Any buy to let landlords about? Can I ask some questions.

[JacobReesMogadishu]

Am thinking of buying a buy to let house locally, it’s something I’ve wanted to do for years and been very close to,doing previously but I get worried and back out.

I have 30k cash sitting in a savings account and about 15k in shares j could sell. Terraced houses near me are 100-110k. So looking at about a 70k mortgage and I have a mortgage in principle, a buy to let one.

So mortgage repayments would be about £250 a month, rent about £600 a month. I know I need to buy house insurance, landlord insurance and pay agent fees. So I’d expect approx £300 a month “left over”. So £3600 a year.

It’s an interest only mortgage over 20 years. If I was able to save the £3600 I’d have £72000 at the end of 20 years so just about enough to,pay the mortgage off. But I know it’s unlikely I would save that much, I’m going to have empty months, property repairs, etc. Gas inspections. So I might only have 60k at the end.

So I’d either need to find 10-20k cash to finish the house purchase.....so it would have cost me 40-50k cash plus 20 years of potential stress but I guess I have a 100k house so will have made 50k.

Or I sell the house to pay the outstanding amount off and keep the balance. So would have maybe 80k in my pocket (approx 30k of which I paid in the first place).

This is all assuming house prices don’t rise in the next 20 years. My property wheeler dealing mate assures me they will. 🤷‍♀️ Obviously if prices do go up that’s even better but I’m wanting to be pessimistic and assume they don’t.

Do the figures sound realistic. The house I’m interested in is currently rented to a long term tenant for £600. It’s a thriving uni town so I’d like to think the rental market is good.

I would expect your house value to at least double in 20 years!

Have you factored in tax? Could knock another 20-40% of the income, and 28% off any gain should you sell.

If you're a higher rate tax payer, you won't get relief on all of the mortgage interest.

I don’t know anything about BTL but if you’re planning on saving the income up to pay off the capital can you pay it off on an annual basis? We have always put extra money into overpaying our standard mortgage off where possible because it means the capital borrowed reduces and so does the interest, so either your payments go down or the lifespan of the mortgage. We’ve managed to move up the property ladder considerably by doing this. And if I had a second mortgage this is exactly what I would do (unless BTL mortgages prevent this)

Hmmm, knew I’d forgotten something. Tax!

Yeah, now the figures are even worse. I knew something else put me off last time.

I’m not a higher rate tax payer yet but will be in 2 years.

So will the tax be 20% or 40%?

Also, whilst thriving university towns have always been a good bet for rental property, I’m not sure how long that will last. Some universities might fold under covid pressures (it’s a big hit to university finances), and in our city there are perpetual blocks of student studio flats being built. I don’t know if this means the end of student life sharing a grimy terrace, and into individual rabbit hutch homes, but there are certainly a lot of them around now.

You will also need to have a life insurance policy to cover the mortgage.

The house will also need repairs and redecorating during the time, further eating into your £3k/year.

Oh it’ll be 40%, the rental income would tip me into the higher bracket now.....don’t think it’s going to be worth it.

I’d only have £170 a month left over after tax.

Don’t forget the rent will go up during the 20 years too, so proportionally the loan to rent proportion will change. And interest rates could go higher.

It is a risk, which if all goes wrong you still have a house to sell.

Property investment for beginners by Robert Dix will explain heaps (there are lots of other similar)
Don't, please don't, be fooled by any hard sell guru who will try to convince you to spend 000s on courses. There are lots of crooks out there!
Please message me if you want to chat, there's always a way!

It doesn’t sound like a good financial deal to me tbh, the tax will take too much of the profits to be worthwhile.

There’s a big element of luck in being a landlord - obviously we minimise our risk with credit checks etc, but we’ve had some good tenants (stay for years, pay on time, tell me about needed maintenance as soon as they notice) and we’ve had bad tenants (move out after 6 months of late payments and messing around/damage stuff/don’t tell me about minor issues which then became major issues and cost lots to fix, which delays the next tenant moving in and leaves it void).

Student rentals tend to be more difficult.

So I wouldn’t do it on those figures! Put your money in shares instead :)

I have several rental properties, this against popular advice, but I always have a full repayment mortgage, and taylor the length of mortgage to the rent minus costs. So one of ours only had a 16 year mortgage for example, if that makes any sense. I cannot understand the interest only mortgages. However we don't earn anything out of it at the moment as this will be part of our pension.

You will also need to have a life insurance policy to cover the mortgage

No you don’t.

Why an interest only? Why not repayment?

Other option is a house 10_15k more which is a licensed HMO and let out to students. Brings in 13k a year rent. But yes, concerns about possible falling student numbers. Though I work as a lecturer so o could potentially recruit my own students. 😀

The repayment mortgage would be almost as much as the rent for the non HMO

By the time I've paid tax, insurance, agency, etc I'd make a loss with a repayment

The buy to let game is over now because the government has removed the tax incentives. You are better off sticking the money in an ISA and buying a global index fund and forgetting about it. The money should grow tax free over time and you won't have to deal with tenants who sometimes don't pay! 🙂

Spaceman1 is right, the buy to let game is over. You also have to have up-to-date EPCs and electrical checks, which is good but more expense. I think the EPC band is soon to be upped again to a D, again for the right reasons but further expense for the landlord. You'll be taxed heavily when you sell too (CGT). An ISA is probably best.

Just to mention - you were probably joking but no you can’t recruit your own students as tenants! Conflict of interest.

Yes, I was joking.

You have to think long term. If it just about covers costs or even makes a small loss after tax I would just go for it. It certainly will be a pain at times dealing with tenants and house repairs etc but it certainly will have gone up in 20 years time. Your money is not going to do much in savings.

Yes, savings seems pointless with low interest.

I don't mind not making money for the next 20 years as long as I'm not losing money hand over fist every month for the next 20 years. Breaking even for 20 years and then having a house mortgage free at the end of it to be used as a pension would be fine.

I'm so bloody nervous/indecisive and read so much conflicting stuff I don't know what to do.

My advice would be to have as nice a property as possible and therefore you hopefully get long term tenants, don't take any money out of it, at least for a while so you have some reserves in the bank. Our agents charge a flat 10% with no finders fee. The will also do any repairs etc, but will run it by us first, so sometimes we do them if it's an easy fix.