Should we invest in buy to let?

palford

Thanks again for all the replies and very useful information. What I’m picking up apart from the numbers is also the hassle factor and time involved.

Sarah1Mitty2

Rumana03 said:

palford said:

Hi thanks for the replies. I agree there’s an ethical component which is part of our consideration. Also thanks for the reply with practical advice about ability to pay mortgage if not let. 

I wouldn't advise getting a buy to let at the moment. My tenants having been sitting in my property for 2 years without paying rent and owe me £14k which I doubt I will ever get. It's honestly not worth the hassle. There's so much paperwork and checks to be done constantly. And then every year you have to do a self assessment tax return...

How can they do that, can`t you take legal action?

Woolsery

Sarah1Mitty2 said:

Rumana03 said:

palford said:

Hi thanks for the replies. I agree there’s an ethical component which is part of our consideration. Also thanks for the reply with practical advice about ability to pay mortgage if not let. 

I wouldn't advise getting a buy to let at the moment. My tenants having been sitting in my property for 2 years without paying rent and owe me £14k which I doubt I will ever get. It's honestly not worth the hassle. There's so much paperwork and checks to be done constantly. And then every year you have to do a self assessment tax return...

How can they do that, can`t you take legal action?

Legal action may result in a 'win' in court, but if the other party hasn't any assets....

Edited to add: Even before coronavirus, aquaintances of mine had racked-up £19k worth of rent arrears with another acquaintance, who has still seen no money.

Thrugelmir

blackshirtuk said:

saajan_12 said:

High level, if you invest 100k and borrow 265k:
* Rental income with 1 month void = 1k x 11 = £11,000
* Financing costs = say 2.5% x 265k = £-6,625
* Agent costs = say 1 months rent = £-1,000
* Repairs, certificates say 10% of monthly rental income = £-1,100
Net £2,275 profit, ie 2.27% return on your £100k investment. 

This is better than most bank accounts (~1%), but not better than the general average you get from most tracker funds (~7% over long term). You may be able to improve the above if you self manage, but then it can take a significant amount of time to learn and attend to repairs / documents etc. 

Also this is the pre tax picture - taxes on residential property are particularly punitive, due to stamp duty, higher capital gains tax, partial relief only on financing costs.. If you have room in your pension and ISA limits, I'd max those out first as you have 0 tax, and beyond that work out which investment gets to the biggest return for the risk you're comfortable with. 

I would agree with your numbers but don't forget the appreciation of the property itself, which on a long term average is 5% pa.

£365K x 5% = £18250 
When added to the profit thats £20,525 or 20.525% return on the £100K investment

Capital Gains are taxable though. 

Rumana03

Sarah1Mitty2 said:

Rumana03 said:

palford said:

Hi thanks for the replies. I agree there’s an ethical component which is part of our consideration. Also thanks for the reply with practical advice about ability to pay mortgage if not let. 

I wouldn't advise getting a buy to let at the moment. My tenants having been sitting in my property for 2 years without paying rent and owe me £14k which I doubt I will ever get. It's honestly not worth the hassle. There's so much paperwork and checks to be done constantly. And then every year you have to do a self assessment tax return...

How can they do that, can`t you take legal action?

I am currently waiting for the court to grant me possession. As I mentioned it is taking a very long time & to be honest I'll count myself lucky if they are evicted this year even. I can try and claim the money back but the solicitors said there is a small chance where some ex tenants are not able to be traced to recover rent arrears.

diystarter7

Interest-only mortgage looks/sounds good but we are in an er where rates may shoot up.

Re HMO, you get larger returns if all is well but bigger problems and repairs usually when compared with a similar property in the same area.

HMO has licencing costs and people living there not getting on, more breakages and more chances of void periods or just the one T  ticking off others.

You've not said where you live but if the property is quite a bit cheaper, go for a small, modern property as they are easier to look after. Buy local as LA on first meet are all nice but come the probs some will not live up to the promises and even a simple repair may cost you over the odds. If you are local, you could go and look/repair or keep a better eye on things.

If you borrow less as suggested ie buy locally, less to worry about if things do not pan out

If you are up to a bit of diy, buy in the best location, smaller the garden/drive the better and if paved even better as many T's do not bother to cut grass etc or it costs you to do this.

HMO, finding new T's cost money every time and new risk - insurance usually higher and licence fee's.

Buy in the best location you can afford and look for working people with good work history.
As you will be looking for professionals they need to travel to work often vai public transport, so transport links important.
A shop close by helps.

If poss, buy in an area you would not mind living in if things went wrong where you lived nd had to sell up, you could always move there.

Decor it simple, not cheap but simple and easy to maintain/repalce and not something you want in you place. Avoid designer rads etc as exepnsive and not heat effiicent often.

If possible, your new rental - get a good plumber to check all taps, w/c etc as well as an electrician and get things changed ie go one better than min requirements so it hopefully does not break down.

Ensure you hire a good, well established LA and look out for the repairs as some charge extra commission on top of works in excess of ?? amounts.

Start safer/smaller and once more comfortable/knowledgeable take a bigger risk imo

(IMO, pure guesswork, I feel prices have peaked for the next year of so as peeps worried re rate rises as well as massive cost of living rises)

Gycraig

The return doesn’t sound great for the outlay tbh, 100k down and 265k mortgaged for a 1k a month return before letting agent fees Taxes etc is awful 

steve866

Gycraig said:

The return doesn’t sound great for the outlay tbh, 100k down and 265k mortgaged for a 1k a month return before letting agent fees Taxes etc is awful 

Putting aside the hassle and potential risk and assuming a 10% letting agent fee, it looks like the OP would get an 11% pre-tax return on his £100k, without even considering the property going up in value. I’m not sure how they could be described as awful? 

Nearlyold

steve866 said:

Gycraig said:

The return doesn’t sound great for the outlay tbh, 100k down and 265k mortgaged for a 1k a month return before letting agent fees Taxes etc is awful 

Putting aside the hassle and potential risk and assuming a 10% letting agent fee, it looks like the OP would get an 11% pre-tax return on his £100k, without even considering the property going up in value. I’m not sure how they could be described as awful? 

Your calculated "11% pre tax return" completely ignores the interest payments on the additional £265,000 they need to borrow to be able to buy the property.

Dazed_and_C0nfused

Nearlyold said:

steve866 said:

Gycraig said:

The return doesn’t sound great for the outlay tbh, 100k down and 265k mortgaged for a 1k a month return before letting agent fees Taxes etc is awful 

Putting aside the hassle and potential risk and assuming a 10% letting agent fee, it looks like the OP would get an 11% pre-tax return on his £100k, without even considering the property going up in value. I’m not sure how they could be described as awful? 

Your calculated "11% pre tax return" completely ignores the interest payments on the additional £265,000 they need to borrow to be able to buy the property.

And that those interest payments are not allowable expenses in HMRC's eyes.

You may well be eligible for a tax deduction linked to the interest/finance costs but it doesn't stop you having a higher profit for tax purposes and that can be taxed at a higher rate and also impact things like HICBC and loss of Personal Allowance when adjusted net income exceeds £100k