Talk to me about becoming a landlord

[AllTheWayFromLondonDAMN]

Hey all

Putting this is chat for traffic!

I wonder if anyone can give me any advice.

Me and DP own a house in London with a mortgage (and a help to buy loan). He works full time and earns circa £60,000 with the potential to earn a bit more (middle leadership, public sector). I have an autoimmune disease which made me give up my teaching career, but I tutor and do a few other jobs freelance. Earn about £12k a year.

It may just be middle of the night and can’t sleep chat, but the announcement about 5% mortgages got me thinking. I obviously won’t have a pension if my illness means I never work “properly” in a professional job again, but I’m wondered would it be worth buying something in a cheap area and renting it out. This would obviously be provided we could get finance or save to buy outright.

Landlords of Mumsnet- I want to run some numbers past you to see what you think or if I’ll being wildly optimistic about costs.

So if we brought a house in somewhere like Middlesborough it seems like we could buy a decent 3 bed for about £36,000. By my estimations through browsing RightMove it looks like I could charge £350pcm rent.

So looking at the figures various mortgage calculators have suggested with a 5% deposit of around £2k the mortgage would be circa £180 a month. Then that having a letting agent do everything for the tenants (obviously, because we are 300 miles away) would cost around 15% of the rent, so £60 a month. Leaving us with a profit of circa £110 a month.

Obviously I know that I’d have to pay for anything and everything that goes wrong in the property and gas inspections/certs etc. But if we saved all of that “profit” each year for say... 10 years maybe that would cover all of that and we do have disposable income we could save too and a bit of (circa £5k) savings now.

Here at 3am this seems like a decent plan, keep the house ticking over and okay, never really make a profit for 20years or so if you’re saving it all to reinvest in the house, but then hopefully sell up once I’m retirement age (about 30 years or so) and you’ve got a decent chunk of pension money there.

What are the pitfalls I’m not seeing? This probably all sounds hopelessly naive and the idea of being a landlord sits poorly with my politics, but I know I need a long term plan.

And if this is utterly fanciful, please don’t flame me, as I say it might just be 3am chat on painkillers (I’ve got an inner ear infection, hence being awake!)

Thanks for all your help in advance.

Off the top of my head your £110 a month would also have to cover tax, building insurance, landlord insurance (you'd be mad to be a LL without it), annual gas safety check, fees when you find a new tenant/renew a lease through your agent, any repairs (anything from a broken lightswitch to a new boiler) and any decorating between tenants.

You also have to consider void periods and things like the EPC, electrical report, smoke and carbon monoxide alarms as and when they are required.

Personally I also think it would be madness to buy a rental in an area you don't know. What's the job situation like there? Are there lots of rentals there? Is there a lot of social housing being built? Letting agents are very often shite so you also have to factor in the times you'll have to sort things personally so how easy would it be for you to get back and forth to there.

I think being a landlord is a business and needs to be treated like one. It's not passive income. You can't simply leave everything to agents, because legally the buck stops with you. Any mistakes and you're the one who can't evict a problem tenant or you're facing enforcement action from the council.

BTL mortgages start at 25% deposit. You cant have a residential mortgage (5,10% etc) on a BTL. But yes I like the idea and we are planning similar.

Oh and most landlords dont have a repayment mortgage. So your 110 profit is not what it would be. Most have interest only. I would not buy in a random area though. 36k sounds too good to be true. Someone could afford that working a few shifts in a pub so why would they rent?

As pp said there are a lot of other expenses to account for. If your partner will pay tax on their portion it will be at 40% too, as they are in a higher tax bracket. Personally I wouldn't have thought the risk and stress associated with being a landlord would be worth it without making more turnover on a monthly basis though I appreciate that you'd have an investment through the mortgage/house purchase x

It's a great idea OP. You're on the right lines. Keep researching and running the numbers.

You could always buy this as your own property, maybe stay in it for a while/ renovate and then speak to the bank about changing the mortgage to BTL. Might be a more flexible approach.

Your main risk is tenants not paying/ getting behind with the rent. Things will go wrong and need to be sorted immediately (I.e. boiler breaks/ pipes burst) but your property manager should have all the contacts and experience to sort things like that quickly. You just need the emergency find available.

Costs will probably be disproportionately high on a cheaper property.

Insurance, decorating, maintenance and boiler servicing could cost as much as for a property you can charge more rent for, for example. That could make a difference to the numbers.

You might have to pay council tax during void periods too. Most of these houses in cheap areas will all be Band A so similar council tax. I live in a Band A property, but it's in a less economically depressed city so worth around £150k and would rent for around £600 pm but council tax similar to your Middlesbrough example.

Agree about more people in lower cost areas buying. People in London and SE think it's normal for low to averagely paid people to rent, because buying is unaffordable, but if you can buy for £36k, even people on NMW can get a mortgage and why would they pay you £350 pm rent when they can buy it with a mortgage of £180 pm?

Being a landlord can be a nasty business and fraught with worry and problems. Paying tax on the income, void periods, council tax liability when empty, maintenance and repair costs, insurances, estate agents fees, legal fees if necessary and the array of legal obligations you have (gas maintenance, electricity certificate etc.) You pay stamp duty when you purchase, as it's a second home. There may be other costs in the future too, as new legislation is brought in. For example in Wales, you have to register as a landlord and undertake training and a test to become certified. This is compulsory.

Many existing landlords have sold as it's no longer worth them letting houses out. It's not the income stream it once was. The hassle and stress can be huge. You'll need a significant sum put by for major repairs that need immediate attention, such as leaks. Don't forget Capital Gains tax when you sell either. I wouldn't do it.

Can you really buy a house that doesn’t need loads of work for £36k ? A couple of years ago someone in my family sold a house that was falling apart (to developers) in Middlesbrough following a death and even that was £72k . If the house really is that cheap I doubt you’d have much of a rental market .

An old neighbour has recently got her property back after 6+ months of no rent, the property absolutely trashed and no chance of getting any money back from the ex tenant as she is on benefits. They will have lost approx 10-15k in total, just getting them evicted for anti social behaviour cost them 4k in legal and bailiff fees. You have to take the above scenario into account when working out your finances.

I live not a million miles from Middlesborough (ie., when I'm searching for houses, ones in that area come up though they're right on the edge of my search radius). I think 36k is pie in the sky for something sensible, and I think the reason houses are cheap is because there are no jobs. I'm guessing you would need to budget for the possibility you'd end up with tenants who'd be more likely to need to move on/would struggle to pay rent than if you were somewhere with higher house prices and better job prospects.

Unless you wanted to be a slum landlord, you would need to budget for repairs and maintenance within that 10 year period, too. It's not just about things going 'wrong'. You can't charge tenants for 'betterment' so if, say, your tenant drops a tin of paint on a five year old carpet, you can only expect them to pay for the value of a five-year-old carpet rather than a new one, that sort of thing.

If you're only going to be making £110 a month how are you going to pay for a new boiler when it conks out at month 2 of the tenancy? It's unlikely a 36k house aimed at the buy to let market is going to have been well looked after so there will be a LOT of costs and unlike when it's your own home you don't have the option of asking your tenants to just live without hot water for a few months while you save.

Being a landlord comes with a huge number of legal (and moral, if you care about that) responsibilities because you hold huge power over someone else's quality of life. It's not a passive investment and using a letting agent doesn't absolve you of any responsibility either as they are just your representatives.

Buy to let mortgages need a 25% deposit.

I know nothing about Middlesborough, I looked on rightmove. Lots of houses for sale around the £55k mark, renting for around £500 a month - with tenants in residence. That means a lot of landlords are selling up. What does that tell you? (and it isn't just about Middlesborough)

you need to cost up:

• full insurance including rent guarantee (good luck with covid...), malicious damage, legal expenses. Check small print re drug dealing/cannabis farm - it doesn't happen often but if it does, the place can be destroyed, you will be looking at months with no rent and a massive repair bill. And you'll get nothing back from the tenant.

• gas safe, electrical check (latter only once every five years), fixes, repairs. On that level of rent (my tenants pay around the same although obviously it doesn't all come to me after agent fees and expenses), these bills can knock out a month's rent, never mind your profit.

my rental in a relatively decent area of a small town returns around 3.5 - 4% gross. Currently have great tenants, stuff still goes wrong so I fix it and there goes more rent. You need a good financial cushion, if the boiler goes it isn't their problem that you don't have the money.

The main issue is the changing regulation. Eviction currently impossible due to covid and the backlog will be about 2 years. By then section 21 will probably have been abolished, section 8 is easily subverted (Shelter advise how to do that) so get a rogue or someone who turns into a rogue and you are stuffed.

you may have an agent but the buck stops with you. Mess up one bit of paperwork and you will struggle to evict whatever they do.

Once these guys leave (hopefully not for a while, impossible to evict anyway so thank goodness they are good tenants) I'm selling up. Far too risky to chance someone new.

yes, savings rates have been negative for years and the stock market is risky. Government message seems to be to piss it all away...

Thanks everyone for your input- I’ve learnt a lot!

I’m pretty sure it was 3am madness but lots to think about.

To make good money, you either need a lot of small/cheap properties or you need at least one high value/high return property.

The recent tax changes have screwed those who borrow most of the asking price - not all the mortgage is allowable as an expense, only the interest. Tax relief on the interest is only 20%. You can easily end up making a cash flow loss as you're paying tax on money you don't actually have.

The houses fetching those prices are not in decent areas and the likelihood is you are not going to get decent tenants. Could you afford no rent, various repairs, eviction notices and potentially court? New kitchen, bathroom, flooring, wiring? If you don’t know the area, don’t do it.

Been doing this for years, as I was so fed up when I rented, I wanted to do a better job.

It's a lot to do with luck. If you have great tenants, who look after the house and communicate well, it's much easier. Doing things at a distance is quite difficult. Little stuff you'd pop and do at home requires someone to be paid appropriately, so a small job can end up very expensive.

Only buy a house you'd live in yourself!

I don't mean expensive, I mean safe-feeling and just nice.

Don't do it. A single 1000 pound repair would wipe you out for the year and 1000 is nothing - new boiler, leaking roof- basically non-negotiable repairs that you can't just defer. Plus it's just not tax efficient anymore. In your position, and assuming your DH has a civil service pension, I'd agree to live off your DH's salary and save at least half your salary into a pension scheme, or an ISA if you want more flexibility. Over 30 years I reckon that would outperform a 36k rental in Middleborough.

Dont - not worth the endless hassle, anxiety and paperwork. It certainly won’t make you rich, likely the opposite

Yeah & once they become tired, the freshening up costs lots as you only maybe have one chance to do the work every so often. That's why places end up slums, not enough capital expenditure, even if the landlord is not an arse.

I wouldn't do it even if I could afford to buy another property outright ....it just doesn't seem worth the hassle 🤷🏼‍♀️

How long can you afford to be without rent? Current wait to evict is something like 18 months. That would be quite some time without any rent and then you have to go on and repair whatever damage they type of people who pay no rent for 18 months cause to your property. That will eat into you £110/month “profit” very quickly.

The hassle of being a landlord is absolutely not worth the £110 a month you've calculated as profit, plus you'll spend anyway that it agents' fees and maintenance and admin. I became an accidental one and I absolutely hated it and I had the loveliest tenants who were no bother.

And if no one's said it already, it may become more and more difficult to evict.

I'm a landlord and own my property outright. I used to have a btl in a cheap area as well. All was ok until the tenant wrecked the carpet and claimed it was down to flooding. I replaced the carpet and the tenant immediately moved out. It's very likely that the tenant thought I'd take the money for replacing the carpet out of her deposit) I wouldn't have as I would've put the damage down to wear and tear.

So be aware of all the dodges. I've been mainly lucky so far but if something goes wrong, it takes priority. At one point I was spending all of the rental income on repairs and I had no money left for holidays etc.

I think there are moves to further regulate landlords in England. A useful source of info is the NRLA if no one has suggested it yet.