Buying first property with view to rent out in one year

[AleenaM]

Me and OH currently live in a student city and looking to move away in the next year, we rent and don’t own anything. A 2 bed flat has come up for sale in an area very popular with students and sometimes families, where it could easily rent for £500-£600/month. The price is about £105-110k. I have some money saved up and a bit of cash gifts from family and I am thinking of buying the flat in my name and keep in the long term. Am I taking a simplistic view in planning for us to live in for one year, and then as we move away, rent the flat and let the rent income pay the mortgage? What happens if I want to take a second mortgage for our live-in home together with OH further down the line, do I have to switch to a buy to let and how complicated is this? Also, how realistic is it owning and managing a property some 300miles away from where you live? That’s how far we would move.

Any help appreciated, thank you !

How much do you know about all the regulations of being a landlord?
Will you have plenty of financial back up ie savings in case you get a tenant who trashes the place/doesn’t pay rent for six months or however long it takes you to get them out.
Have you found out about the new tax rules coming in with regard to buy to let.

Hello, couple of things to consider:

You don't say how much your gifts/savings to be used as a deposit are, but unless it's at least £30k I would have said your plan is a non starter. This is because although you could initially take out a residential mortgage at up to 90% LTV, if you then plan to rent it out in the long term you will need to convert to a buy to let mortgage which is usually a maximum 75% LTV. Mortgage providers will sometimes let you rent out a property on a normal residential mortgage for a short period, e.g. if you are going abroad to work for a limited time but not normally if it's a long term arrangement. People do of course just rent their houses out without telling their mortgage provider but it's highly unwise as you'd be breaking the terms of your mortgage which could cause all kinds of chaos if they found out.

So you need to be planning as if it's a buy to let mortgage right from the start - so you need at least a 25% deposit, plus costs (there wouldn't be stamp duty if you're a first time buyer but account for legal fees, mortgage admin fees etc). If you took out a 75% LTV value mortgage on a 105k flat, your repayments would be in the region of £375 a month, So if you could indeed rent it out for £500 a month - at first glance it seems like a good return.

However - you'd need to pay tax on most of that income (you can get some tax relief on rental income but increasingly little). Assuming you are a 20% taxpayer, let's say £75 pcm goes to the taxman. You'll need to pay a managing agent to look after the property for you as you won't be local, so that's another 10% or £50 pcm to the agent. Then you'll need landlords insurance, another £15 pcm for basic cover. Then you need to set aside some each month to cover periodical repairs/updating of the property and also any void periods in rent (either where you tenants have moved out or where they've stopped paying rent and you need to evict them) - how much depends on the state of the property, type of tenants you go for and how much risk you are prepared to accept but I'd want to keep at least 3 months rent payments in savings- it's starting to look less profitable.

That still doesn't mean it's not a good investment - if you expect a lot of capital growth on the value of the flat for instance it may be a good idea even if the rent only just or doesn't even fully cover costs. But remember if it's not your main residence when you come to sell it, you'll need to pay capital gains tax which is a good chunk of your profit lost.

So in general I would say it would be an awful lot more straightforward and less stressful to keep renting where you are now for this year, put your savings into an investment fund, perhaps one linked to the value of the housing market if you intend to use them as a house deposit. Then you only have one purchase to deal with of the house that you intend to use as a main residence. Being a landlord is quite a stressful and expensive business in the main and there's a lot of uncertainty in the market at the moment due to Brexit so it might not be the worst thing to hold off a year?

@Shinesweetfreedom I know nothing about being a landlord. I would have some extra savings and can get help from my OH/family for more expensive emergencies.

@maxelly your response is super helpful and puts things into perspective. I have around 15% deposit but if in a year's time I am required by the bank to up my share of ownership in the property to switch to buy to let, I would be able to. Would the landlord insurance cover me for unpaid rent by tenants? Part of my savings, about 6k is tied up in a Help to Buy ISA, so I would only have 10k for a possible investment fund, isn't that an even more risky type of business?

Well yes, investing your money carries certain risks which you need to understand and be comfortable with- but with investment funds you can set your level of risk according to your circumstances. Very low risk portfolios won't make as much interest of course but then your money is safe. Investing in funds linked to housing markets wouldn't be in that very low risk bracket for sure, but what you have to remember is that in buying the BTL you are investing capital in the housing market just the same as if you bought stocks linked to the housing market, with the additional issue that you are incurring a large liability/debt in the form of a mortgage. So in a nightmare scenario e.g. a 50% drop in the housing market, if you've bought a BTL you lose 50% of your capital, probably lose a chunk of your rental income as well as tenants will expect lower rent, but you still have to pay the mortgage and can't liquidise the asset or move funds around easily if you now have very low equity or even negative equity. Normally the housing market will recover even from significant drops but it can take years depending on the local area. Whereas if you'd invested it, yes you'd lose 50% of the capital but in theory your new purchase would also be 50% cheaper and you would still have the remaining cash available to easily access and use for the purchase. That's a simplification of course but my point is don't make the assumption that bricks and mortar are automatically safer than other investment methods, in the short/medium term in particular.

Landlord insurance can cover lost rent yes, but it will cost you more. That £15 pcm I quoted was for basic cover only, not accidental damage, legal cover, rent guarantee or furniture and fixtures cover. You can also get rent guarantee schemes (where effectively you rent your flat to a third party such as a housing association or commercial provider) and they then guarantee your rent regardless of void periods etc, and they take responsibility for renting it out - but this isn't always allowed by mortgage providers if you wanted to go down that route, you'd need to check it out and perhaps speak to a broker.

Also, re your Help to Buy ISA, I don't think you can cash this in to buy a property you intend to rent out, even if you will initially live in it, check out this article.... blog.moneysavingexpert.com/2016/04/can-you-rent-out-a-home-bought-with-a-help-to-buy-isalifetime-isa/

Sorry to sound negative and of course there are benefits in owning a property that's all yours, for instance I know some people take a lot of comfort in knowing there's a property in their sole name if they are not married to their OH, in case of a relationship breakdown or similar. Equally if you think you might want to move back to that region at some point I can see the point in keeping a foothold in the market. But there are other ways you can protect yourself and for me personally I'd rather invest my money in getting as good a property to eventually live in as I can/as small a mortgage as possible, whilst retaining a reasonable amount of cash not in the housing market at all (as a safeguard against market crashes), rather than having all my capital tied up in a BTL and stretching myself both practically and financially to maintain 2 properties...

If you are very new to all this sounds like some financial and investment advice wouldn't go amiss, any accountants or independent financial advisors amongst your family/friends who could point you in the direction of some reputable and unbiased advice (you may have to pay but worth it IMO)?

@maxelly thank you again, your help has been very detailed so far and lots of points that I wasn't aware of that will lead me to further reading. No one close to me that is knowledge at all.

In regards to the ISA and my intentions, mine and OH's intentions were to move out of our rented flat ( and this city) 5 years ago, this intention seemed to grow stronger every year yet I am seeing no sings of us moving (mostly OH not making a move). So while I say we would move in a year, I am extremely unsure of that, and I could well not be any further in our plans to move out of this city. My intentions are not to let the property for sure, it's more the other way around, he's not making any move and I want to buy something, but if I need to move out of the city, what would happen to my flat and could switching to a letting mortgage be a good safety net? Hope that makes sense. Long term plan would be to keep the flat and it would be one extra property for our future children.

The cash I have is not that much that I am dying to invest it, it's only 10k at the end of the day, which sounds like little to me.