Buy to let - advice

[HRCsMumma]

Hi everyone.
I've recently come into 200k Inheritance and am planning on buying a small flat (outright) and renting it out. There's a shortage of rentals in my area but there are some flats on the market that I will arrange viewings for.

I would buy a nice 1 bedroom flat for that, or a 2 bedroom dooer upper. I live in a commuter down at the moment. There is a town 8 miles away, and the properties are cheaper, but it doesn't have a train station. I'm wondering if that would be a better option.

For the right property I could potentially have a small mortgage against it but if it needs work I'd need to dip into the 200k deposit to do this.

Do you think it's better if I buy a smaller property in the commuter town, or do I go out a bit and buy in the town without a railway line. The town without is quite a mediocre area but it is up and coming. It's mainly army land and does have a reputation of being quite 'rough.'

Any advice? My tenants for the foreseeable would be my brother and his girlfriend. I would of course take out all need insurance policies and protect the deposit via TDS deposits. Would I be able to do this without an agent / agency fees? Our would it be best to rent through EA.

Happy to do either, but I know absolutely nothing about BTL so don't know the ins and outs. I will make an appointment with an FA before buying of course.

The flat in the distant future will either be let out until DD is old enough (only 3) to have it passed to her, or it'll go towards me upsizing which I am not planning to do for at least 10 years.

I've never bought before so should I get a mortgage, this will be my first.

Thank you in advance!

My advice (from experience) would be - don’t. Find a better investment for your money until your DD is older.

Several reasons:

Legislation and tax changes have made being a landlord much harder and the margins are very tight. It’s not the investment it used to be.

You don’t seem very clued-up on what it involves, so you have a very steep learning curve ahead of you.

Renting to family can be fraught with problems. Don’t mix family and business.

If you ever come to buy for yourself in the future, it could affect the amount of Stamp Duty you have to pay.

if you still feel it’s a great idea, do your research. Get all the information - pros and cons - that you can.

Don't do it, especially if you plan to move family in.
There is a reason (actually many) why so many small landlords have sold up.
Its complicated and can be messy and not the easy money it used to be

If your brother didn't pay his rent could you evict him?

Do you have enough money available each month to fund repairs and maintenance (remember tenants cannot and should not wait until you have saved up).

Do you have a handy address book of reliable trades people for repairs?

Can you afford to go without rent for up to six months if the tenant does not pay or you cannot let the property?

If no to any of those, do not do it.

Wait until after the autumn statement (31 October) before you even consider it as there may be tax implications. Also, you say it's your first time buying - where do you live at the moment? If you're living in rented then better to buy something to live in and get a mortgage for the balance than to buy an investment property and still pay rent.

Echoing the advice above not to do this. The days of the small landlord are over.

As a landlord you will be responsible for a range of costs: insurance, all the maintenance, gas safety, electrical safety, CO2, Leggionaires etc all of which add up to a tidy sum. Local councils are also charging fees for licencing landlords.

You will be taxed on the income at your marginal rate - if you are working this is likely to be at least 40%. You will also have the extra hassle of dealing with HMRC.

You will pay a stamp duty premium on buying a second home and will incur capital gains ( likely to be going up) if you ever sell the property.

This is all before you factor in any issues around your brother not paying the rent. Are you going to evict him if he loses his job? Gets sick and cannot work?

You will spare yourself a lot of needless hassle by investing the whole lot in NSI or similar. No risk. Guaranteed return.

The rougher the area you buy in, the more likely you are to have problem tenants who don't pay, wreck your house and take months to evict with a lot of legal hassle and without you taking any income from them at all.

Always but in a nicer area that is less likely to attract these kind of tenants if you can.

Hi, thanks for the advice. I'm not clued up at all as mentioned this is all new to me. Thanks for the tips and I'll speak to the IFA next week.
You mention other better investments, could you please give me some examples so I can look into?

I have £10k in bonds which I will separate and use for any repairs.
If I buy the flat outright there will be no mortgage to pay on it. But if there was a mortgage on it, yes I could afford to cover 6 months rent.
I'm not 100% on the idea of family moving in, it was just something I've thought of.
I don't have a handy book with numbers in for repairs but my family are in many trades, and also I can source traders online to do work if needed.

I'm living in one of my parents properties that I am due to inherit anyway, so no plans to move elsewhere or get my own mortgage for the time being.

That's a really good point, thank you!
I'll stick to around the area I live in.

Most of the flats I have seen advertised for sale lately (NW) are losing a great deal of money in “real” terms (inflation adjusted). If you wanted to sell it in ten years, could you afford to lose 1/4 to 1/3rd? Depending on area of course.

I would go with the commuter town. One thing we have noticed whilst hunting is prices are dropping the most in places people don’t HAVE to live; villages with few amenities, towns with few road or rail connections.

But I would also post in Investments and probably do a thread on Money Saving Expert to gauge a wider opinion on how best to invest the money, OP.

Thank you, this is good to know. I'm in Surrey and there's a bit of a shortage of rentals here. There are many posts daily on the community pages asking if there's any rentals going so I don't think the demand is short, but that can change I know.

I'll post on the investments board too.
I think if I was looking to have a mortgage myself then I'd consider it, but I'm in a property my parents own which will trickle down to me anyway and I'm not needing to move for any reason so I think it would be silly to get myself a mortgage for a house for me to live in for the sake of it.

I am really keen on doing a BTL but there is lots to consider. If I do go ahead with it, I'll do it via an EA who can help with the proper vetting and checks etc.
i know that comes with a fee, so perhaps a smaller property owned outright in the commuter down I live in would be best. So then I don't need to pay the mortgage on top of the fees etc, so that way the rent (subject to fees and tax) is just a nice bit of money coming my way each month.

I need to weigh up the tax implication on it for sure before I do anything hasty, so I'll do that with the IFA next week. Thanks for the advice!

My experience is the same.
I spend so many days and so much money fixing the place, looking after tenants (even when they were people I knew) etc etc.
I would have made more money investing elsewhere and would have had the time at weekends and evenings back to spend with my own family.
The heyday of BtL is over, and Labour are only going to make it harder for people with one property.

I'll go against the grain of other posters and say go for it (but wait until October before you do). You can't really going wrong investing in bricks and mortar in the long term.

Buying outright so you aren't at the mercy of interest rates. Or have a small and affordable mortgage. The repayment mortgage on one of mine doubled from £800- £1600 last year so I chose to revert to interest into for the foreseeable.

A few considerations:

1. Perhaps reconsider letting to a family member, it could be problematic if they don't pay/ look after the place.
2. Go with an agent to take the stress out. They can vet the prospective tenants etc. but more importantly, many offer a rent guarantee (via insurance) so your rent will always come in and eviction costs are covered if needed.
3. Keep enough money aside for emergencies (replacement boiler etc).
4. (In my experience), better not to be greedy. I charge below market value as I want long term happy tenants in who will look after the properties. It's worked well for me so far.
5. Consider capital gains/ tax implications and extra stamp duty costs if it's a second property...

If you decide after a year or two it's not working for you, you can always sell it.

Good luck.

I took professional advice and have my money in a range of investments with different risk profiles. It’s in a managed portfolio and I’m very happy with the results. No calls on a bank holiday weekend saying I need to get a boiler replaced immediately, no non-paying tenants, no trashed house when they leave…

Why do you want to do a BTL and have you done a calculation as to the return you would get from that versus investments? I have been going down this path myself recently, but once you add on all the extra costs and the implications for income tax and capital gains tax it didn't seem to make any financial sense. That combined with the fact that lots of landlords are currently trying to get out of the BTL market, and that even if you have somebody to manage it there are still always going to be issues you need to deal with, has made me decide to just go for pension / investments. But people may have other reasons for doing BTL so I just wondered what you wanted to get out of it?

Hi OP,
I might be wildly wrong in the assumptions I make but just some food for thought.

You have told us that you live in a house that your parents own that you expect to inherit.

It sounds like you have also received a windfall inheritance that your brother is not getting (I'm guessing that because he isn't buying his own flat)

Two issues immediately spring to mind. Your brother/family resenting the fact that you live for free?/cheaply? in your parents house while wanting to charge your brother rent to live in yours. They might think that you should let him live for free/very cheaply in your mortgage free flat or buy your own place now that you can afford it freeing up the house for him to live in.

Why this disparity between you living in your parents house & inheriting it and your brother not getting the same treatment? Do you have other siblings?

Another issue could be if your parents require care that could mean that the house you live in has to be sold to pay for it. Your parents wouldn't have a choice about this if they had to self fund care and had run out of other money. Remember that care can cost way over £1000 each week. I live in a property that my parents own and am in the same position - and I bear this in mind.

What I would suggest is if your parents are happy for you to inherit the house you live in as you have said (I'm assuming that this was based on your sibling/s inheriting other cash or property) that you ask them about being given/buying out your siblings share of the house that you live in now.

For example if the house you live in is worth 400k, and if you have only one brother then your parents could give you the house and you give your brother the 200k (so you have both had 200k of benefit). It is perfectly legal to be given a house or to buy it under value. Your parents would have to pay capital gains tax on any increase in the value of the property for the period that they have owned it and not lived in it. The stamp duty situation would need to be checked legally but I believe it is paid on the "consideration" or what is paid for the property.

You might think why would I pay 200k to own this property when I will inherit it anyway? You will gain the security that your home cannot be sold for your parents care fees - it would be yours. You will gain the freedom of ownership - to remodel the house, extend, to sell and upsize/downsize, to move areas. Additionally you are not continuing this situation where you benefit from your parents house but your sibling does not in the long term.

OP
Whats your attitude to risk? I ask because your proposal for going down the BTL route is pretty high risk. Not only are you exposing yourself to a single asset class (UK residential property) but within that a single property. So you will be at risk of unforeseen issues with the particular property or the area falling out of favour due to local issues. The risk is increased due to lack of knowledge of what it all involves.

Plus you're investing in a very "illiquid" investment - if you want to raise money a sale could take months and you can't sell part of it, its all or nothing.
Sure it might all turn out well, but theres a significant chance it will all go pear shape.

There are lots of alternatives out there - potentially involving increasing pension contributions (if you're currently employed) or using an ISA in order to gain stock market exposure. Post on the investment board and hopefully someone can give you some pointers.

I guess because as PP said you can't really go wrong with bricks and mortar. It would free up some money for me on a month to month basis, albeit not a lot with the tax implications. It would be a future investment / property for DD which (hopefully) increases in value. If I ever did want to buy myself a house in the distant future it will be a good down payment on a mortgage.

I'm a single mum, so I don't have a partner to fall back on with costs etc, which is one of the reasons I'm not going for a mortgage for myself. Plus I'm happy with where I am now as it suits me and it's secure as it's family property so no risk of my landlord hurting me out to sell.

If you do rent out to a family member you need to be aware there are tax implications if it is rented out to them below market value. Also I'm sure you're aware but worth mentioning you will still need to pay tax on any income received from family just as you would another tenant.

Thank you, I'll post on there for some advice.

Hello, thank you, yes I'm aware re tax. My parents have properties that are rented out (I'm one of their tenants) so I'm going to sit down with this weekend and then see FA next week. Thanks for the advice.

Completely agree. I'm a landlord. It used to be a great investment. Now, if I were able to get out of it, I would

Marking my place as also looking to buy something with down payment of 90k inheritance. Regular income, although not a massive amount t due to costs & a property down the line for dc are my motivators. Waiting for the autumn statement is wise advise, although not sure how much more they can do at this stage!

Ok that's good. I think whilst MN is helpful, your best advice will come from your parents especially as they have experience of rental properties and also the FA.

If you don't own any other property at least you won't need to pay any additional stamp duty tax.