My DH and I are young EU citizens living in London for the last 3.5 years. In total we earn around £80k.
I am looking into buying a 1 or 2 bed flat in Zone 2 valued between £270k and £375k for us to live in for the next couple of years (at least 2 - at most 4 or 5) before I likely move abroad. We have around 100k for a deposit - so I could go for lower LTV (70%-80%) products (and a BTL mortgage before moving abroad).
I don't think it makes sense for us to purchase the flat to live in it for just 2-4 years due to all of the transaction costs and the recent drops in rental prices in London that make renting competitive again.
But my idea is then to mitigate some of the transaction costs by renting it out whilst I am not living in it.
By buying the property for my residence first - I would get at least £6500 of tax reductions (in terms of a HTB ISA and reduced FTB stamp duty). Also as a BTL I don't have to pay the 3% surcharge an investor might have to pay. Another advantage of owning the property from abroad would be that I would get to offset complete mortgage interest due to low UK income.
My main concerns are:
- is it difficult to manage a property from abroad?
-> I am calculating that we will probably need to pay at least 12% of rent to the agent for finding the tenants, setting everything up, managing smaller queries...
-> I assume that the agency will likely rip you off in case there are any major works that have to be done and have to be managed by them (in terms of scope and their markup/fee). Also you will need to pay a handy man for any smaller repairs that you might be able to resolve yourself.
- my non-UK resident status will affect the availability of mortgages and landlord insurance products
-> We could somewhat mitigate this by remortgaging just before going abroad - ideally to a long term tracker mortgage without an ERC or a 5 year fixed rate mortgage (and then sell soon after if the market is good)
- non-UK resident status makes it somewhat problematic in case there are legal issues with tenants
-> in that case I imagine you have to find a solicitor, give them the power of attorney, show in court when needed and etc., probably less problematic then 1 and 2
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I don't think London exodus due to WFH is that big of a concern - or at least it's overstated. The supply/demand imbalance in London is just so strong that I doubt it will ever happen in the medium/long term.
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I don't think interest rates will rise but highly unlikely they fall more. Most likely we get negative real interest rates which inflate away the debt...
From my numbers - if the "gross yield" on a London flat was 5% - the net yield is actually only about 25% of that amount after taking into account:
- BTL mortgage interest - assuming 2.3% @ 65% LTV (the low LTV is needed to pass the mortgage stress test...)
- the agent fees - 14% of rent
- voids - 4 weeks per year (takes into account maintenance and selling in the end)
- maintenance + service charges - in total ~1% per year of the property price for both
- other rental costs (gas inspection, landlord insurance, license, inventory...) - £50/month
- transaction costs (solicitor, agents fees, mortgage... ) - around £75-£125/month if amortised over 10 years for a 300k-375k flat
Under the above assumed costs, if prices rose 2% per year - the actual ROI at 65% LTV mortgage would only be 9% (which is much better than cash!).
It seems to me that the only way this flat is a good investment is if the prices and rents continue to grow. Thus I think the biggest risk is that I don't have the long-term staying power (to wait out inevitable rent/price rises due to inflation - say 2% a year) due to difficulty of getting mortgages from abroad and that managing a flat from abroad means you're in a weak position with real estate agents.
What do you think - should we buy or keep renting?