WWYD - Second step or BTL

[LemonSwan]

Hi All,

I just wanted to get some advice from fellow mumsnetters with more experience than us.

We have tripled our income in the last year through our business taking off and now have a good nest egg which I am itching to invest.

We have been looking for the second step on the ladder but we are going round in circles. Really we are happy where we are and want to move but dont need to move.

If you had 30k spare as a deposit, 100k equity in your current house (valued at 250k) and can borrow 250-350k (varied as we set our own salaries).

Other considerations.. approximately 2 years until we will start trying for our 1st child which will have financial implications with childcare.

Would you...

1. Consolidate all assets and move to the second step
2. Buy a BTL

Maybe discuss with a broker?

Being a landlord isn't easy. This current thread is useful if you're considering it.

Learning to be a landlord? www.mumsnet.com/Talk/property/4199671-learning-to-be-a-landlord

Luckily we have a number of landlords in the family to help advise on an curveball issues which arise and we were going to go fully managed anyway as we are looking at an area which is a number of hours drive from where we are.

We were planning on a flat to take advantage of the lower flat prices atm and the structural building maintenance being managed.

The broker has said we can do either, it just comes down to what we want to do which we are struggling with.

No brainier for me get a bigger house, but I have no desire to become a landlord just too many possible tricky outcomes for me, it’s great when it works, but could be an added strain on life if it doesn’t, I’d rather enjoy a bigger/nicer house.

I’d consolidate all my assets and move to a house which suited me long-term. BTL for non-professional landlords without a portfolio has really run its course, there are no tax breaks in it and a lot of uncertainty.

If you’d paid your own mortgage on your forever home off and had a windfall you were looking to invest and couldn’t decide between BTL and Bitcoin, I’d probably say that BTL was a good bet if you didn’t like crypto. But you still have mortgage debt and an ambition to upsize, so buying a BTL doesn’t make financial sense when you look at the full picture.

Thanks all,

The type of house we would really want is about 700-800k atm. So nowhere near out current budget.

We need to either move or remortgage this year. So were looking to move to go to a second rung, but that gap is big here and we can only really improve slightly in the following - bigger house, better location or bigger garden - often at the detriment to the other categories (First world problems I know).

The idea with the BTLs was that we would build a portfolio and add one this year, another next year and possibly a third before our main house came up for remortgage again and we started looking again.

As we are self employed we thought this would take the pressure off income loss a bit when we have kids as the rent income could at least cover our new main house mortgage. This would be under a ltd company structure and in the future allow us to channel 40k a year into pensions tax free instead of 4k for personal.

I dunno whether the issue here is my trying to sort everything at once. Financial security, investments, better house, pensions etc.

Its all confusing me very much.

I would move somewhere bigger, or make a few years of overpayments on your current property.

Although you can borrow a lot, you're not actually playing with the much cash with stamp duty, solicitors fees etc. (not judging, it's more than we have available!) Plus if you need to sell your second property to get your dream home you'll be stung with lots of additional taxes.

And remember BTL mortgages normally require a 25% deposit, so you're looking at max 120k (unless you're considering remortgaging, which doesn't seem sensible).

Plus I think lenders require a longer track record of income than a year for self employed people (my friend had to provide 2 years of books) so the amount you can borrow may come down. Best speak to a mortgage advisor.

That's before any considerations about the challenges and risks attached to being a non-professional landlord (even if you go fully managed).

An alternative could be to buy a house that needs work that you could add value to by adding a bedroom/extending etc?

Always look at the 'worst case' scenario- ie if you have no tennants,and you are trying to work with twins not just one baby that need childcare ( lovely - but maybe unexpected !) could you still afford to run everything ?? If the answer is yes - then anything 'better' than this would be a bonus.
(Obvs this is not saying twins are bad or anything like this - it's just to get you thinking !)

I would definitely put the money into your home, move and get a better house for when you're trying for children. Your position with regard to a lender seems excellent - no children to take into account, both working full time presumably, business doing well.

As a pp says, you don't know what's around the corner - whether the business will continue to thrive, a baby arrives with additional needs / multiples meaning you can't return to work full time or have huge childcare costs etc (that's as a parent of unexpected twins ).

If you're still in a great position after moving up the ladder, then look at a BTL next year maybe.

The type of house we would really want is about 700-800k atm.
If you already have other properties (your BTL) then you will pay the 3% extra Stamp Duty i.e. an extra £21,000.

Note that either option - namely second step or BTL - means putting all your eggs in one basket which is never a good idea. Especially when you note that property is a very illiquid asset and has huge transaction costs attached.

Thank you all. It seems unanimuous. Everyones thoughts are where I was last week and its interesting you all say you don't know what's around the corner Its for that reason really I somehow managed to convince myself it was better to BTL to take some pressure off if something did go wrong. As everyone is saying the opposite I am not sure how I have decided that was a safer option.

To a pp - yes it would be 120k budget for a flat in a northern city (to take advantage of the low prices for non garden flats in covid). Would obviously have been a flat with the new cladding safety certificates.

Back to the drawing board then :) This is what I mean about us going round in circles!

This is going to come across as patronising and honestly it isn't meant that way, just that I think the unanimous response is probably because the pps are probably older (sob!) and have lived / are living with the "hit" your finances take when children come along whether that be through a reduction in your income / increased costs (or both). Have you looked at what might your costs / income might be with a baby? Those factors have a big impact on a mortgage application. So I completely agree that BTL income will be fantastic in the future, but if you intend to use it towards your new main house, you've got to get the level of mortgage you need to be able to buy that house if that makes sense! Tough decision, but great that you have options.

Thanks @Africa2go :)

Thats not patronising at all! Exactly why I am asking you wise owls!

Yes that is what I am concerned about. Self employment is not quaranteed like employment and again when we hopefully have children I am concerned about moving to second step and then having a cash crunch.

But I realise if we BTL that we will be paying a lot (c. 30+K in additional stamp fees on our main house by the time we move twice) for only a small amount of financial security (7k a year income) which could easily become a hinderance rather than a help if we have non payers.

Its a mine field.

You would also need to consider what might happen if interest rates keep going up. For many, they've not known anything over 5-6%. For us, we remember the 14-17% - and no fixed rates back then!

You don t pay the 3% surcharge buying a house if it is replacing your main residence so there is no 30k extra in stamp duty.

Generally speaking the economics of buying through a ltd co getting a mortage and having an agent manage for you will eat up all yield consider your accountants fees for example. That said maybe you ll get lucky on capital gains. Interest rates are highly unlikely to rise materially anytime soon as shown by low long term rates. Hope this helps

I agree, don’t BTL. I’d personally make ISA subscriptions (assuming you haven’t already) into a balanced stocks &shares portfolio - (majority equities at your age). Tax efficient but still gives you flexibility.

@Ariela I am hoping I never see those days! There was talk of negative rates the other day so I dont see that happening anytime soon touch wood.

Thanks @ambitiousjelly - That is helpful to know. That stamp duty scared me but maybe as a pp said its something to do once we move to step 2 if we have spare cash. Looking at the figures again its only really worth doing I think if you get a 2 or 3 bed and as we can only afford 1 currently its probably a silly idea.

Thanks @NWnature
We have currently looked into that but want to use this for something which will make an impact on our future. Its currently just doing nothing for us whatsoever hence the itchy feet, and putting it in an ISA is just bubbling at inflation is it not?

@LemonSwan you can target a return above inflation if you choose an investment ISA (stocks and shares) however obviously performance isn’t guaranteed and it could fluctuate in value over the years. Have a google of some performance over the past 3, 5, 10 year time periods to get a feel. You could look at somewhere like Nutmeg or Brewin Portfolio Service or just look at the performance chart for the MSCI world (a global equity index - you can buy a fund which tracks this basket of businesses). Definitely worth considering as it diversifies your wealth away from just property and is very tax efficient as no income tax or capital gains within the iSA as it grows. However as I mentioned you just need to consider your time horizon and risk appetite as to whether it’s appropriate but if you were considering BTL with the savings I think it offers more benefits and flexibility- you can always sell part of an Investment portfolio if you want to redeploy that cash and usually realise your cash within a few days which isn’t really an option with property.

Thanks @NWnature , I really appreciate you taking the time. I will have to research these more.