Property Investment??

[matc]

I'm currently in the process of re-mortgaging my house to pay off my ex; once this is done I'll still have about £85k equity in it (based on a pessimistic valuation in the current climate). Now with it being a quite big house that I shared with the ex, I'm not that keen on staying there so was thinking of renting the place out.

The rental income will exceed the new mortgage by IRO £500 per month, which I understand will be taxable at 40% (based on current earnings); so I was thinking of taking more equity out of the house to 'invest' in more buy-to-let property, thus leaving me with a higher mortgage payment and no need to pay tax on the rental income.

Now if this was in the height of the property boom I guess it would have been a no brainer, but based on the uncertainty in the current market I'm a bit reluctant to buy anything.

FWIW I was thinking of taking about £40k extra in equity out of the current house and use it as 2 deposits for new build flats. These would give me a mortgage payment of about £550 p.m. each (based on interest only) but attract a rental income of approx £700 each. The extra money was going to be used to make over payments on the mortgages, again elevating the need to pay tax on the rental earnings.

My question really is, does this sound like a crazy idea and am I likely to get a lender willing to lend me the money at a sensible rate? My thinking is that as soon as we get banks willing to lend people money again, the market will start moving and the properties I have will rise in price. I will probably rent a bachelor pad myself in the short term, just so I can find my feet and decide where I want to live.

Any advice would be greatly appreciated.

[Scooby72]

It all sounds so simple in theory, but I reckon the reality could turn out a lot more messy the way things are at the moment.

Personally I wouldn't go near property at the moment, especially a BTL on a new build.

Also at some point in the not too distant future interest rates are gonna have to go up and maybe quite sharply. Consider how that would effect your 'Interest only' repayments if the BOE base rate went back to say 5%.

I'm no financial expert, i'm just saying be very careful.

[amare32]

I would say property investment is good if you have the money to buy all the properties outright with no mortgage.

[scotal]

matc said:

I'm currently in the process of re-mortgaging my house to pay off my ex; once this is done I'll still have about £85k equity in it (based on a pessimistic valuation in the current climate). Now with it being a quite big house that I shared with the ex, I'm not that keen on staying there so was thinking of renting the place out.

Where will you live?
Is the mortgage you have just set up a BTL mortgage? If not will you be able to get another resi mortgage?

matc said:

The rental income will exceed the new mortgage by IRO £500 per month, which I understand will be taxable at 40% (based on current earnings); so I was thinking of taking more equity out of the house to 'invest' in more buy-to-let property, thus leaving me with a higher mortgage payment and no need to pay tax on the rental income.

Remember you only get tax relief on the interest portion on their mortgage, so if you have a repayment mortgage you will not get tax relief on all of it.

matc said:

Now if this was in the height of the property boom I guess it would have been a no brainer, but based on the uncertainty in the current market I'm a bit reluctant to buy anything.

That's a very telling line, you're taking a huge risk with your current property, to leverage up to buy more and you aren't sure about it?

matc said:

FWIW I was thinking of taking about £40k extra in equity out of the current house and use it as 2 deposits for new build flats. These would give me a mortgage payment of about £550 p.m. each (based on interest only) but attract a rental income of approx £700 each. The extra money was going to be used to make over payments on the mortgages, again elevating the need to pay tax on the rental earnings.

Again the overpayments would still be taxed as they are capital reductions not interest.
How large would the LTV be on your BTL mortgages? £20k is going to have to be buying you an awful lot of flat in the current market.
Why new build? These are still toxic to many lenders especially where btl is concerned.

matc said:

My question really is, does this sound like a crazy idea

It does the way you put it, you need to do a lot more homework on BTL.

matc said:

and am I likely to get a lender willing to lend me the money at a sensible rate?

Rates on BTL are higher than resi at the moment, Fees on BTL are horrendous.
Have you considered void periods?

matc said:

My thinking is that as soon as we get banks willing to lend people money again, the market will start moving and the properties I have will rise in price. I will probably rent a bachelor pad myself in the short term, just so I can find my feet and decide where I want to live.

Any advice would be greatly appreciated.

Its stirkes me you would be better off binning your current property, and then if you want to invest, + buy yourself a new place look at it form a "blank sheet of paper" point of view.
Renting a place yourself whilst letting other places out seems a little bit daft to me.

[JQ]

Personally, if I was in your position, I would sell your current house and rent somewhere cheap and cheerfull and sit on the cash. See what happens to the market over the next 2 years and then be in a really strong position to buy when it looks like we've actually hit the bottom of the market.

It appears that values have only dropped 10% from top to today - not exactly a crash and houses are still unaffordable to the average person. I really can't believe we've seen the worst of it yet, rising unemployment, massive public spending cuts to come, rising interest rates, etc. However, the market does not really make much sense at the moment, so I could be completely wrong and there's another boom round the corner.

[matc]

Thanks very much for all the detailed replies. I've given this some thought since my original post and I'm currently thinking of re-mortgaging to pay the ex off and then renting my place out. I'll then rent somewhere a little nearer to town which is more fitting to my current lifestyle, and just keep hold of the property I've got. If and when the housing market does bottom out, or start moving in the right direction again I could release some equity to buy somewhere else, or just sell up.

The reason I'm not keen on selling it at the moment is because the house is a perfect family home in a highly saught after area, where properties very rarely come on the market. As this market is virtually stagnant at the moment I'm just going to get silly low offers on something that could be worth £50-60k more in the coming years. Also I'm not entirely certain where I want to live, so I'm not keen on losing this house as a base should I want to move back to the area.

[Scooby72]

amare32 said:

I would say property investment is good if you have the money to buy all the properties outright with no mortgage.

That all depends on what prices do over the next couple of years.

I would agree over a 10, 15, 20 year period you are likely to be right.

But short term especially at the moment, if house prices start dipping again, you'd be better off sticking it in a Building Society in a fixed rate bond.

I personally believe that property investment could be a fast way to lose a lot of money over the next 2 or 3 years.

[walm]

Just my 2p on this.

It is slightly ridiculous but the government in their wisdom decided to allow tax relief on your interest payments for a BTL.

As a result there is a HUGE incentive to mortgage up to the hilt.

BUT I would do the math VERY carefully.

Eric will have the full answer but IIRC you can set 10% of the rent income against fair wear and tear/maintenance on the property.

You can offset any management charges or letting fees.
As above you can offset interest payments (NOT principal repayments).

So if you use agents and they take 10% less another 10% on maintenance, you are much closer to £550 than £700.

Also remortgaging costs £££ so it might not be worth it if the admin fees are high.

You should also take into account the fact that you probably won't let out 100% of the time. One month empty and that £700 a month you thought you were getting drops to £640 over a year.

For obvious reasons I really wouldn't lever up on new build BTLs. You know you don't want to.

[Trommel]

Scooby72 said:

I personally believe that property investment could be a fast way to lose a lot of money over the next 2 or 3 years.

There are lots of variables - yield is yield, whether it's coming from an asset which may gain or lose value, from money on deposit, a bond or wherever.

Investing in property for capital growth is always a gamble in the shorter term.

[Bodo]

amare32 said:

I would say property investment is good if you have the money to buy all the properties outright with no mortgage.

Leaving aside how the property prices will develop, it is a very good idea to lend money for asset investment currently. We are expecting (again speculative) a high inflation likely to be triggered by the cost of the current economic crisis.

If the inflation rate goes up to more than 5%, then you might pay back the mortgage faster due to climbing rental income.

[skeeterm5]

I think the biggest challenge you may face is actually finding any btl lenders at the moment, hardly any products about and those that are seem to be aimed at landlords with a track record.

S

[Trommel]

skeeterm5 said:

I think the biggest challenge you may face is actually finding any btl lenders at the moment, hardly any products about and those that are seem to be aimed at landlords with a track record.

... and a 40% deposit.

[slipstream 1985]

Bodo said:

amare32 said:

I would say property investment is good if you have the money to buy all the properties outright with no mortgage.

Leaving aside how the property prices will develop, it is a very good idea to lend money for asset investment currently. We are expecting (again speculative) a high inflation likely to be triggered by the cost of the current economic crisis.

If the inflation rate goes up to more than 5%, then you might pay back the mortgage faster due to climbing rental income.

you are assuming that asset inflation will be met with wage inflation which is not happening. quite the opposite right now actually

[Bodo]

slipstream 1985 said:

Bodo said:

amare32 said:

I would say property investment is good if you have the money to buy all the properties outright with no mortgage.

Leaving aside how the property prices will develop, it is a very good idea to lend money for asset investment currently. We are expecting (again speculative) a high inflation likely to be triggered by the cost of the current economic crisis.

If the inflation rate goes up to more than 5%, then you might pay back the mortgage faster due to climbing rental income.

you are assuming that asset inflation will be met with wage inflation which is not happening. quite the opposite right now actually

When I calculate a long term investment like property, I'm more interested, what happens in the next 10 years. The relevance of right now for a long term investment with borrowed money is: interest rates are low.

[Dr_Gonzo]

Something doesn't add up here. How does 40k allow you to put down two 25% deposits on flats that will generate £700 pcm rental income? How much are these flats new? It would seem they must be less than 100k, although I don't see how a sub 100k flat would rent for £700 pcm.

And your £550 pm mortgage would be way too close; you'd end up paying for your tennants to live there whilst not increasing your equity in the flats at all.

- Rent = £700 pcm £8400 p/a
- Minus at least 1 month unoccupied = £7700
- Minus Insurance, repairs, renewals, rates etc @ 10% (£770) [£6930]
- Minus Service Charge & Ground Rent (est £100 pm) (£1200) [£5730]
- Minus Mortgage costs (550 pm at present = £6600 pa)
- Profit/loss = (£870) loss for each flat per year

Add on to that a longer empty periods, problem tennants, major repairs, tennant finders fee, management charges (if applicable) and you're on to a major losser. Could you really afford it if both flats happen to go unoccupied for 3 months? This why so many people came unstuck with BTLs, especially the new build 'luxury' apartment sector.

[matc]

Dr_Gonzo said:

Something doesn't add up here. How does 40k allow you to put down two 25% deposits on flats that will generate £700 pcm rental income? How much are these flats new? It would seem they must be less than 100k, although I don't see how a sub 100k flat would rent for £700 pcm.

And your £550 pm mortgage would be way too close; you'd end up paying for your tennants to live there whilst not increasing your equity in the flats at all.

- Rent = £700 pcm £8400 p/a
- Minus at least 1 month unoccupied = £7700
- Minus Insurance, repairs, renewals, rates etc @ 10% (£770) [£6930]
- Minus Service Charge & Ground Rent (est £100 pm) (£1200) [£5730]
- Minus Mortgage costs (550 pm at present = £6600 pa)
- Profit/loss = (£870) loss for each flat per year

Add on to that a longer empty periods, problem tennants, major repairs, tennant finders fee, management charges (if applicable) and you're on to a major losser. Could you really afford it if both flats happen to go unoccupied for 3 months? This why so many people came unstuck with BTLs, especially the new build 'luxury' apartment sector.

Yes you're quite right; when I first posted I had only had a brief speculative look at the current property purchase prices V's rental incomes, and thought it might be a good idea. I hadn't really taken into account the level of deposit's required by the lenders at the moment to get anything approaching a sensible rate.

I've decided to re-mortgage the current place to pay the ex off, using an interest only mortgage; so if I do decide to rent it out at a later date I won't get stung paying 40% tax on the income generated from it. I guess I'll then just sit tight and see what happens with the market, I guess I can release some equity from the house as and when the opportunity to invest elsewhere arises.

Thanks everyone for your feedback on this.

[Dr_Gonzo]

matc said:

Dr_Gonzo said:

Something doesn't add up here. How does 40k allow you to put down two 25% deposits on flats that will generate £700 pcm rental income? How much are these flats new? It would seem they must be less than 100k, although I don't see how a sub 100k flat would rent for £700 pcm.

And your £550 pm mortgage would be way too close; you'd end up paying for your tennants to live there whilst not increasing your equity in the flats at all.

- Rent = £700 pcm £8400 p/a
- Minus at least 1 month unoccupied = £7700
- Minus Insurance, repairs, renewals, rates etc @ 10% (£770) [£6930]
- Minus Service Charge & Ground Rent (est £100 pm) (£1200) [£5730]
- Minus Mortgage costs (550 pm at present = £6600 pa)
- Profit/loss = (£870) loss for each flat per year

Add on to that a longer empty periods, problem tennants, major repairs, tennant finders fee, management charges (if applicable) and you're on to a major losser. Could you really afford it if both flats happen to go unoccupied for 3 months? This why so many people came unstuck with BTLs, especially the new build 'luxury' apartment sector.

Yes you're quite right; when I first posted I had only had a brief speculative look at the current property purchase prices V's rental incomes, and thought it might be a good idea. I hadn't really taken into account the level of deposit's required by the lenders at the moment to get anything approaching a sensible rate.

I've decided to re-mortgage the current place to pay the ex off, using an interest only mortgage; so if I do decide to rent it out at a later date I won't get stung paying 40% tax on the income generated from it. I guess I'll then just sit tight and see what happens with the market, I guess I can release some equity from the house as and when the opportunity to invest elsewhere arises.

Thanks everyone for your feedback on this.

You'd still pay the same amount of tax whether it's an IO mortgage or capital repayment. The difference with the repayment mortgage is that you can't set-off the full mortgage payments against income, only the interest portion. As the interest will be the same whether you have IO or repayment it doesn't matter which you have, you'll still pay the same amount of tax. The only difference is how much you have to pay to the mortgage company each month.