Do these sums add up for a BTL?

[GradNonFashinista]

Myself and a friend are thinking of buying a BTL between us. We’ve seen a house which currently has a tenant for 120k.

Would plan on each putting 15k deposit down so would need a 90k mortgage. Rent is £700 a month. Mortgage would be around £400 a month depending how long we fixed it for.

we can each also put in half solicitors fees and stamp duty.

so we’re looking at “profit” of about £300 a month. We’d obviously get taxed on the £700. So that reduces it by £140. So £160 “profit” a month. Which we’d need to keep to one side for any repairs, etc. we wouldn’t use an agent on an ongoing basis but probably would at the end of a tenancy which is around £150. Though obviously if tenant stays that’s great. Gas certificate every year at £85.

i can see us only breaking even and if we have a big bill like a new boiler being out of pocket. But a friend who has a few BTL said the first few years are tough but the rent goes up a little every year, the house increases in value over time and to view it more as a capital growth rather than for income?

I think you need to look into the change in rules coming for landlord. House must have a level of energy efficiency and safety. Also there is a change proposed surrounding longer lets for the rights of the tenant. I would be wary as it's not a get rich quick scheme

Check the local council’s rule about being a landlord. Here you have to have a licence to demonstrate you are an appropriate person to be a landlord which costs £500 every 5 years. You also need to factor in insurance.

Also if there is no agent the will be calling you in the night if there is an emergency. We did it on a new build for a few years never again

I thought house prices were set to fall this year ?

Is that building insurance?

I’ve given up believing it.. they said that in 2008 when there was a recession, they said it at the start of covid.

I would wonder why your friend wants to go in halves with you if they already have a few BTLs as it seems not enough reward to bother. I would also only consider it if your sums are based around a repayment mortgage and not an interest-only. Especially as there is no guarantee that when you come to remortgage in a few years time that it will actually be worth more - and then your LTV may make it trickier to get a mortgage with a reasonable rate.

Sorry, they’re different friends. Both me and the proposed partner friend are new to this. We have another friend who has a few BTL.

But no, that’s an interest only mortgage

Is it a leasehold flat? Then you need to pay service charges too (not your tenant).
Gas certificate, electric certificate. Repairs/wear and tear.
Is this unfurnished?

If you are in higher tax income bracket, you will be paying more than 20%.
With current interest rates, are you sure your £90k mortgage will be just £400?

if not leasehold, then you need to have building insurance. Probably also landlord's insurance.

Landlord insurance covers the building and various things relevant to landlords like legal advice and some cover void periods - another possibility you need to factor in.

We own a BTL but only because we live in a house that comes with DH’s job, so we do it to have somewhere to live when he retires rather than make loads of cash. We employ an agent, fix everything promptly and have good insurance and ‘make’ about £100 a month, which for complicated reasons to do with DH’s job we don’t pay tax on.

I recently sold a BTL I’d had for over 10 years. I sold it for £1k more than I paid for it. And it cost me money over the years. It’s very hard to make money off BTLs nowadays.

No way then, the rent isn’t enough of a reward to warrant the risk and you are relying on property prices increasing when where it just doesn’t seem at all likely for a few years at least , and even if they were to increase you would only be getting 50% of the increase, and it would be subject to capital gains etc.

Also how tight is money? I’m guessing as you are both putting 15k in that it’s a stretch for at least one of you - otherwise why not pay a bigger deposit and have a cheaper mortgage/better LtV rate? How likely are either of you to need your £15k back in the next few years?

Others above have made some great points about insurance costs and repairs/wear and tear.

A family member had a BTL property for a while. Based on that things I would look out for;

• letting agent fee for finding a new tenant was more like 1-1.5x monthly rent in that location (south England). Included photos and viewings and all the Right to Rent checks required nowadays. Inventory (check in, check out) was extra on top but very valuable in case of disputes with the tenants.
• how old is the electrical EIR and EPC reports? They need to be redone every 5 and 10 years respectively from memory. As someone mentioned above, there is legislation coming around minimum EPC required to rent so you’d need the house to be compliant.
• there will be potentially cleaning costs, redecorating, Council tax and utility costs in between tenants and in void periods.
• those costs plus landlord insurance etc would be deductible for tax.

if you’re buying with a friend it’s also worth considering your approaches to emergencies and tenant call outs (who is local? Do you take turns? do you have tradespeople you know and trust who could attend? And also planned exit?

I’d personally be wary of locking in cash into a BTL right now unless I was certain the house would be both easily tenanted and easily resellable. But that might be more about my general comfort with risk. I’d also have to seriously consider what the chances are of both friends having different expectations of when and how to exit/troubleshoot issues.

Another consideration is the property being empty between tenants or a tenant who doesn't pay.......

What happens if you and your friend disagree in future.......

On the figures you are quoting I wouldn't do it.

Service charges/ground rent often in 1200-1600 pa range. About 100 a year for gas cert/service. Legionella assessment every so often. It all adds up.
And if you are PAYE, may put you into having to do a tax return. Could you do this yourselves? It's not that hard but another thing to add in if you don't.
Plus other things that crop up - a company checking that doors up to fire standards.

No, the sums don’t add up.

I would also be cautious about doing it with a friend. What happens if one of your circumstances change? If one of you loses their job, gets married/divorced etc, or if you have a falling out.

You also need landlords insurance (probably £200 ish), fees for agents, allowance for cleaning between lets, allowance for potential voids between lets, a good buffer in case of repairs, etc etc.

A couple of months void, for example, would take half that profit immediately.

It’s a big risk for little return. There are your buying and selling costs, maintenance costs, compliance costs, and as well as the money, there will be time required for keeping this business going and tax returns.

You’d have less hassle and more money getting a Saturday job once a month and investing the proceeds in a LISA / SIPP

I could possibly put in 30k deposit, not sure if my friend could also put in more. But could possibly put in a bigger deposit. I currently have quite a bit of excess wages left at the end of the month, so could cover the mortgage without any rent if needed.

My friend who has btl properties has some in that area and says they’re never empty for long and people tend to stay for years, she recently had someone leave after 11 years and had it empty a few weeks while she did some work and had viewings and had six different people all day they wanted it.

i guess long term I’m wanting something to help top my pension up when I retire in 20 years time, help me have a more comfortable retirement. Saying that I already have 25 years of a combination of nhs and teaching pension, possibly another 20 years of pension contributions so I don’t think I’m going to be destitute in retirement. But it would be nice to possibly be able to retire early rather than wait till 67.

£400 for an interest only mortgage? That doesn’t sound right - and if all you can get in rent is £700, it’s not feasible.

I pay £660 a month on a repayment mortgage for my BTL. The projected rent at the time was £950, which more than met the 125% of mortgage threshold. Your potential rent also meets that threshold, but you’re not paying anything off, so you’re almost entirely reliant on price growth for any real profit.

Maybe I’m doing the sums wrong

I honestly think the days of making loads on capital appreciation on BTL's with a mortgage has sailed. Also changes in the law of BTL's now means it will in 2025 need to meet an epc c for any new tenants.

You also need to factor in letting fees, and also could you afford the mortgage if the tenants stopped paying and legal fees if that happens to get your property back.

And I say this as an experienced landlord who inherited a property portfolio from my late parents, this is not a business I or my brother wanted to be in as we have our careers so employ an agent to manage them, as you basically have to be available 24/7 if not to deal with repairs, problems etc

You’ve not even mentioned insurance.