Buy to let...talk to me

[BakedBlossoms]

Just that really. We live in a 2 bedroom flat with no garden in London with DS aged nearly 5. Aim was always to move back to the south west where I grew up and flat went on the market just before lockdown. Covid happened and interest completely dropped off - flats without gardens are just not selling. We are desperate to move due to having another baby on the way and have dropped the price several times now.

Both DH and I are in secure jobs with a decent amount of savings in the bank. I'm wondering if it would be madness to switch to an interest only BTL on this property and let it out for a couple of years while we move to the south west - we'd probably rent for a bit ourselves during this time. We would use a managing agency for the tenants and would not take on the management of the flat ourselves.

I'd love to hear experiences of others who might have done this.

If it’s only short term would your provider give you consent to let?

You can then sell once (if) prices settle? I think morally you would need to make it clear to prospective tenants that this is what you intend to do though?

I think to be honest we'd want to let it out until the property market bounces back a bit and frankly with brexit and the covid economy I can't see that happening for years yet. If we let it out I think we would be looking at at least 3 years initially.

Can you avoid to pay the mortgage if the tenant stops paying or any void periods? Also maintenance on the property for eg if the boiler needed replacing?

We are in the same boat as you, but discounted letting due to the above.

Yes, as we have a good whack of savings in place I think we could afford to take those hits or I definitely wouldn't consider it. Our intention would be to take out interest only as a precautionary measure but to overpay every month.

How would you feel emotionally if someone trashed it? I'm a tenant and I know most tenants are perfectly capable of looking after a home, but you could be unlucky and it does happen. Given it's been your home, how will you feel if they don't look after it as you'd like?

Mmm, I don't know really. I'm pretty unemotional about that sort of thing but I appreciate you don't know how it feels until it happens to you.

But would you need your savings for a new property? Unless your current mortgage is very low, I wouldn't advise it. The law is changing around renting and there are lots of legal obligations. Even if you have an Agent you will need to actively manage them to make sure the legal obligations are met - the buck stops with you. You'll need to check that your mortgage provider will let you switch to interest only - things have tightened up in the mortgage market. You'll also need specialist insurance.

We wouldn't , no, as we'd rent for a bit before committing ourselves to an area. We could also use some of our savings as a deposit and still have a safety net, they are fairly hefty.

I think our BTL interest only would be around £500 pcm and our rent £1300 approx.

As in the rent we'd get on the property would be about 1300.

How much equity have you got in the property- providers generally require more equity/lower LTV value for BTL than ordinary residential so switching to a BTL may not be that easy if you have an 80% mortgage for instance.

As others have said, do be aware of the extra costs of letting out, so even if rent should easily cover mortgage do budget for management fees, void periods or missed rent, maintenance and compliance, and tax (with the latter, income from rent is now taxed much more heavily than previously and you can't offset/deduct the mortgage payments, so if you are a higher rate tax payer could be quite expensive...), with all of this you could end up it actually costing you money rather than being in anyway profitable. Which could be fine for you if you want to retain an investment in the London property market so you are happy to play the long game, but otherwise I think you might want to liberate your capital and reinvest where you actually want to live sooner rather than later, even if this means dropping the price slightly?

you would need insurance covering the building (if relevant), contents, malicious damage, legal expenses and rent guarantee. plus agent fees.

you will need to make sure everything works, it meets all the legals etc. (gas safe, electrical cert, smoke alarm, EPC)

you would need money to fix things and to realise that agent or not, the buck stops with you. Make enquiries and see if the sums really stack up. Even renting out a London flat, I'd be surprised if it will pay for another rental elsewhere.

remember there's no such thing as an 'accidental landlord' - you are deciding that you don't want to sell because it has dropped so much in value. That's fine but make sure you know what you are getting into.

I couldn't sell my flat last year, switched to an interest only BTL and have it managed by a letting agency. It's really easy. I make very little profit on it (around £50 a month by my calculations, although haven't done my first tax return yet), due to tax, letting agency fees, landlord insurance, ongoing ground rent and service charge, however it's definitely been worth it for me. For the time being I'm going to keep it, and then either sell a bit further down the line, or if finances allow then switch to a repayment BTL and pay down the capital. Even less profit, but think the asset might be more valuable in the long run. You do have to detach though, and start to view it as a financial decision rather than the home it used to be to you.

Even renting out a London flat, I'd be surprised if it will pay for another rental elsewhere.

I wasn't expecting it to, my thinking was that:

500pcm interest only mortgage on our rental property, 1300 pcm rent gained so £800 profit which pays the expenses, plus a bit left to overpay possibly.

Then we just use the money we'd be using to pay our own mortgage on a property we would live in (rented) in the south west.

Thank you everyone. Lots of helpful things to think about here.

That £800 is definitely not all profit OP! You aren't accounting for all the other expenses. I'd make your sums more like:

Income:

-£1300 (rent)

Outgoings

-Mortgage: £500
-Tax: £250-£500 depending on whether you are higher/lower rate taxpayers and what other costs you can deduct
-Management fees: £150 (c.10% as you won't be local so will want full management service)
-Insurances etc.: £50
-Service charge/ground rent: ?

So I would make your 'profit' more in the region of £100-300 p/month, which will be wiped out by a couple of months void period p/year or the boiler breaking or similar, and doesn't account for service charge or any bank charges/early repayment fees for switching the mortgage. That's fine so long as you aren't particularly expecting to make much from it and just want to keep hold of the equity in the property as an investment but BTL on a small scale is certainly not the cash cow it once was...

That £800 is definitely not all profit OP!

No sorry i know, i just meant that was the amount left over after rent.

To clarify I am not looking for a cash cow, simply to hold onto the flat as an investment for a few years. I have no desire to make money from letting it out.

Just spoken to our mortgage provider and actually BTL interest only would be even less than I thought, something like £350.

I would always hang on to property, especially in London if you are able to. When I moved in with my DH I rented out my house and it was the best decision I made. I don’t make a huge profit as I have a BTL repayment mortgage but it’s a great investment. A letting agent is a must, so much simpler. We now have a couple we rent out and so far have been very lucky with tenants! I have landlords insurance & do a tax return each year and can cover the mortgage if it’s ever empty. Good luck

thank you Namealreadyinuse1 that's helpful