Advice about buying a property and buying to let

[purplepowers]

I'm looking for a bit of advice. My parents are gifting me with £150K. I am planning to buy a flat which I want to rent out. I have my eye on something which costs £310K. I am hoping the rent will pay the mortgage. I am not planning to put the whole lot as a deposit, but approximately £135K and keep £15K as a buffer for solicitor fees, stamp duty, minor redecoration etc, plus money in case the flat doesn't rent straightaway.

It is an affluent area and flats here rent out for approx. £1200 a month. How much would I need to pay out roughly per month if I borrowed £175K? I understand I need a special buy to let mortgage. Who does the best rates? Any advice appreciated as I am totally in the dark with this. Thanks.

Anyone? Trying to bump for any advice

I'm guessing that you already own a property, but just in case you don't I should point out that most (perhaps all these days, I'm not up to date with current lending policies) BTL lenders will not lend to you if you're not already a homeowner.

Interest rates will depend on what type of mortgage you want to take out, which in turn will be largely based on your appetite for risk - would you go for a tracker mortgage or a fixed rate, and if fixed rate then how long for? If you went for a short term (2 year) fix you'd probably be looking at monthly interest only repayments of around £440, a longer term fix would I imagine be somewhere in the region of £550 per month. Bear in mind though that interest rates are extremely low right now and will inevitably go up over the next few years; at an interest rate of 7% your IO repayment would be over £1000 per month.

What's your aim in taking on a BTL? If you're looking for a decent annual return then £1200 rent on a £310k property is a pretty poor yield to be honest, I wouldn't expect to make much (or any once interest rates go up a few points) money on that once you take into account all the costs, particularly if you are going to use an agency to manage it for you which will probably cost not far off £150 per month.

Do you have a full business case breaking down all the costs (eg service charge, ground rent, landlords insurances, maintenance, gas safety checks, allowance for voids, agency fees etc)? You could almost certainly make a better return on £150k by investing it elsewhere.

Thank you for your reply. It's all very useful to know. I am a homeowner and not planning to use an agency. What do you suggest investing the money in?

No offence but you really do sound like you haven;t thought this through. You need to do way more research. The mortgage is just only one cost to consider. Poster above lists most of them and you might also want to consider white goods or furniture. There are also legal obligations you will need to make sure you understand and meet (e.g. do gas safety check once a year, put your tenants deposit into a proper scheme etc) and provide a proper tenancy agreement. Also if you are thinking of it as a long term investment you need to factor in replacement of e.g. kitchen, bathroom, and any other non routine type maintenance such as share of roof bills. You would need to be sure there was enough potential capital gain of your property to really make it worthwhile (don;t know your area, but I wouldn't count on big capital gain at the moment).

Sorry bit of a rant there but I do think many people in this country assume BTL is an easy way to get rich. Far to many ignore the fact that properties need investment to keep them in good condition. I have just spent the day touring round various ex council estates where landlords have snapped up properties for BTL from hundreds of miles away and basically couldn't give a shit about them, all they care is that the get the rent in every week.

If I had that money I would max out best rate ISAs, invest in a stocks and shares isa, buy some shares to trade (look at Hargreaves Landsdowne), get a tracker fund, maybe even buy a bar or two of gold - Royal Mint sell them now!,

I think the only way to make money on a buy to let is either to be in London or to rent out a dump at a high price; which also means being in London. In other areas tenants have the sense not to rent dumps unless they are cheap dumps.

I don't have a mortgage on my rental and it returns a grand 3% or so after expenses and insurances. A mortgage would swallow all of that. Of course there is capital gain but I think the days of big numbers on that are over.

Purple, I think you need to do some basic sums to work out what sort of return you might get on this property.

I believe that the usual formula for calculating your gross 'yield' is the monthly rent x 12 divided by the purchase price then x 100 to get the percentage. So in your case, this would be 1200 x 12 = 14400/310000 = 0.046 = 4.6%.

This sounds respectable but it is the gross yield so it doesn't take into account any associated costs of owning the property e.g. mortgage repayments, insurance, ground rent, service charge, ongoing maintenance and repairs.

Then there are also the costs of finding and putting a tenant into the property e.g advertising for tenants, gas check, inventory, putting deposits into a deposit scheme, cleaning etc.

So to get your net or true yield, you need to add up all these estimated costs and deduct them from your annual rent figure. Mortgage alone will probably swallow up very approximately £400-500 a month.

Then do the yield calculation again using the actual annual rental figure to see what your net yield will be.

I think that's all correct but be warned that maths is not my strong suit and someone else might come along and correct me!

Once the flat is let, don't forget that as well as your outgoings you will have to save money every month for the taxman, although some expenditure is tax deductible.

Basically, BTL does take up a lot of time and money. It's not a recipe to get rich quick, that's for sure.