What mortgage should a new graduate get to to become a resident landlord, renting to friends?

Imnotamoneyexpert

Hi,
Our son has just finished his a 4 year Uni course and wants to return to Bristol. He's managed to get a low wage lab job but he has good potential to earn more over next few years. He and three mates have been looking to find somewhere to rent together.
We then had a light-bulb moment, that rather than him throwing approx £500/month "down the drain" (c £2000 for all of them) is this the time for him to use his inheritance money as a deposit and allow him to get on the ladder and be a live-in landlord.
We want to start trying to work out Mortgages and how much deposit he'd need (doesn't look as if much out there less than £400K) and if we'd need to be guarantors (which would likely be approved), but I can't work out where to start to help him with this.
It's urgent as they are actively looking to rent, but if this idea something worth exploring, they should try to get somewhere for 6 months only.
It might however be better to let them rent for the year, allowing time to give this all more thought and planning!
However, please can someone advise what type mortgage we should get, as it's not a buy to let if he lives there, but how would we get a mortgage company to look into the rent he'd be getting in from his friends?
THANKS for any words of advice.

joshiesaunt

I might be missing something but could he could just get a normal residential mortgage and take them in as lodgers?  He'd have to pay tax on the income over a certain amount.

joshiesaunt

Also, if he's on a low income, he'd need a very high amount to put down on a circa £400K mortgage.  Lending has tightened up.

Caz3121

quick ballpark - 4.5x his salary + deposit = purchase price. If that comes close to the figure needed he could have a chat with a mortgage broker

Imnotamoneyexpert

joshiesaunt said:

I might be missing something but could he could just get a normal residential mortgage and take them in as lodgers?  He'd have to pay tax on the income over a certain amount.

Thanks. I thought it wasn't a normal residential if he's renting out to 3 friends. I thought I read somewhere that OK if only rent to two, but perhaps I'm getting confused with something else?

Imnotamoneyexpert

joshiesaunt said:

Also, if he's on a low income, he'd need a very high amount to put down on a circa £400K mortgage.  Lending has tightened up.

I'd hope we could include as income the rent from his 3 x friends, which would be about £1500/month, but there would be no way to prove that whilst getting the mortgage. 

Imnotamoneyexpert

Caz3121 said:

quick ballpark - 4.5x his salary + deposit = purchase price. If that comes close to the figure needed he could have a chat with a mortgage broker

4.5 x salary = peanuts! But, if we could do 4.5 x salary AND include rent that would be coming in from his 3 x friends, it feels as if it should work. 
Our 14 year old is also fortunate to have the same inheritance and with such low rate interest, we wonder if they should both buy together, as then the deposit might look more attractive. That would though make things even more complicated as obviously we'd be acting for our 14 year old, but I don't think older son's monies would be enough if he's going to need a higher percentage deposit because of his very low income. 
Guess we need to talk to a mortgage broker!
Wonder if any open on Sundays??

Thrugelmir

Imnotamoneyexpert said:

Caz3121 said:

quick ballpark - 4.5x his salary + deposit = purchase price. If that comes close to the figure needed he could have a chat with a mortgage broker

4.5 x salary = peanuts! But, if we could do 4.5 x salary AND include rent that would be coming in from his 3 x friends, it feels as if it should work. 

Suspect that lenders will think otherwise. The pitfalls are only too apparent. 

monetxchange

I'm currently trying to get a mortgage on a 400k place, earn 75k a year (self employed though) am in late 30s with established and good credit, most of the place will be help to buy and I've got 52k deposit on a 206k mortgage - and I am struggling at the moment even with a broker. They're being so tight on income at the moment that I think your son may have a hard job on affordability too, even if the deposit was boosted.

It'll be quite hard/near impossible to get lenders to lend on the basis of potential rental income in the future that may never materialise (ie if one or two of the friends moves on or pulls out and your son is left with a large mortgage he can't afford). Lenders are picking through every penny at the moment. Definitely consult a professional.

There's also a long backlog and things are moving very slowly, so don't expect to have a place sorted in a short while especially if people are looking to move in somewhere asap.

As an aside, your son isn't a kid anymore, but is this something he actually wants to take on? Getting proper landlord cover and being the sounding board for all his friends complaints when something goes wrong and then shouldering the blame and responsibility for getting them sorted, demanding late payments etc? It will be a test of friendships to the extreme. If he's a recent graduate too, people move on quickly and often at this age. He might not be in the same place work wise in a year and want to be tied down to a place, and if his friends move on, will he be okay having strangers move in? When I was 21 I thought I'd want to live with my mates forever, even floated buying somewhere together. One of them I'd fallen out with within a couple of years and the other was married before long - it's a lot to settle in for the long haul so young when life will have many opportunities coming for him.

Definitely make sure this is something he wants to spend his inheritance on, and your younger son too.

steve866

I appreciate that rent is a waste of money long term, but I think for someone who should earn good money long term and has a good deposit sorted already, paying £500 rent for a year or two whilst his income improves is fine. Does he really want the hassle of owning a house he can only afford with 3 lodgers? 

Imnotamoneyexpert

Thanks all.
He would like to do this, but perhaps the numbers won't add up and he needs to continue in the rental market.