp duty make things a lot more less cost effective to buy so unless you plan this very carefully you may find its actually more hassle than its worth.


You don't specify what type of property you are thinking in investing in,leaseholds usually come with management charges so that may need to be factored in and also how do you pan to manage the property?

Via an agent or self manage...agent fees typically start around 8% but some can be as high as 10-12% if fully managed.....

If you are going down the self manage route then an organisation like the Landlords Association is a good place to join especially if you at the moment have no knowledge of running the business you will be.

A good set of trusted tradespeople behind you is never a bad idea either if you don't plan to be a plumber,handyman or electrician all in!!


and then there is the factoring in of what typically called a void period where you have tenant change over and the upkeep and utilities pass back to you...Ideally this should be kept to a minimum period but I'd be factoring in a closed month possibly every 18 just to be cautious.

Pixie5740

Robwales wrote: »

Hi

Longtime reader but first time poster...hope you don't mind me asking this

I have friends who are insistent that BTL is still great (they have 5-10 properties) and advocating me to do the same (with a £50k funds I have available).

However, I am a top rate 45% tax payer...and despite their insistence I don't see how the maths adds up..certainly not with the new tax relief rules impacting (and in full force in 2020, that I am using for my calcs)

Id greatly appreciate a review by someone more familiar with the BTL scene!

So - some background - £100 property, £50k deposit...in Wales so attracts 3% stamp duty (as additional property). Assuming £50k interest only mortgage.

Here are my initial Calcs:

Purchase price £100,000
deposit £50,000
mortgage £50,000
mortgage fee £150
Solicitors fees £1,000
Stamp duty £3,000
Surveys fees £500
initial refurb costs £1,500
TOTAL purchase COST £106,150

Annual Rental £6,600

Annual Mortgage interest only £1,500
Annual letting Contract fee £50
Annual Gas/ Elect Certs £100
Annual Maintenance fees £900

Taxable income £5,550 (rental minus maintenance?)
Tax @ 45% on income £2,497.50
2020 Relief (20% of interest) £300
Total tax bill £2,198

Annul costs £4,748 (tax bill + maintenance and other costs)
Net profit £1,853
ROI % of total purchase cost 1.7%

Questions
1. Do these numbers look about right? (don't worry about the purchase price and the rental rate - I know these are correct for the exact region in question - I appreciate they look out of whack for SE but trust me they are fine)

2. So what would be my annual net rtn...i have assume a calc of the net profit over the total purchase price...is this correct @ just 1.7%?!

3. It works for them i think (or at least better) as they are in the 20% tax bracket...and also they are looking at it historically without the new tax rules (i have applied the 2020 rule above as a worst case for me)?

All feedback much appreciate - especially as i know this is a repeated topic!

Many Thanks
RobWales

The gross rental yield actually looks pretty decent but the net is pretty pants especially since you're an additional rate tax payer. It could be a lot of hard work for not a lot of return. If you are planning to eventually own a property portfolio it might be worth setting up a limited company to own the properties. What other investment vehicles are you currently utilising?

BTL isn't the golden goose it once was and the government keeps taking steps to make it less attractive. That said, there will always be demand for private rental accommodation because whilst the government is making BTL less attractive it is also continuing to flog off social housing without replacing it.

Robwales

Thank you for the quick response


its freehold
it will be self managed - no agent
they use a 3rd party to deal with credit checks - I cant recall the name
And I have good connections with trade guys to help


But its the financial sense im really questioning...in terms of ROI, this to me doesn't stack up very well for all the hassle it entails (ignoring property value appreciation in the longterm ie just in terms of a revenue stream...£1.8k net per year).
and I have assumed 100% occupancy but agree something more like 90% would be more appropriate

getmore4less

gross yield is 6.2% which is the right side of 5%, historically before the interest rates dropped to zero the target was 10% so you are lower than that.

You are investing £56k you are clearing £1,850 3.3% return on capital

Not great but enough to not be losing money until you get voids and higher expenses.
try the numbers with 11months rent or 11.5months(1 void every 2 years)

Does the area get the high swings in prices or is it much more stable where long term you get a bit of growth.

Your £56k should do a lot better in a pension or are you maxing that out already?

Also ISA are likely to be the next best option to protect any returns from tax.

have you looked at exposure to property through investing.

ThePants999

getmore4less implies this, but hasn't made it totally explicit: you shouldn't be including the borrowed capital in your calculations. You're only spending the deposit plus fees etc, and you've already accounted for the mortgage interest in your costs, so if you account for the mortgage itself, you're double-counting. The easiest way to think of it is that you're getting the property for £56,150 plus £1,500 a year, rather than £106,150.

Wanderingpomm

To make money you need to run the property via a ltd company to be tax efficient

foxy-stoat

If you become a Landlord with these types of figures you are really working for the HMRC and risking a lot. Look to invest elsewhere.

Cakeguts

We have several properties in various places. Some are in the North West. £100k there would buy a 2 bed terraced house in an area that wouldn't be the most desirable but also wouldn't be the least desirable so a sort of average area. Lots of people buy houses like this to let but there appears to be a fairly high turnover of tenants and there are a lot of this type of property on the market at anyone time.


We have mostly 3 beds because they attract families as well as couples. We hardly ever have any voids. We have had two in the last couple of years but before then none for about 4 years before that. However the values of the properties are higher than £100k and there are no mortgages. Two of the tenancies on two different properties have been running for well over 10 years now which is what you want if you are trying to pay a pension. Everytime you have a void you lose money.



If your rent estimate on £100k is at the top end you will have to keep the house in pristine condition so work in every void or your rent levels will drop.



You also have to have an amount of spare cash to carry out repairs.

need_an_answer

Cakeguts wrote: »

We have several properties in various places. Some are in the North West. £100k there would buy a 2 bed terraced house in an area that wouldn't be the most desirable but also wouldn't be the least desirable so a sort of average area. Lots of people buy houses like this to let but there appears to be a fairly high turnover of tenants and there are a lot of this type of property on the market at anyone time.


We have mostly 3 beds because they attract families as well as couples. We hardly ever have any voids. We have had two in the last couple of years but before then none for about 4 years before that. However the values of the properties are higher than £100k and there are no mortgages. Two of the tenancies on two different properties have been running for well over 10 years now which is what you want if you are trying to pay a pension. Everytime you have a void you lose money.



If your rent estimate on £100k is at the top end you will have to keep the house in pristine condition so work in every void or your rent levels will drop.



You also have to have an amount of spare cash to carry out repairs.

The void situation is an unknown quantity really isn't it....youre very lucky to have long term settled tenants...I've read that the average is around 18 months and that sort of stacks up with my properties ...my longest tenant being 2.5 years and my shortest 7 months.

A lot does depend on the area in which you rent and the type of property.


Thankfully voids don't seem to be long in my area typically a month but that's probably because I also use the time to upgrade/repaint etc in order to keep climbing the rental value rather than allowing it to slip.


OP what sort of tenants are there in the area of wales that you are ,looking at?

What sort of contingency is there for the non paying tenant?

I appreciate that at present you are interested in the financial % return but you would be foolish not to consider the other factors that are involved and pose potential issues to being a LL.

if its just a % return you are looking for then I don't believe that a BTL is the way for you to go forward.

The fact that you have asked on a forum for a "sanity check" possibly suggests that you're not entirely convinced that its a route you want to take...

As cakeguts says you need to know your market and its somewhat different depending on what area or type of property you invest in.

Cakeguts

need_an_answer wrote: »

The void situation is an unknown quantity really isn't it....youre very lucky to have long term settled tenants...I've read that the average is around 18 months and that sort of stacks up with my properties ...my longest tenant being 2.5 years and my shortest 7 months.

A lot does depend on the area in which you rent and the type of property.


Thankfully voids don't seem to be long in my area typically a month but that's probably because I also use the time to upgrade/repaint etc in order to keep climbing the rental value rather than allowing it to slip.


OP what sort of tenants are there in the area of wales that you are ,looking at?

Just to let you know. 2.5 years for us would be short. We have one that is about 15 years another which is about a year behind at 14 years. We have had the odd 6 months from time to time but we started letting propery in 1990 so over that time you do get the odd void. I would think for us a 4 year tenancy would be about the usual length although it is not unusual for them to be longer than that. Most of the properties are 3 beds and in nice areas for where they are. They are all on full agent managment.



The problem is that people seem to think that you can do this on the cheap and still get good tenants. In the area that we have most of our properties a £100k house is a first time buyer's 2 bed house so they aren't all that interested in renting them because they can afford to buy them. This means that a successful rental either has to cost more or considerably less. The more to appeal to people who want a bigger house and the less to people who can't afford to buy.



Letting property is like any other business you have got to find a gap in the market.