Buy-to-let finance query

mountaindog

Well I’ve taken on board all you helpful guys have said :T and decided to buy and my offer was accepted. My solicitor said he would check with council over improvements so here goes!

Dithering_Dad

Hi, how much did you offer for the property?

Are you sure that the returns are there with only an annual rental yeild of £4920 per year (I took an average of the £370 to £450 and came up with £410 per month x 12 months). If you want a 6% return you would have to pay £82000 for the property, including any deposit. If you are paying less for it, then obviously you'll get a better return.

I'd also be worried about getting a property in a block with current council tenants. All it takes is for the council to place a couple of nightmare families into the block and your tenants move out and your property value declines.

sarkin

Let me get this right you are purchasing a btl property in a block of ex council flats, of which some are still owned by the council. If there is a fall in the market places like this will be badly hit, I feel you could loose your shirt on this one. For BTL I think house conversions make the best BTL but as there are so few around these days people have to buy new builds. Anyway it looks like you have made your mind up so good luck

mountaindog

Hi DD

Paying 85K with a deposit of 20%.
It’s a worry over other tenants but as I posted earlier I know another landlord in the block who has 5 years of experience (in the block) and has had no trouble. The area is relatively free from trouble, other places in the town I wouldn’t touch with a barge pole! I hope the council wont rock the boat and re-home known duffers!! ( perhaps I am naive ).

I know they have done a lot recently to make the area safer and pleasanter by making the communal grounds, which are quite substantial, enclosed & gated with key entry. I have spoken to a lady out side the block and asked her opinion of the area and she said it was “fine” . She even enthused on the enclosed area. But as we have all said before crystal ball time!

Mortgage has been agreed in principle but so far only on a fixed rate for 2 years. Only to day I have seen headlines saying a reduction in the lending rate is more than likely over the next 12 months. I think it said three reductions, one this year and two next, so may look at flexible options, thoughts please?!

Dithering_Dad

Just carried out a few (rough) comparison calculations...

If you buy this property for 85k with a 17k deposit, you will need a mortgage of 68k. Imagining an interest only mortgage at 6%, your monthly repayments will be £340. Your monthly rental is approx 410, leaving a profit of £70. This assumes full 12 month occupancy and it leaves out all of the electricity & gas checks, property insurance, maintenance charge for apartment block, property maintenace, etc.

Basically, for your 17k investment you will get a £70 return with the BTL, before tax. This represents a return of 4.95%.

You could put this money into a savings deposit account and get a better rate of return, with no hassles with tenants & no risk to your capital (you'd get an even better return if you drip fed it into Cash ISAs). Your only real hope a of a decent return would be if property prices keep going up, but I'm currently working in the banking industry and all I hear is recession, property prices falling, sub prime mortgage woes, fewer mortgage applications. This does not bode well for house price rises, even in London.

mountaindog

Point taken and understood! My IFA hasn’t said half as much as you (lot) only finding me BTL mortgage deals!

Will do some serious thinking over the next week (on holiday) and weigh it all up!

dunstonh

Point taken and understood! My IFA hasn’t said half as much as you (lot) only finding me BTL mortgage deals!

Perhaps thats because he is an IFA and not a mortgage adviser. IFAs are investment advisers. Some IFAs also act as mortgage advisers but then you start getting into jack of all trades master of none territory.

Although did you ask the IFA suitability of the investment potential or did you just ask him to find a deal?

If you want a bit more scary data then read the following:

Property investment funds suffered losses in 1991 for the first time in a long long time but started to recover almost immediately. The Halifax price index had only shown a stability in the prices when the property funds took their big drop. House prices went on to fall for the next 4 years.

Property funds didn't suffer another drop until July 2007. The Halifax house price index stabilised that month but last month showed a drop.

Is history going to repeat itself????

Obviously we dont know but unless you are builder or have manged to pick up a property cheap or there is good potential for conversion for student accomodation then it really is looking like BTL is not a good option at this time.

sarkin

According to my software with those figures you could fix at 5.29% with monthly of 300, but there is a £2000 arrangement fee. If you take a higher rate and lower arrangement fee your looking at £330 a month. As others have said £70 a month return on £17,000 does not look good. If it was me I would bank the money and take a risk free 6% from a bank with no hassle.

luckyfool

Another consideration here is what's the prospect for the rent in the future. There is still an undersupply of housing for the foreseeable future, and with the market slowdown scaring first time buyers away a bit from the market there are some commentators predicting that BTL yields and rents will increase. If you are able to buy and hold the property for the long term (and I mean 5-10 years, not 2 or 3) then you should still have good prospects for captial growth, and improved rental yields as well. There is alot to think about, but reducing it to a 4.95% rental income vs. 6% in a savings account does not really cover everything.

Having said that, I would certainly be wary about relying for BTL just now as your sole pension provision.

dunstonh

Another consideration here is what's the prospect for the rent in the future. There is still an undersupply of housing for the foreseeable future, and with the market slowdown scaring first time buyers away a bit from the market there are some commentators predicting that BTL yields and rents will increase.

The converse could also take place. As landlords sell up as its no longer viable to keep the properties and prices begin to fall, this frees up housing stock for buyers (particulary first time buyers) and this creates a cycle of events where those renting choose to buy and leave more rental properties empty and force the rental yield down as those looking to rent have more choice.

but reducing it to a 4.95% rental income vs. 6% in a savings account does not really cover everything.

It certainly doesnt. Mortgaged buy to lets are a high risk transaction (borrowing to invest) whereas savings are low risk (although higher risk if you are using savings accounts for retirement provision). Savings rates historically just about beat inflation.

Also, you dont pay capital gains tax on savings (or investments within an ISA) but you will on gains on the property and there will be no reliefs to reduce it anymore apart from your CGT allowance.