Buy-To-Let Property - Advice for First Timers

[tricot39]

Out of the blue DH has suggested that we might consider a Buy to Let property to generate some extra income. We will need a mortgage. Given all of the costs which are likely to apply, what is the "real" yield (before tax and expenses etc) that we would need on the property to make it worthwhile? And what is the remaining yield that we would be looking at as taxed income?

Aside from the financial side, the management of tenants is pretty daunting - I had a tenant rent my first flat and she ended up having 5 adults and 2 kids living in a 2 bed flat. How do I screen tenants and get secure personal/financial references etc? How do I deal with deposits? Disputes? etc etc The property will a short distance from our home so I am hoping to do without an agent - last time all they wanted was to fill the flat and didn't care who with - to get more control over the process.

Lastly, things can go downhill fast if repairs are not kept up to date. How often is it reasonable/sensible to make inspections?

Anything else we should know?

TIA

[TalkinPeace2]

if you need a mortgage to do it, don't
the market is flooded and prices are falling

have you filled your ISA allowances - better use of cash and time

[RCheshire]

I've never done BTL but it really seems like something that made sense if you got it into 10-15 years ago.
Why would you want to touch it now with a mortgage? I can understand if you have a broad range of investments and housing is one part of it, but I really can't understand taking out a loan for it - given we're living through a period of stagnating or falling house values, and the letting market is going to take a real knock later this year as housing benefit caps kick in.

Most of the people who made a killing on BTL did so through the house price rises of the 1990s, not from the rental yield.

[tricot39]

We are in an area where prices have held/are rising and rental demand is good. It would be at least a year before we would buy something - if it seems sensible.

We are not expecting to make a killing on capital growth but are looking for extra income.

I thought the whole idea was daft but it could work for us - hence my list of practical questions for experienced landlords

[Lonecatwithkitten]

Being brutally honest it is really really tough to make any income from BTL currently. The mortgage deals are not that great currently and you need a pretty big deposit.

[specialsubject]

I am looking into doing it with savings, to get better than current interest rates and for inflation-proofing. I would expect gross yield in this area of 5-6% from a house costing about £110k. Real yield after agents fee (and I think a good agent is essential), insurances, repairs etc; well, depends how much needs fixing but would hope for 4% or more.

I tend to be pessimistic with these figures. But no, if it needed a mortgage i wouldn't do it.

[Lonecatwithkitten]

Specialsubject real yield needs to include your insurance, at least a 10% wear and tear budget. So actually in reality you begin to knock down to 2.5 to 3% yield.
From experience I would say that flats are much easier to run than houses an actually have a higher yield.

[Timetoask]

We rent out a flat. I have just calculated our yield for you, and it comes to 4%. We don't have a mortgage.
If you are going to get a flat I recommend you make your calculations ignoring 3 of the monthly repayments. One will go the building management company (who put their cost up every single year!), one will go to the letting agents (I would rather not use them, but prefer not to take the risk), and one will go on improvements and fixing things.
If you are in it as a long term plan (10 to 15 years) before you see the actual benefits then I think it is worth doing, however, if you need a mortgage and want to produce income straight away then its not a good idea.

[Samnella]

[[http://www.moneyvista.com/guides-tools/mortgages-homes/tax-implications-of-owning-a-second-home/ this gives some good advice about calculating yield and income]. I have just done our and we have a yield of 5.3% with an income after all expenses of £6500 per year. We have a mortgage and live in London so as yet the property has not gone down in value so we have also made money on its increase in value but of course that only matters if we sell. Don't underestimate how much you will spend on redecorating etc. I spend far more on the rantal property than my own house.

[Samnella]

hopefully the link will work now


this gives some good advice about calculating yield and income. I have just done our and we have a yield of 5.3% with an income after all expenses of £6500 per year. We have a mortgage and live in London so as yet the property has not gone down in value so we have also made money on its increase in value but of course that only matters if we sell. Don't underestimate how much you will spend on redecorating etc. I spend far more on the rantal property than my own house.

[TalkinPeace2]

20% tax on that income
AND the mortgage deal will be a commercial one not a domestic one - Land Registry and HMRC are tipping off lenders

[specialsubject]

interesting stuff lonewithkitten (and everyone else). Have rented before and found that the actual damages were nowhere near 10%, and this will be a newer house. I did include insurance - I'm in a cheap area for that. Until we look at actual properties won't get real figures.

allowing for voids is a good one. Should be operating below the tax threshold (two of us) - as you see OP this is not a way to get rich!

[TalkinPeace2]

"operating below the tax threshold"
do you have no other earnings then, because the income from the property will be added on top of your salaries etc and taxed at your top rate
and losses on property cannot be offset against other sources of income

[Samnella]

How do I screen tenants and get secure personal/financial references etc?
We use an agent (you can negotiate fees) to find tenants as we find it too time consuming to do ourselves what with work and the kids. BUT I akways ask to meet the tenants before they move in, and insist on seeing a copy of the fiaincial references and call the last landlord myself. You will sometimes be fobbed off saying its data protection but I just say no one moves into my property without these condiitons being met and they can just ask the tenant permisson for me to see the credit report. I dont trust reference companies to get lanlord references as in 7 years I have only been called or emailed once to give a reference when a tenant has moved on!

If you have the time to do it yourself then make sure you make it clear in the ad who you don't want. It just stops alot of time wasters. We always say no HB or pets for example. There are plenty of reference companies (just google)you can use and when we have found a tenant without an agent we have charged the tenant for the search as a way of them securing the flat. I then keep advertsing and showing people around but tell people the flat is reserved subject to refernces. I then take contact details of anyone interested in case the references fall through. Again make sure you call the landlord rather than rely on the reference agencies. I always ask if they have paid the rent fully and on time, any damage and how they kept the property.

You need to decide who your target audience is. Our flat is a large 2 bed property in London so suits young sharers. We avoid HB as our mortgage forbids it and there can be many issues with delayed payment and getting your property back if you need to. However, a friend delibertley targets this group and it works for him.

How do I deal with deposits? Disputes? etc
You have to secure deposits now. I usethis which is freee and just needs you to take the time to follow the instructions carefully. If you don't serve the information specified and secure the deposit within a certain period of time you can potentially lose 3xthe deposit if the tenant took you to court. It's straightforward, you just need to understand the requirements.Agents will try and make you believe its all very tricky and they should do it for you at a charge but you can do this yourself.


Lastly, things can go downhill fast if repairs are not kept up to date. How often is it reasonable/sensible to make inspections? I do mine every 6 months.

[tricot39]

Thanks. I need to do some number crunching. What is "HB"?

[RCheshire]

Housing Benefit

[ForeverProcrastinating]

Samnella has given good advice, I just wanted to add a couple of points with my letting agent hat on. Generally speaking, if you provide a property that appeals to a responsible rental sector (professionals, families), ensure your paperwork is 100% correct (not a AST from WH Smith's), charge a fair but market rent, keep the property in good repair and ensure it is managed properly and inspected regularly, you should be fine.

There are HMO's (House in Multiple Occupation), student and holiday lets, all of which require more specialist knowledge and experience to ensure legal compliance and minimal hassle.

I have spent my 25+ year career treating both landlords and tenants respectfully and fairly, it seems good karma to me. However, take care as the majority of the lettings industry are still unlicensed and we are classed alongside tax inspectors and traffic wardens.

FWIW, I do all my referencing thoroughly and always get all of my references in writing AND speak to the previous landlord. Three 'bad apples' (non payers) to date isn't too bad.

The vast majority of letting carries on without drama or problems, it's just when it all goes pear shaped that people shout loudly. Good luck.

[tricot39]

Hhm well the expected rental yield works out very small - about the same net income after tax from the rent as if we left the deposit amount in an ISA! But that was fairly conservative assuming maximum fees, 10% actual wear and tear, an empty month et etc. So it might be possible to get slightly more income by keeping costs down, but as a poster said above, it is pretty hard work with a mortgage and there is obviously lots more risk to our capital.

So interesting, not quite as mad an idea as I had first thought!
But probably not for us at this point.
Thanks for the information and advice.