Those who know about buy to let - what sort of rent would you want to aim for on a £100k property?

[atticusclaw]

W are in the very early days of thinking about a buy to let property. I'm fairly cautious given that we still have a mortgage on our own home but DH is keen and we do have a good amount of disposable income.

We can get a 3 bed property for £100k (not particularly nice village but good school catchment). Rental income would be circa £450 a month.

Alternative is to look at 3 bed in nicer village for about £130k (same good school catchment area). Would rent out in a flash. Rental income would still be about £450/£500 a month.

We clearly need to think about this very carefully but before I waste lots of time looking at it does that sort of return seem ok? I think it works out at 6.48% on the cheaper property.

We would put in a 25 percent deposit and have an interest only buy to let mortgage to max out on the tax relief.

I'm a LL of over 20 years and I will never understand how LLs can even break even when renting out a whole house for so little. I know that people do so it must be possible, but I just can't work out how.

My expenses, per house, work out at an average of £4000 a year. So that's insurance, misc expenses and around £3000 per house of repairs/maintenance. If you are only getting around £6000 a year in rent that's only leaving £2000 a year for your mortgage interest. Now not every house will cost that every year, but that's what it works out at on average for a number of houses over 20 years.

Then of course it would be a good idea to get rental income insurance, which can be about 5 to 10% of your income. Without that you risk having to evict for non-payment, which takes an average of 8 months, often more, during which time you receive no rent. And it can cost you hundreds, or thousands if you need professional help, in legal/court fees.

So that's not helping your decision about which of the two would be better, but it's questioning whether you are sure it is financially viable at all.

So to put it another way, percentage returns don't take maintenance and other expenses into account.

Where are you located exactly? 450 return on a 100k property is very poor to be honest. We would achieve a much higher return on a 100k spend.

What part of the UK are you in? I am in the North East and here you would pay around 50 to 70k for a house that would return 400 to 450 so that sounds a lot to me.

And as thecatneuterer said, there are a lot of other costs to take into account.

Cleo

East Midlands. We're not looking to make money on the rent it's more about the hopeful appreciation in value.

It's a 6.48 percent gross rental yield, 4.05 percent net yield taking into account 25 percent costs.

We have rented out property before but not for ten years. The market was very different then!

I think we might be better reverting to plan A which was to buy a second property that we want to downsize into when we leave this house.

How about a guaranteed rental income of 6% net?

Plan A sounds like a much better idea.

yep, don't be surprised that renting out property isn't a licence to print loads of cash. I also wouldn't do it with a mortgage.

rent guarantee insurance costs me 2.5% BTW.

Renting out a property that you want to live in is not necessarily a good idea. The exception would be if the criteria for the property that you want to downsize to just happen to be criteria for a good rental property.

ime, the rent only just covers costs over the long term. Major repairs take capital and are further investment.

You need to remember all the costs involved with being a landlord. Maintenance and repairs, insurance, letting fees, periods when the house isn't let. There's always something that needs fixing or replacing.

We have had rental properties before just not for a long time and when we had those properties they were a lot cheaper to buy. We're both lawyers so know all the ins and outs re tax etc.

Logic behind buying a property to downsize into is that we currently live in a sprawling great dump house with a lot of land which needs constant maintenance but is worth over a million. We have more disposable income than we have ever had before at the moment and we're not lavish spenders. Buying a pure investment property looks like it would be more hassle than its worth really. Buying a smaller house for us to downsize into on the other hand would mean that since we would eventually move into it as our permanent residence we'd avoid any CGT. So if we buy now and assume that in all likelihood over 20 years there will be some capital appreciation then we've gained. Any rental income we can get from it in the meantime will help to pay off the mortgage.

We'd have to save for a bit to get a larger deposit but I think its probably the better option if we're looking at property.

On the other hand we could just keep overpaying on this mortgage which was my preferred option in the first place.

I would rent at a value that covers your interest and repayment plus a bit more if possible. At 25% equity I'm guessing you need to rent out at £750 or so.
At the end of your interest only mortgage you need to have built up the repayment cost from rent to make it financially worthwhile in my opinion.

I've looked into doing this, outside of London. I think thecatneuterer has hit the nail on the head. There are lots of costs involved. I couldnt make the numbers work now so have opted as follows:

1. Pay off current mortgage at v high overpayments. Should be done in 5 years touch wood. House about £1m probably over, but as is london, not a huge home that we can't manage in when we are elderly. Plus v good local hospitals may come in handy! So not downsizing.

1. Save up extra cash when mortgage cleared. Will be going back to work full time by then. Max out ISAs, premium bonds first. Low income, but safe parks for emergency cash.

1. First 100k cash goes into btl North of London (few contenders here, but will need to re-visit when ready)

1. Next ~100k goes into different btl if first one works out. Beg advice from my property developer mother re when to stop with property

1. Diversify into other assets. Metals, shares, etc. high risk stuff.

This is the rough plan. Btl market may collapse if regulations change. May need to adjust plan drastically. Who knows. Not taking any inheritance into account, but if I get any, will get into high risk stuff much sooner.

I must stress this is a very long term plan, subject to good health and gainful employment. I couldn't get a good enough rental yeild projection to offset the associated costs of btl PLUS our mortgage interest at this point in time for us.

YMMV.

Hi all
Any wise owls out there that can advice me.
I have a property that at this moment in time is in negative equity I have approx 13 year left on it and I have a interest only Morgage.
I am contemplating using a rent to buy scheme to "help" with my situation
My question is, are they as good as they sound or are there any pitfalls I need to be careful of.
I would be most grateful for any advice

Capital appreciation does not happen on its own.
It is not a 'given'.

It is a function of growth in rents or occasionally the desire of a particular property or area because of its non-income producing character (eg good catchment area).

If rents do not grow then there is no reason why generic property should rise in value in the short term.