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!

Hello, it's a fair question!

My brother is a half sibling. The inheritance is coming from my dad's side. We don't share the same dad. The house I'm in is my dad's and step mums house. I do get charged full rent in this house. It's a little under market value but I do still very much pay my way. I've grown up with my step mum and class her as my mother, but that's what I mean when I say parents.

My half brother is young (late teens) he does have his own inheritance from his dad's side but that won't reach him until the person dies. My brother hasn't had an easy start in life so I would love to help him out with somewhere he can rent from me for under market value.

Because im not going anywhere (if ever), I thought it could be wise to put the money into property where it will only hopefully gain. Im not too bothered about the immediate return, as long as it's something worth doing. If I end up in a negative each month due to the tax and fees or if I break even then it's not worth doing the BTL.
Im only in the very early days of this, I haven't spoken to anybody professionally yet and I'm going to sit down with my parents this weekend and they can give me help and advice. (Dads done this for a living for nearly all of my life)

If your parents own properties would you not be better seeking their advice?

We sold our BTL and bought a holiday let.
It’s a 2 bed, 2 bath duplex apartment, it’s been a much better investment than the BTL.

Would your parents consider a joint investment?

just put the cash in an SP500 tracker ETF. Returns on average >10% per annum and very liquid

If you pay rent for where you live why not take this opportunity to get your own place? So, for example, if you pay £600 rent (that figure could be wildly low or high) why not put your 200k into the deposit of buying your first property and have a mortgage up to the £600 that you are used to paying anyway. I think you said you had 10k of savings - that should cover fees and it sounds like your dad could help if you were short.

Again wild assumption but your daughter is 3 so if I guess you are 20-40 years old your dad could be 40-80 - you could be waiting 20-60 years to inherit the property that you live in.

I think your best financial decision is buying your own home. Benefit from your first time buyer stamp duty exemption, benefit from your main home being exempt from capital gains tax. Get the security of your own place. Perhaps your dad/step mum will let you buy the property you live in under value for the 200k. If they will I would snap their hand off.

Edited just to add renting to a teenager that is a family member sounds like the stuff of nightmares.

It can go wrong. Really wrong.

Remember 2008? I owned three houses, two halfway through renovations when house prices dropped and the world finances collapsed. I lost £100k in under 6 months.

One of my more recent BTL's lost 10% of value over the 10 years I owned it. I sold it two years ago knowing I was taking a loss on the capital because it needed new windows and a new kitchen - and that would have cost £40k. I had already put in new bathroom (£8k) and new boiler (£2k) when it blew up.

The boiler popped on December 26th leaving my tenants cold for three weeks and me with no rent that month, then I had a tenant do the dirty and get me to make them homeless so they could get a housing association house (that cost £6k and stress of going to court, making people homeless etc). I had issues of dodgy new tenants elsewhere in the block, leaks into my property from upstairs, vandalism, recycling bins not being used properly by others (ever been through 6 recycling bins by hand to sort them out so they would be picked up? It took 4 hours elbow deep in manky rubbish, retching) etc etc

Overall in 10 years I made about £12-15k of income on a £135k property, after all my costs and bills through the years.
I could have invested that money and made a lot lot more - an achievable 5% interest would have made me £87k in the same 10 years, with no hassles at all...

thankfully not quite such as bad experience as outdooryone, but we've had 2 very bad tenants. one of them so bad that it would have been cheaper to leave the place empty for 18 months than to have rented it out.

as soon as we can sell up we will.

Definately do it via an agent. you cant keep up with all the legislation and checks otherwise. though you still may get shafted by a bad tenant....and i've heard bad examples where relatives are involved

I had a lucky escape with a buy to let flat. The tenancy was due to end timed with our house sale, because we needed both properties sold to buy our new larger house. The occupant moved his (allegedly) disabled daughter in and refused to move out. The council told him to stay put, or he’d be making them willingly homeless. We were stuck with the mortgage on it, no rent coming in, in danger of losing our new house. We only resolved it in time because the legal tenant actually was his employer. I’ll never go down that road again - I was raging with anger over the unfairness of it, when we had been great landlords too.

On the flip side - we did make a profit which we needed for our new purchase but the stress was honestly immense. And, I didn’t enjoy doing the tax returns either!

If it works out with your brother OP it would be brilliant. If for any reason it doesn’t, it could become a big headache.

We have just become landlords. Tenants moving in next week. I will let you know how it goes. Our research showed lots of small landlords are selling up but we thought we’d give it a go for a couple of years and if it doesn’t go as hoped then we will sell up.

pros are that there is a shortage of rentals near us and house prices continue to go up so we figured it was worth a try. Could be a good pension for us in the future too as ours are not good. We didn’t set out to become landlords but as the opportunity arose it sounded like it could be good.

I mean the pluses of a BTL are that it's a tangible asset that will probably at least hold value, and guaranteed monthly income (assuming they pay), albeit make sure you save taxes and maintenance/repairs allowance out of that so you have a contingency fund. Minuses are that returns are actually pretty crap at current market prices (despite everyone talking about parasite LL's, yields are low), and it can be a big hassle. A big expenditure (boiler, roof or just redecorating between tenants) can mean you make no money for a good few months. If you proceed I would advise renting at arms length through a good agent (get recommendations- I use a local independent firm and they are great, but it's 7%). If you're a higher rate tax payer, the income less costs is taxed at higher rate (kind of obvious but a lot of people don't think about it).

And another thing to consider is that all rentals have to be EPC C at least by 2030. For a lot of pre 1950 houses, and particularly Victorian terraces, that's almost impossible to achieve (one of mine will apparently cost around £20,000 to bring from.a D to a C. It already has doubled glazed everything, newish boiler and great loft insulation. The upgrades would be major structural changes).

yeah- which is why I think it wont happen or at least there will be some get out whereby so long as the tenant signs some bit of paper to say they acknowledge it isn't EPC C, it's fine. The alternative is just not workable, especially in London.

I also tend to agree that it can't happen. My feeling is that they will change the way EPCs are worked out, making it easier to achieve a C. But regardless, I wouldn't be buying a BTL of less than C just in case.

1. Don't do it till after October budget.
2. It's hands on, illiquid, headache, stressful and can ruin a holiday.
3. Research equities (big index trackers), but stay on sidelines till budget and US elections.
4. Park your money in premium bonds (~4.3% no tax), money market funds (taxed), short term Gilts (no CGT)
5. DYOR
6. Goodluck

Thanks everyone! I've spoken to my dad, he also suggested looking at in index account and putting it in there, as the return may be similar to what I get back from renting, and it's obviously much less hassle.

I've also been having a look at bonds. Perhaps splitting some of it in bonds and some in an index account. I'll let that slowly build and keep saving. And probably buy the house that I'm in.

I am speaking with an IFA next week, but now I've read more about index accounts and bonds and also how renting just isn't what it used to be, I'd rather invest the money well for a good return without the hassle of renting. Thanks for all the advice!

Any advice on index accounts or bonds? I'll pop a thread over in investments too.

Sounds like a good decision @HRCsMumma

If you can buy the house you’re in, that would be a fantastic thing to do. Security for you and your daughter. As others have pointed out, while you’re expecting to inherit it in the future anyway, the risk with that is that your parents may need to sell it in their very old age to pay for care home fees if they ever need that.

I would take legal ownership of it now if you can.

@HRCsMumma thank you for the update. Indeed nothing is guaranteed, but investing in a few places / products would likely get the same return for a lot less hassle.
The difference with many BTL of course is that they lever a smaller deposit to get a loan, thereby 'increasing' the size of investment they made. You accept the higher risk and hassle in return for hoping for big gains. But, my feeling is that those days are gone, and being a landlord is going to get tougher and tougher - and Labour have intimated as much.