Discussion
I know this has probably been done to death but I have been thinking about jumping onto the rental property bandwagon for a few years. I know a number of PH'ers are Landlords so am interested in honest opinions on the following scenario.
The rental market local to where I live (rural area of NE England) is very buoyant at present and this has been confirmed by extensive research with local letting agents etc. I can buy a very nice, modern, well presented 2 bedroom semi-detached property, in a nice part of town for £90k maybe less. The purchase price would be negotiated hard and would be inclusive of all fees and any decorating costs etc. The property would be let unfurnished.
I have assumed occupancy of 46 weeks / pa and the rental income would be £500 / month. I have a deposit of £20k available. Yield would be around the 6% mark initially.
Looking at the cashflow model even allowing for a 2% increase in rental income pa and a 1.5% increase in letting expenses pa it doesn't seem to be a great earner in the short term but acknowledge this is a long term plan. I am certainly getting bugger all interest on my £20k at present..!!
Although I have capital growth modelled within my cashflow forecast I am neglecting any growth for the time being. Conversely, I am not expecting the property to depreciate further.
Any thoughts on this…?? Am I utterly mental to even consider buying a property at present…??
The rental market local to where I live (rural area of NE England) is very buoyant at present and this has been confirmed by extensive research with local letting agents etc. I can buy a very nice, modern, well presented 2 bedroom semi-detached property, in a nice part of town for £90k maybe less. The purchase price would be negotiated hard and would be inclusive of all fees and any decorating costs etc. The property would be let unfurnished.
I have assumed occupancy of 46 weeks / pa and the rental income would be £500 / month. I have a deposit of £20k available. Yield would be around the 6% mark initially.
Looking at the cashflow model even allowing for a 2% increase in rental income pa and a 1.5% increase in letting expenses pa it doesn't seem to be a great earner in the short term but acknowledge this is a long term plan. I am certainly getting bugger all interest on my £20k at present..!!
Although I have capital growth modelled within my cashflow forecast I am neglecting any growth for the time being. Conversely, I am not expecting the property to depreciate further.
Any thoughts on this…?? Am I utterly mental to even consider buying a property at present…??
You might struggle to get a mortgage as you are on the cusp of the 75% LTV requirement that I believe most lenders have. Have a look at it on a repayment basis too and see if you think it still works...after all if you are BUYING to let you also need to look at paying off the mortgage. One thing I read about recently is that even if you take out an interest only mortgage the lender can force you to start making capital repayments if the LTV goes above 75% so you should definitely factor in whether it still makes sense on that basis.
Beardy10 said:
You might struggle to get a mortgage as you are on the cusp of the 75% LTV requirement that I believe most lenders have. Have a look at it on a repayment basis too and see if you think it still works...after all if you are BUYING to let you also need to look at paying off the mortgage. One thing I read about recently is that even if you take out an interest only mortgage the lender can force you to start making capital repayments if the LTV goes above 75% so you should definitely factor in whether it still makes sense on that basis.
Some good points. I had considered a repayment mortgage but based on the monthly mortgage payments it would more than likely be a break even at best considering the 'letting' expenses that need to be factored in. Also, the monthly mortgage repayment is significantly higher and I'm not sure I would want to stomach that should times be lean. Will look into this again though just to be sure. However, the upshot is that the capital is reducing month on month and effectiely someone else is paying the house off.I have enquired about a BTL mortgage and am confident I can get approval as LTV is over 20%.
Not heard about the potential for lenders to insist on making capital repayments so will look into that. Thanks.
Beardy10 said:
One thing I read about recently is that even if you take out an interest only mortgage the lender can force you to start making capital repayments if the LTV goes above 75% so you should definitely factor in whether it still makes sense on that basis.
Do you have a link to anything on this. As yet I have seen no small time btl'ers hit with a margin call.
MoonMonkey said:
Not heard about the potential for lenders to insist on making capital repayments so will look into that
I think I read it in the Sunday Times so it could be rubbish but definitely worth checking out. I am of the school of thought that most things written by journalists are massive generalisations and quite often wrong. Whenever I read about anything to do with my work in the papers it is nearly always full of factual inaccuracies so I assume everything else is!MoonMonkey said:
I have enquired about a BTL mortgage and am confident I can get approval as LTV is over 20%.
There's only one lender going to beyond 75% LTV currently. Good name, but they know how to charge for application fees.Pleanty of lenders will do 75% LTV or below. Rates and deals vary.
As for whether BTL is for you.......
1. Are you preapred for the hassle of being a landlord?
2. Are you prepared for a house price fall to wipe out your deposit (even if you don't crystalise that loss it'll still be stressful.) How long are you prepared to wait for it to recover?
3. Have you got a contingency in place in case your investment is emoty longer than you plan (Rentals are bouyant now, what happens in 6months, 12 months, 2 years etc)
4. Are you buying in an area you'd be prepared to leave your car? If not, who is going to go round and short s
t out?Have you factored in insurance and maintnence? Tenants can be great, but they can also be a nightmare. Who's going to repaint the place after the last tenants kids draws on every wall in the building (as happened to a client of mine)
Are the local agents any good at lettings or will you do it yourself. If you do will you put up with the crap you might get?
If you go through an agent how will you keep an eye on them?
There's a lot to think about above and beyond simply buyimg the house, financing the house and letting it out.
The repayment strategy on a BTL is usually that the mortgage is interest only, and then the sale of the property pays it off.
scotal said:
There's only one lender going to beyond 75% LTV currently. Good name, but they know how to charge for application fees.
Pleanty of lenders will do 75% LTV or below. Rates and deals vary.
I must admit we have a further appt booked with a friend who is in the mortgage business so we do need to do a bit more work in this area.Pleanty of lenders will do 75% LTV or below. Rates and deals vary.
scotal said:
1. Are you preapred for the hassle of being a landlord?
This is an unknown area tbh as never done it before so is definately a risk.scotal said:
2. Are you prepared for a house price fall to wipe out your deposit (even if you don't crystalise that loss it'll still be stressful.)
The short answer if you put it like that is no but then it's a risk. We have lived in the area since 2001 and house prices have increased steadily peaking a couple of years ago. There certainly hasn't been the massive boom like there was darn sarf so I would be very very surprised if house prices would drop to such a level to risk losing all the initial investment.scotal said:
How long are you prepared to wait for it to recover?
As long as it takes to be honest. We live in the area and have no plans to move. The area is also under development (recent Tesco superstore, Aldi etc)scotal said:
3. Have you got a contingency in place in case your investment is emoty longer than you plan (Rentals are bouyant now, what happens in 6months, 12 months, 2 years etc)
The contingeny plans are that the monthly mortgage payment / bills are relatively easily do-able should the house remain empty. We also have a relatively small mortgage by todays stds on our main house plus not all the savings would be tied up. I feel relatively comfortable and I'm usually somewhat risk averse tbh.scotal said:
4. Are you buying in an area you'd be prepared to leave your car? If not, who is going to go round and short st out?
The area is very nice and has a mix of 2/3/4 bed semis and detached properties so a well to do area with young families etc. I'd be more than happy to live there myself.t out?scotal said:
Have you factored in insurance and maintnence? Tenants can be great, but they can also be a nightmare. Who's going to repaint the place after the last tenants kids draws on every wall in the building (as happened to a client of mine)
Yes, I have factored in start-up costs, annual letting expenses e.g. gas servicing, buildings ins, annual maintenance etc plus periodic (every few years) a lump sum is required for redecorating etc.scotal said:
Are the local agents any good at lettings or will you do it yourself. If you do will you put up with the crap you might get?
If you go through an agent how will you keep an eye on them?
Current plan is to use the services of a local letting agent to advertise, credit checks, secure deposit and first months rent plus sort the tenancy agreement. We would do the remainder ourselves but have agreed that we would want the final say on what tenents we get. The area of tenent crap is an unknown and something we need to be prepared for I would agree.If you go through an agent how will you keep an eye on them?
scotal said:
There's a lot to think about above and beyond simply buyimg the house, financing the house and letting it out.
110% agree and we aren't going into this with our eyes closed. I have a cashflow model that is x pages long etc to look after the money side but the unknowns like dodgy tenents are a concern that we need to mitigate as far as possible by measures we have already put in place.scotal said:
The repayment strategy on a BTL is usually that the mortgage is interest only, and then the sale of the property pays it off.
That's what we have assumed thus far.musclecarmad said:
fk all this cashflow model bullst mate.
I think you should perhaps be a bit more to the point! k all this cashflow model bullst mate.
Re the rest of your points, i.e.
musclecarmad said:
how would you cope if your tenant didn't pay and smashed your house up
who will your solicitor be
can you be fked with a tax return
what about your gas man corgi engineer and insurance
who will your letting agent be and what about fees
what if your property goes down in value and the lender makes a margin call
do you like having time to yourself at weekends - say goodbye to this. for example, if a tenant calls and the washing machine has leaked what will you do. what if a window gets put through. what if the key snaps in the door - they will call you for everything.
what if they sue you
what if they refuse to leave
the law is on the tenants side and NOT yours
after tax how well off will you be
how will you shield yourself against inevitable future rate rises
are you going to let furnished or unfurnished
have you considered capital gains tax on the gain at up to 28% that can be a kick in the teeth
I think you raise a number of absolutely valid points, but I would caution the OP against being scared off by worrying about the worst case. If he is renting the right property in the right area, and takes care to choose the right tenants then he should be fine. The problems often come when people rush to get the first person they come across into the property asap as they are worried about a void period. The right house, in the right area priced at the right level will, 99% of the time, attract the right kind of tenant.who will your solicitor be
can you be f
ked with a tax returnwhat about your gas man corgi engineer and insurance
who will your letting agent be and what about fees
what if your property goes down in value and the lender makes a margin call
do you like having time to yourself at weekends - say goodbye to this. for example, if a tenant calls and the washing machine has leaked what will you do. what if a window gets put through. what if the key snaps in the door - they will call you for everything.
what if they sue you
what if they refuse to leave
the law is on the tenants side and NOT yours
after tax how well off will you be
how will you shield yourself against inevitable future rate rises
are you going to let furnished or unfurnished
have you considered capital gains tax on the gain at up to 28% that can be a kick in the teeth
musclecarmad said:
fk all this cashflow model bullst mate.
how would you cope if your tenant didn't pay and smashed your house up
who will your solicitor be
can you be fked with a tax return
what about your gas man corgi engineer and insurance
who will your letting agent be and what about fees
what if your property goes down in value and the lender makes a margin call
do you like having time to yourself at weekends - say goodbye to this. for example, if a tenant calls and the washing machine has leaked what will you do. what if a window gets put through. what if the key snaps in the door - they will call you for everything.
what if they sue you
what if they refuse to leave
the law is on the tenants side and NOT yours
after tax how well off will you be
how will you shield yourself against inevitable future rate rises
are you going to let furnished or unfurnished
have you considered capital gains tax on the gain at up to 28% that can be a kick in the teeth
i'd say you are utterly mad, utterly bonkers and greedy but do what you like - i see it every bl00dy day
That's certainly an opinion and staright to the point...!!! lolk all this cashflow model bullst mate.how would you cope if your tenant didn't pay and smashed your house up
who will your solicitor be
can you be f
ked with a tax returnwhat about your gas man corgi engineer and insurance
who will your letting agent be and what about fees
what if your property goes down in value and the lender makes a margin call
do you like having time to yourself at weekends - say goodbye to this. for example, if a tenant calls and the washing machine has leaked what will you do. what if a window gets put through. what if the key snaps in the door - they will call you for everything.
what if they sue you
what if they refuse to leave
the law is on the tenants side and NOT yours
after tax how well off will you be
how will you shield yourself against inevitable future rate rises
are you going to let furnished or unfurnished
have you considered capital gains tax on the gain at up to 28% that can be a kick in the teeth
i'd say you are utterly mad, utterly bonkers and greedy but do what you like - i see it every bl00dy day
Most of the financial issues are accounted for on my cashflow (e.g. CGT, increase in rates etc) hence in my OP I commented that this isn't a 'big earner' over the short term.
The issue re: tenents is proably the biggest unknown for me personally and not something you can 'model'. I'm fortunate that I know the area, know a number of tradesmen but agree from people I've spoken to on the subject you either get model tenents who stay for years or tenents from hell. Difficult call.
Bob Fossil said:
The right house, in the right area priced at the right level will, 99% of the time, attract the right kind of tenant.
I think this is pretty much the position we see ourselves being in although maybe I didn't quite put it so well. I certainly wouldn't rush in to putting the first person in and would be prepared to be choosy in order to find the 'right' tenant.Anyone any views on the financials (maybe difficult I appreciate) with a yield of 6%..?? Other sources recommend a target of 7%/8% so I didn't think we were a million miles away so maybe worth a punt if we can negotiate hard on the purchase price and maximise rental income.
MoonMonkey said:
Anyone any views on the financials (maybe difficult I appreciate) with a yield of 6%..?? Other sources recommend a target of 7%/8% so I didn't think we were a million miles away so maybe worth a punt if we can negotiate hard on the purchase price and maximise rental income.
Personally I think 6% is a decent return if you are in it for the long term - also depends on your tax position as to whether you want to pay the capital back or not... but there are folk much better qualified than I to advise on this aspect.
Pros and cons
If everything was a sure thing in life everyone would be doing it
every business has risk
calculate risk to reward and then decide if property is the way forward
many wannabe landlords tried it, grew to quick, got greedy and lost everything
if the figures work and your are not over streching yourself and have adequate funds for the bad times then give it ago
but property is always LONG TERM and never short term
If everything was a sure thing in life everyone would be doing it
every business has risk
calculate risk to reward and then decide if property is the way forward
many wannabe landlords tried it, grew to quick, got greedy and lost everything
if the figures work and your are not over streching yourself and have adequate funds for the bad times then give it ago
but property is always LONG TERM and never short term
Slightly off topic - I was watching "Homes under the Hammer" the other night. A middle aged couple had just bought their twelveth property in as many months (this was filmed in 2007 - 2008)
How on earth do they manage to fund such ventures and what must their mortgage repayments be like?
How on earth do they manage to fund such ventures and what must their mortgage repayments be like?
Grandad Gaz said:
Slightly off topic - I was watching "Homes under the Hammer" the other night. A middle aged couple had just bought their twelveth property in as many months (this was filmed in 2007 - 2008)
How on earth do they manage to fund such ventures and what must their mortgage repayments be like?
easy it's called leveraging. How on earth do they manage to fund such ventures and what must their mortgage repayments be like?
Getting the first is hard the second much easier etc etc
what they will have done is got a deposit either from savings or from equity in their own house plus a buy to let to get their first rental. Next as we were in a rising Market re mortgage up to the max ltv they can which means equity out of the house use that as a deposit for the next etc etc.
It snowballs. It's far easier to get big money mortgages or loans than small - take this from someone who currently has quite a nice size property portfolio which even in feb2009 none were anywhere close to negaite equity.
However I've just sold one off - reason for that one I cannot see any further growth ie at the £250k mark and it just finished it's fixed rate so to get a new fixed or rust var vs the upside it just didn't make any sense. The risks far outweighed the pros. That's the first I've offloaded.
Also decided to sell as tennants just left after the STD year plus I want that mortgage free on main residence asap.
Also I judged it would need new carpets after another year and a few other odds and ends plus a notable increase in crime antisocial and robbery also helped weight the negatives. Remember it's not just the £ that are important.
Oh and being a landlord is a lot of extra work. The number of times I've been called with emergencies per year and at very difficult times for me is highly inconvient.
One time after repeatedly telling them never leave the key in the door lock inside the house. Then the very first day when they move in they do that. All the hassle breaking in sorting things out yourself.
Calls when your overseas.
Late payments
chq payments so annoying trips to the bank
them ignoring mail from council or electoral role
them putting rubbish in red or green bin when not on electoral role
them calling up at midnight when you went to bed early I'll with blocked toilet which turns out to be blocked manhole and when asked they lift the manhole and see nothing just "mud " ie brimmed with poo total idiots.
That's an important nite what if your working late or on a night out or sick or on hols who sorts it out for you? I've been out there fixing things when I've got a doctors note and feviously ill.
If you cannot fix it do you have trrusted traders? What about deliveries say new washing machine you got to take a day off work or pay higher price and have an estate to take it hone.
Weekends during the summer cutting their lawns. Summer painting all the fences. Etc etc
it's a huge effort. Repainting the house once a year top to bottom. Hard work and has to be done quickly.
Day off to get your gas safety cert
all adds up and really it has to make sense as in lots more pros than cons as if not it's hard work.
Does it pay off - has for me has for plenty and hasn't for plenty too who couldn't afford it.
If you rent now and will carry on renting then I'd say that's the wrong choice. That's a big risk and a punt if it goes belly up your screwed at least a decade until you can get a mortgage again
Forgot to add this year one tennant tried to sue me ... They were robbed. The house is 10years old fully double glazed and 5level lock doors etc. They didn't lock the front door claiming it's a fire hazard as they wouldn't be able to unlock it and get out safely. Now clearly I had nothing to worry about but had to deal with the stress phone calls constantly arguing with them then after talks broke down they went the solicitor route which means I had to as well - cost plus days leave plus evening work on it plus stress and sleepless nights.
Clearly it was thrown out and didn't get to court but even so that was a good 6-8weeks if mega stress
Clearly it was thrown out and didn't get to court but even so that was a good 6-8weeks if mega stress
musclecarmad said:
Grandad Gaz said:
Slightly off topic - I was watching "Homes under the Hammer" the other night. A middle aged couple had just bought their twelveth property in as many months (this was filmed in 2007 - 2008)
How on earth do they manage to fund such ventures and what must their mortgage repayments be like?
they will probably now be bust or very close to bust.How on earth do they manage to fund such ventures and what must their mortgage repayments be like?
CGT is now 28% so they will be in negative equity if they ever sell if they have leveraged themselves up to the hilt.
i'd wager that they are now bust unless they both have very good jobs
The point though is as the uk tax payer owns huge % of the banks it certainly makes sense to keep rates low 0.5% and keep those with debt paying as if they en mass go bankrupt who really loses out??? Bank share holders and yes that's us.
The issue is it doesn't matter how we got to wheee we are you can analyse it till you eat out your own arse but if you just start here draw a line under it move on and get things fixed.
The issue is it doesn't matter how we got to wheee we are you can analyse it till you eat out your own arse but if you just start here draw a line under it move on and get things fixed.
MoonMonkey said:
Anyone any views on the financials (maybe difficult I appreciate) with a yield of 6%..?? Other sources recommend a target of 7%/8% so I didn't think we were a million miles away so maybe worth a punt if we can negotiate hard on the purchase price and maximise rental income.
Can I clarify: when you say "6% yield" are you basing that on 52 weeks' rent or on the 46 weeks occupancy that you mentioned in your first post?If you're talking about 52 weeks rent then it has to be 7%+ IMO
seaninog said:
MoonMonkey said:
Anyone any views on the financials (maybe difficult I appreciate) with a yield of 6%..?? Other sources recommend a target of 7%/8% so I didn't think we were a million miles away so maybe worth a punt if we can negotiate hard on the purchase price and maximise rental income.
Can I clarify: when you say "6% yield" are you basing that on 52 weeks' rent or on the 46 weeks occupancy that you mentioned in your first post?If you're talking about 52 weeks rent then it has to be 7%+ IMO
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