Buy To Let, or just chill?

katerobbins2

mi-key said:

Also consider why if there is such great demand at good rents, the person is selling the flat in the first place, and why they accepted a cheeky offer... 

I've been told it's required a rapid sale because of sickness in the family, and it was on the market for 70k more than I offered for a while... Also, it does need a few touch ups here and there, so most buyers at this price point are probably put off by that! 

mi-key said:

Do you really want to get home from work and have to spend the night sorting out some problem for the tenants that they want fixing immediately? Or having to spend your weekend trying to find a plumber who can fix a leaking shower?

Also have you considered what you would do if your 4 friends decided to move out and get a house together so you would lose £3000 a month income from them? Or if for some reason the flat sits empty for 6 months with no income from it? 

All of the points you raise are exactly the dilemmas currently going through my mind, and I guess why I'm here asking for help! What would you do in my situation? There isn't really a risk of my friends all moving out, and tbh if they did I would just find others - I had a queue of friends in terrible accom in London that wanted to move in with me! They're all currently paying mates rates, with all bills included, and living in a freshly built house with great mod cons... It's a good deal and I could charge a lot more based on what I see on Spareroom!

_Penny_Dreadful said:

There are more than just two options, BTL and leaving the money in a savings account. What other investment options have you considered? 

I haven't actually looked at any other options for my money, if I'm honest. As I said, I'm the first from my family/friends to make decent money, so I'm quite blind in this situation. I would really like more financial stability, so that I can take a break from my job and know that I have a side income still, which is why I was thinking about getting this extra property. 

The tax questions are very valid, and I will need to look into them. I'm currently PAYE in my day job, and I have an accountant for the lodger income, so I'm really not sure. 

katerobbins2

steve866 said:

Have you factored in the tax given your salary and existing rental income? I am personally holding off purchasing an additional property until interest rates (hopefully) decrease 

This sounds like a good move, and I would love to wait a bit ideally - but my aim is to reduce my hours (potentially to zero) from this summer, so I would need to wait even longer for the four months of pay slips!

I have just been told that my BTL fixed rate has dropped by 0.1% though so things are moving in the right direction...

tacpot12 said:

The flat seems to make financial sense. You should get a return from the rent of about 4-6% depending on whether you can get the £1800 or £2000 per month you think you can, and you don't have any problems with the tenants. You would also have the potential for a further return due to property price rises. I've allowed an amount for the normal expenses of letting a property (insurance, letting agents, safety checks, repairs for wear and tear, etc.).

Interestingly the mortgage survey went ahead today, and I have been told that the surveyor used a figure of "£2000-2200pm" for the rental calculation, which seems like reach, but if it's good enough for the bank... 

Out of interest, could you let me know what sort of £ figures each of your "normal expenses" there would be please? I'm so new to this that I don't actually know what sort of amounts those might look like, but I'm glad they seem to still work out! 

Also should I be worried about the service charge? Do people usually do BTL on places with a service charge, or are they avoided?

lika_86 said:

Overpay your own mortgage and reduce the rent you are charging your friends?

As mentioned, they're already getting a very good deal for this part of London, and they all have decent full time jobs so it's not an issue! My mortgage is being overpaid on a monthly basis, and I aim to continue doing this. This really is just a question about making the right choice for financial security, and I guess I'm trying to prioritise myself (and my future family). 

Thank you all so much for the help so far, it is so appreciated!

_Penny_Dreadful

_Penny_Dreadful said:

There are more than just two options, BTL and leaving the money in a savings account. What other investment options have you considered? 

I haven't actually looked at any other options for my money, if I'm honest. As I said, I'm the first from my family/friends to make decent money, so I'm quite blind in this situation. I would really like more financial stability, so that I can take a break from my job and know that I have a side income still, which is why I was thinking about getting this extra property. 

The tax questions are very valid, and I will need to look into them. I'm currently PAYE in my day job, and I have an accountant for the lodger income, so I'm really not sure. 

You could probably see similar yields using different investments that you could wrap up in an ISA which have the advantage of a) no tenant calling you up because something needs fixing and b) no tax to pay.  You do want to move some of that £110,000 out your savings account though as only the first £85,000 with a banking institution is covered by the Financial Services Compensation Scheme so if the bank goes under you’ll lose a good chunk of your money. 

Should you find yourself with a tenant who stops paying the rent you still need to pay the mortgage and the mortgage payment won’t be treated as an expense on your tax return as you’ll only receive a 20% credit which is ok if you’re a basic rate tax payer but you’re not. 

Personally, and maybe this is just because I’m Scottish, I find the whole leasehold thing weird, and when investing in property in England I go freehold every time. I find it odd paying ££££££ for what is essentially just a very long lease that you either need to extend at some point or allow to run down until it’s worth hee haw. 

mi-key

katerobbins2 said:

mi-key said:

Also consider why if there is such great demand at good rents, the person is selling the flat in the first place, and why they accepted a cheeky offer... 

I've been told it's required a rapid sale because of sickness in the family, and it was on the market for 70k more than I offered for a while... Also, it does need a few touch ups here and there, so most buyers at this price point are probably put off by that! 

mi-key said:

Do you really want to get home from work and have to spend the night sorting out some problem for the tenants that they want fixing immediately? Or having to spend your weekend trying to find a plumber who can fix a leaking shower?

Also have you considered what you would do if your 4 friends decided to move out and get a house together so you would lose £3000 a month income from them? Or if for some reason the flat sits empty for 6 months with no income from it? 

All of the points you raise are exactly the dilemmas currently going through my mind, and I guess why I'm here asking for help! What would you do in my situation? There isn't really a risk of my friends all moving out, and tbh if they did I would just find others - I had a queue of friends in terrible accom in London that wanted to move in with me! They're all currently paying mates rates, with all bills included, and living in a freshly built house with great mod cons... It's a good deal and I could charge a lot more based on what I see on Spareroom!

To be honest if I was in your position, and given the pretty small return from the flat, I wouldn't buy it. The main thing that would worry me would  be the lack of backup security if I was planning to give up my job. If you are getting 3.5% on your savings, that is pretty much the same as you will get from the flat,and may end up being more if problems arise that need paying for or it takes a few months to find tenants.

You don't have all the extra work and hassle of being a landlord and keep a good emergency fund for when you stop working.

Being a part time landlord isn't easy, and the financial rewards are pretty small. The landlords I know who do well out of it do it as a full time job, and own multiple properties ( one owns over 50 in one town ) so it makes it worthwhile and they can afford to employ people to help manage the company

katerobbins2

_Penny_Dreadful said:

Personally, and maybe this is just because I’m Scottish and I find the whole leasehold thing weird, but when investing in property in England I go freehold every time. I find it odd paying ££££££ for what is essentially just a very long lease that you either need to extend at some point or allow to run down until it’s worth hee haw. 

This is really great advice and exactly what I'm thinking... I received the LPE1 form today, and it turns out there are potentially "roof works" coming up, along with a rise in service charges. The block is run by a resident group + a management company, but the idea of paying more than £2k a year for that really scares me. 

mi-key said:

Being a part time landlord isn't easy, and the financial rewards are pretty small. The landlords I know who do well out of it do it as a full time job, and own multiple properties ( one owns over 50 in one town ) so it makes it worthwhile and they can afford to employ people to help manage the company

I think I need to read more about being a part time landlord, because I've probably been shielded from a lot of issues by renting my places to very chilled friends... Lots to learn for sure. 

Thanks again for the advice! I really appreciate the insights 

mi-key

katerobbins2 said:

_Penny_Dreadful said:

Personally, and maybe this is just because I’m Scottish and I find the whole leasehold thing weird, but when investing in property in England I go freehold every time. I find it odd paying ££££££ for what is essentially just a very long lease that you either need to extend at some point or allow to run down until it’s worth hee haw. 

This is really great advice and exactly what I'm thinking... I received the LPE1 form today, and it turns out there are potentially "roof works" coming up, along with a rise in service charges. The block is run by a resident group + a management company, but the idea of paying more than £2k a year for that really scares me. 

mi-key said:

Being a part time landlord isn't easy, and the financial rewards are pretty small. The landlords I know who do well out of it do it as a full time job, and own multiple properties ( one owns over 50 in one town ) so it makes it worthwhile and they can afford to employ people to help manage the company

I think I need to read more about being a part time landlord, because I've probably been shielded from a lot of issues by renting my places to very chilled friends... Lots to learn for sure. 

Thanks again for the advice! I really appreciate the insights 

A friend of mine owns a flat in a block 6 with leasehold. The needed major work doing on the roof and some other bits, and were charged £14K per flat !

Yes, definitely check up on all the legal things you will need to conform with ( there is a hell of a lot when renting out a property you aren't living in as its a whole load of different rules than having lodgers who aren't tenants ! ) 1

I think most people who have recently become BTL landlords with one property are just hoping the increase in the property value will give them a return in the future as an investment, rather than actually getting a monthly income from it. Unless someoone bought a BTL property years ago when prices were a lot lower and has a small mortgage on it, then it's not the best plan for short term returns
 

_Penny_Dreadful

katerobbins2 said:

_Penny_Dreadful said:

Personally, and maybe this is just because I’m Scottish and I find the whole leasehold thing weird, but when investing in property in England I go freehold every time. I find it odd paying ££££££ for what is essentially just a very long lease that you either need to extend at some point or allow to run down until it’s worth hee haw. 

This is really great advice and exactly what I'm thinking... I received the LPE1 form today, and it turns out there are potentially "roof works" coming up, along with a rise in service charges. The block is run by a resident group + a management company, but the idea of paying more than £2k a year for that really scares me. 

I was in a similar situation to you in that I was the first of my family and friends to make really good money.  I ended up getting into BTL because I was offered a job in the Middle East for a few years, let my home out, and was then making money hand over fist with very few living expenses and no income tax to pay.  This means that I had sufficient capital not to be heavily geared.  Since then BTL has become less and less tax efficient so if I was making that good money overseas would I get into BTL now?  Probably not and I guess that's the point behind the higher rates of SDLT and the ADS in Scotland.  Even the Tories, whom I have never and will probably never, vote for are going after landlords with proposed, new legislation and you'd think most landlords would be their core voter base.

When it comes to investing don't put all your eggs in one basket.  As a higher rate tax payer maxing out your pension contributions would be worth looking at and back when I started looking into investments I was recommended the book, "Smarter Investing" by Tim Hale.  (The general gist is don't get fancy.)

If you do decide that you still want to get into BTL then by all means do it.  My recommendation would be to join a landlord association and to manage the let yourself.  From personal experience I find letting agents to be worse than useless and eat into your profits for no real benefit.

**I should qualify the above by saying that I am in no way qualified to give financial advice.

[Deleted User]

_Penny_Dreadful said:

katerobbins2 said:

_Penny_Dreadful said:

Personally, and maybe this is just because I’m Scottish and I find the whole leasehold thing weird, but when investing in property in England I go freehold every time. I find it odd paying ££££££ for what is essentially just a very long lease that you either need to extend at some point or allow to run down until it’s worth hee haw. 

This is really great advice and exactly what I'm thinking... I received the LPE1 form today, and it turns out there are potentially "roof works" coming up, along with a rise in service charges. The block is run by a resident group + a management company, but the idea of paying more than £2k a year for that really scares me. 

I was in a similar situation to you in that I was the first of my family and friends to make really good money.  I ended up getting into BTL because I was offered a job in the Middle East for a few years, let my home out, and was then making money hand over fist with very few living expenses and no income tax to pay.  This means that I had sufficient capital not to be heavily geared.  Since then BTL has become less and less tax efficient so if I was making that good money overseas would I get into BTL now?  Probably not and I guess that's the point behind the higher rates of SDLT and the ADS in Scotland.  Even the Tories, whom I have never and will probably never, vote for are going after landlords with proposed, new legislation and you'd think most landlords would be their core voter base.

When it comes to investing don't put all your eggs in one basket.  As a higher rate tax payer maxing out your pension contributions would be worth looking at and back when I started looking into investments I was recommended the book, "Smarter Investing" by Tim Hale.  (The general gist is don't get fancy.)

If you do decide that you still want to get into BTL then by all means do it.  My recommendation would be to join a landlord association and to manage the let yourself.  From personal experience I find letting agents to be worse than useless and eat into your profits for no real benefit.

**I should qualify the above by saying that I am in no way qualified to give financial advice.

I agree with a lot of what you say. If I was to be starting out in buy to let today,  the yield would have to be enormous. Get it wrong and the outcome after all the hassle of being a landlord will simply be turning over huge amounts of tax to the government.

Ditzy_Mitzy

Buy to let in your circumstances is pointless and you'll make a loss.  This calculator here:

https://www.vestaproperty.com/learn/calculators/buy-to-let-mortgage?annualInterestRate=4.6&loanAmount=258750&propertyValue=345000&termYears=25&monthlyRent=24000

gives you the basics.  

Headlines, at best case scenario of £24,000 gross rental income (£2,000 pcm): 

Income: £24,000 p.a.
Mortgage with capital repayment: £17,436 p.a.
Difference: £6,564 p.a.

Less:
Ground rent:£250
Service charge: £2,200
Tax @ 40%* on £24,000: £9,600
Total: - £12,050

Bottom line: £6,564 - £12,050 = £5,486 annual loss.  

Alternatively: 

Income: £24,000 p.a.
Interest only mortgage: £11,904 p.a.
Difference: £12,096

Less:
Ground rent:£250
Service charge: £2,200
Tax @ 40% on £24,000: £9,600
Total: - £12,050

Bottom line: £12,096 - £12,050 = £46.  WOO HOO WE'RE IN THE BLACK.  

But you haven't paid for the flat...

D'oh.

*a loss is still made at basic rate.  

lika_86

Ditzy_Mitzy said:

Buy to let in your circumstances is pointless and you'll make a loss.  This calculator here:

https://www.vestaproperty.com/learn/calculators/buy-to-let-mortgage?annualInterestRate=4.6&loanAmount=258750&propertyValue=345000&termYears=25&monthlyRent=24000

gives you the basics.  

Headlines, at best case scenario of £24,000 gross rental income (£2,000 pcm): 

Income: £24,000 p.a.
Mortgage with capital repayment: £17,436 p.a.
Difference: £6,564 p.a.

Less:
Ground rent:£250
Service charge: £2,200
Tax @ 40%* on £24,000: £9,600
Total: - £12,050

Bottom line: £6,564 - £12,050 = £5,486 annual loss.  

Alternatively: 

Income: £24,000 p.a.
Interest only mortgage: £11,904 p.a.
Difference: £12,096

Less:
Ground rent:£250
Service charge: £2,200
Tax @ 40% on £24,000: £9,600
Total: - £12,050

Bottom line: £12,096 - £12,050 = £46.  WOO HOO WE'RE IN THE BLACK.  

But you haven't paid for the flat...

D'oh.

*a loss is still made at basic rate.  

In your capital repayment figures, where are you accounting for the capital repayment?