Buying a buy to rent flat

[gettingolderbutcooler]

Hello MN!
We are thinking of getting a 2 bed buy to let flat, but are wondering what we haven't considered.

We could possibly buy for 230k.
We could put a deposit down of £50k.
Rental income in the area is about 1300pcm
Mortgage would be (interest only) about £800.

We'd want an estate agent to look after it all for us. I guess they take a proportion of the rent?

What things do we need to factor in?
Missing rental months I guess, insurance.

If you are a landlord and have any useful advice we would appreciate it!
Or if it's a really stupid idea feel free to advise that too!

Thank you xx

Do you know what happens if a tenant stops paying? Do you know how long it takes to go to court and how much that process will cost, leaving aside lost rent for the period? Could you afford to do this, maybe more than once?

How old are your children and how sure are you that they're going to want to live together in a flat wherever it is you happen to live?

Insurance for the property and insurance against losing rental
Paying an accountant
Gas safety is annual
Landlord management fees of 10% monthly
Electrical safety five yearly and EPC
Savings pot for emergencies
Savings pot for when a tenant leaves and there's no income while you still have to find council tax 100% in our area plus pay reference checks for new tenants £100 per person and new tenancy £100
You pay 40% tax on income and capital gains when you sell
We make a small monthly income which we pay off our small but expensive buy to let mortgage with high interest rates.
Would I do it again? No but currently am stuck

We could put a deposit down of £50k.
Rental income in the area is about 1300pcm
Mortgage would be (interest only) about £800.

Estate agents fees would be £260pcm
Income tax on rent would be £260pcm

You are already in net-loss territory before allowing anything for incidental repair, maintenance and other obligatory costs (highly unpredictable), refurbishment between tenants, and court costs if a tenant refuses to leave without an eviction order (because they can only qualify for social housing with an eviction order, and leaving a rental home without a court order is considered "making yourself intentionally homeless")

Only worth doing if all these losses are likely to add up to a lot less than the expected increase in house value between now and when you are ready to sign the property over to these DC (always assuming they actually want to live there). Alternatively we could be entering a period of house price stagnation, probable negative equity if it's a new-build (which always lose a bit of value when they are second-hand, but that loss is recouped if generally house prices are rising). In which case you would be much better off investing your capital elsewhere and waiting to see what the situation is when your dc need help with living independently. they may want to pursue a career that means they need to live elsewhere. you can't make sensible decisions on behalf of the young adults that your kids will be in 10 years time, and in any case they are unlikely to want to share a house together for more than a few years before they want to establish themselves separately. structuring your finances now for one possible scenario which might make things easier for them for a few years in 10-15 years time but may cost more than it saves doesn't seem very sensible to me.

As you noted, you appear not to have considered tax, tax and more tax - which I fear will change your calculations. Look into the CGT you or inheritance tax you may get charged when you come to sell or pass it on. Plus interest rates for BTL are higher (though you’re right to say that interest-only is a popular option). All in all, BTL is not as an appealing idea it was five or ten years ago. If it’s for DC, you may be better off investing the money for a deposit of their own.

It wouldn't be a second home for the kids- it would be their starter home which they would have to share

Don’t do this. It stops them making their own choices.

I dont understand why this'll be your kids home.

Interest only means mortgage won't be repaid, someone will still owe the bank the full amount at end of term, usually the property is sold to pay bank back.

On a btl mortgage you're also not allowed to have family live in the property.

You'll also be making next to no profit once you take into account fees, tax, maintenance, bad tenants.

I actually don't think you've thought this through at all.

If you're going to do it at least aim to have mortgage paid off by the time you pass, then you'll be leaving your kids a usable asset, rather than a massive liability.

Landlord here, with 50% equity in properties, and still aiming to get out asap.

@FP1000

This plan is a shortcut to a financial disaster- why would anybody be jealous of that?

Sorry to hear one of you has terminal cancer. Tough times for you both

Why do you think your dcs will want to live in the same area, never mind together? I could understand if you wanted it as an investment that you or they would sell to provide a deposit when they want to buy their own homes.

Dont do it! You will make your kids lives harder and gives ample opportunities for disagreements. Put it in cash isa for them individually instead. It will be better for them and money they can actually use instead of it being stuck in bricks and mortar

Have you factored in ground rent and service charges? You need a really good look at these.
When DS was looking at property we recommended anything over £2k was a no no.
We are long term LL, no mortgage, we are always near the red in January, tax, ground rent, services charges, LL insurance account for all the rentals. That's without the mortgage payment.
In 25 years, we have had one tenant who paid only part of her rent, but she had a guarantor, one who put messy blue tack everywhere and ruined a carpet with ink or a stain, so kept deposit to pay part of the costs .
Our biggest issue was the letting agent who went bust Did not put the deposits in a scheme but forged the paperwork, we had to sit in his office until we got the rent and we think he had a tenant paying him cash while saying he was unable to find one That was horrendously stressful and he had run his business for 10 years, good reputation. l
Put your £50k in an IS A

Don't do it OP.

Landlords have been under attack for the last 10 years now. Think section 24, enhanced stamp duty, and now to look forward to minimum EPC C and the removal of section 21.

This isn't a time to be getting into the sector, it's one to be fleeing it.

We have a mortgage on our BTL (repayment not interest only) at 50% LTV. We need to borrow 10k or so to upgrade the property for the pending EPC reg changes. The bank says no. You need to charge £200 more rent, which the tenants can't afford and the property rental value isn't worth in the current market, so we've ended up borrowing the money separately because we are decent landlords.

Section 24 means you can't offset your mortgage against your rental income. Removing s21 means you won't be able to evict a tenant without a hideously long court battle.

When our current tenants move on, we'll be selling up. Put your money in the bank, you'll get a better return.

Agree with by the time you’ve added in tax and agency fees you could already be at a loss.

Add in the face that ground rent and service charge (likely in the thousands per annum) will be your problem, maintenance costs can add up quickly, annual PAT/gas checks. It will likely lose money, could you afford that and could you also afford it if the tenant stopped paying or you had a month or two with no one in?

Costs: certification (gas safety yearly, electrics, windows, joining local authority selective licencing scheme - check if it's compulsory where you're buying, it costs thousands), payment to agents (10% min if they're managing), ongoing maintenance (imagine all the unexpected costs in your own home - washing machine broken, fridge door, tiles broken etc) then triple because a tenant is not going to look after your home as well as you would as you're footing the bill), landlord insurance, some sort of boiler service scheme (British Gas is costing us about £600 a year but you can't have the tenant without heat and water). Costs to become a landlord - possible works to make the house compliant, costs of finding a suitable tenant or periods where the house is empty. Tax on the income at basic or higher rate depending on your other income. The interest you pay is tax exempt, but you can't pay off a mortgage tax free. Going interest only takes this out of the equation, but I can't see the benefit personally? You're banking on property prices rising enough to make a profit when you sell? Or writing off the long term investment in exchange for a monthly income? The only benefit to me in having a home to let out is the fact I'll own a house to sell at the end - and my rationale has been the same as yours; this was an investment for my kids to cover university costs. We'd not ever intended to become landlords, but a housing market collapse in 2008 made it the best decision at that time, instead of losing tens of thousands. So we don't make any money month by month (in fact usually it costs us), but it saved us from losing tens of thousands in 2008 and we can sell when the kids are grown.

The costs are significant and the returns little or non existent. It's precarious, because tenants can leave, or trash your house and it's largely out of your control and you are the one that picks up the bill. Finding a good tenant is not the easiest (so when you do, you treat them like royalty - I've had the same tenant for 6 years now and wouldn't consider putting rent up incase she leaves and currently rent is about 60-70% of market value, but I'm resisting these ridiculous inflated rents at the minute, I doubt they'll survive and I'd rather keep my tenant).

Given your update about the cancer, i wouldn't do it now. The market is unstable. You might make a loss and make your life post bereavement even more difficult

@YukoandHiro @Hairfriar @Lastqueenofscotland2 @Treacletoots
And all of you- thanks. Done really detailed replies- I appreciate it.
Yes, we were hoping we'd buy it now and it wouldn't be as expensive as when the kids will need to move out (they are mid teens now).
Putting more in an iSA is an idea.
There would certainly be more stress and maybe that will be too much to handle, even with the agent managing it.
We have even thought of doing equity release but we are a bit too young for that (makes a bloody change). 🤪

We've been saying to them that the best way to start off is to pool resources by getting a little flat together, then go their separate ways later.

We are trying to show that you have to start with compromises- but that they will be v v lucky if they can buy a tiny little 2 bed flat.

My first buy was a 1 bed flat and I had to rent out the living room as a bedroom!

They are twins. They both loathe and love each other!

I think investing the 50k in ISAs and splitting the money when your DC are ready to buy would be a lot less stressful. Another idea is to start a pension for each DC I’d you want to help them.

@gettingolderbutcooler - I really don't think you should try and control what your dcs do as adults. Especially as one of you has terminal cancer - you don't want them to feel they have to go along with an arrangement that doesn't suit them because it was something their deceased parent wanted.

If your dcs go to university they may not go to the same one. Many people end up staying in the area they go to university (my youngest has). Their jobs may take them to different areas. As might any future partners.

And then there are the financial pitfalls and constraints others have highlighted.

@SlipSlidinAway
Hmm. That's actually true. They might not want to move back to our area.
Good to reflect on in making our decision.

We have let properties for the last 10 years and I’m broadly in agreement with previous posters, it’s a different landscape now to when we started. Far more taxation, more rules and regulations which all cost money- not to mention rising interest rates. We have sold one of our investment properties already and are in the process of selling another which has an EPC rating of D due to the imminent changes. We’ll have one left then which we’re stuck with at the moment due to cladding but I’m hoping that’ll be mortgageable in the next couple of years and we can think about an exit.

Unfortunately I think your figures will be loss-making unless you had a much bigger deposit. I would also leaseholds altogether, and look at a freehold house in a cheaper area, unless you can find a long leasehold/share of freehold. I don’t actually see anything wrong in having an interest only mortgage on an investment property, it makes cash flow and accounting easier, so long as you have an exit plan, or make overpayments as you go.

I think in your shoes I would wait and see what happens with any changes to regulation and taxation in the sector, along with a possible change of government. We currently have a shortage of homes to rent and it will be interesting to see if any of the changes are reversed to tempt landlords back into the industry, or whether things get even worse. In the short term you can probably get better returns and no hassle putting the money in an ISA.

haha! Sounds like you’re from the same mold as the OP.

I look forward to next years update.
‘Help! I bought a BTL, and due to the falling house prices, my £50k equity has been all but wiped out, and the bank has phoned and wants me to put in some equity, but I don’t have any spare money to do this! The bank said I need to do equity release on my main house, or go onto their ‘high risk debtor’ 10% interest rate! That will mean I’m losing money every month!

The tenants have stopped paying and I’m going through the eviction process ( more money!) but it will take 6 months!
Also the tax is due next week on rent I won’t be receiving anyway!’

@gettingolderbutcooler
I am sorry you find yourself in a difficult position.

However do not buy a second property right now. We did buy our DDs a property each and, guess what, they don’t live in them. In fact we have sold them. They both want to live in London. They work there. We bought when DCs were 3 and 5. We had years of income and neither house had a mortgage. We paid Capital Gains Tax on both sales as we actually owned the properties. Maybe we could have avoided this by putting the properties into trust but if we had needed that money - it was gone. Cannot be revoked.

The Government is thinking about no fault evictions. If you cannot remove a tenant if DC want to live there or sell it, what then? Being a landlord is now for professionals with multiple properties and I’m glad I’m out.

Tax Free ISAs are a better bet for you as Dc are older. Or any tax free savings. Pensions work best when dc are earning to get the tax benefit. £50,000 isn’t a huge sim so don’t incur setting up fees when you don’t need to and don’t borrow in your personal situation. All the best.

As PPs have said, ISA’s or proper savings accounts that pay decent interest.
4% on 50k is <> than you’d make on the BTL.