B2L sanity check
Discussion
Hi folks,
I am currently in the process of sorting out mortgages with Sarnie as recommended on here, so happy with deals etc that end, under 4pc which is a relief. I am, however, a words guy rather than numbers so wanted to check that this was a sensible ‘plan’…
Current mortgage balance on my house 150k on 350k value.
Relative has a 1bed flat, half of a house, they own the top flat and freehold. They need to pay off their main house mortgage prior to expiry in a few years (which would lead into the realms of equity release etc…yuk)
I would buy flat from them for £100k, which would mean they could pay off house mortgage and it means, for them, that they have someone ‘known’ in other flat. A benefit. Open market value of flat is around £120k I would imagine, maybe slightly higher. Currently rented to stable tenant for £650/month.
Current plan is to raise mortgage on mine to 200k and take out BTL mortgage as a limited company on flat. Total interest cost of extra borrowing on my place and the B2L mortgage is around £500 a month.
I can currently retire in 9yrs. Lump sum would be enough to pay off current house, more or less.
There are clearly deferred benefits here of the increased value of flat, as well as relative being financially sorted-this will benefit me in the future. But given the B2L mortgage is interest only, what’s the ‘plan’ to capitalise on this? Obviously rent is paying off mortgage, but I can’t see how to crystallise that into value…
Currently, just into HR tax so the company wrapper seems sensible.
I am currently in the process of sorting out mortgages with Sarnie as recommended on here, so happy with deals etc that end, under 4pc which is a relief. I am, however, a words guy rather than numbers so wanted to check that this was a sensible ‘plan’…
Current mortgage balance on my house 150k on 350k value.
Relative has a 1bed flat, half of a house, they own the top flat and freehold. They need to pay off their main house mortgage prior to expiry in a few years (which would lead into the realms of equity release etc…yuk)
I would buy flat from them for £100k, which would mean they could pay off house mortgage and it means, for them, that they have someone ‘known’ in other flat. A benefit. Open market value of flat is around £120k I would imagine, maybe slightly higher. Currently rented to stable tenant for £650/month.
Current plan is to raise mortgage on mine to 200k and take out BTL mortgage as a limited company on flat. Total interest cost of extra borrowing on my place and the B2L mortgage is around £500 a month.
I can currently retire in 9yrs. Lump sum would be enough to pay off current house, more or less.
There are clearly deferred benefits here of the increased value of flat, as well as relative being financially sorted-this will benefit me in the future. But given the B2L mortgage is interest only, what’s the ‘plan’ to capitalise on this? Obviously rent is paying off mortgage, but I can’t see how to crystallise that into value…
Currently, just into HR tax so the company wrapper seems sensible.
Why would you bother, once you have paid tax on the rent it sounds like you would be losing money each month?
I really don't think the sums stack up for most BTL properties anymore, as someone who has 1 BTL I would rather I had put £20K a year in to an ISA savings account.
Don't forget the capital gains tax when you want to sell it, and the secondary stamp duty you will have to pay to buy it.
Honestly can't see it is worth the grief
I really don't think the sums stack up for most BTL properties anymore, as someone who has 1 BTL I would rather I had put £20K a year in to an ISA savings account.
Don't forget the capital gains tax when you want to sell it, and the secondary stamp duty you will have to pay to buy it.
Honestly can't see it is worth the grief
Just a couple of observations.
So it's a house split into two flats, your relative owns both, lives in the top one and rents out the bottom one? They will sell the bottom one to you so they can pay off the mortgage. Is that right? If so, is the mortgage just on the top flat or the whole property? If it's on the whole property they won't be able to sell half of it to you prior to paying off the mortgage.
The rent isn't 'paying off the mortgage'....... it's interest only so it isn't being paid off.
You have a flat with 100% mortgage, only the interest is being serviced and you make £150 on top which has to cover all your costs. It will take you nearly three years to make enough to cover the stamp duty. In the 9 years you might just break even on the income v's your costs if all goes well and your tenant is happy and doesn't want new carpets or a new kitchen etc, they don't move out and there are no unexpected bills.
You propose to purchase in a company so that you can offset the interest but only £50k will be borrowed by the new company. The other £50k is presumably in your name on your own home so will be more difficult to get the tax relief on.
The only way to 'crystalise the value' is to sell it and hope you can get more than you paid.
If you do it in a Ltd, then as someone else said, there are ongoing costs. You also cannot get access to the money without paying tax on it. So if all went well and you sold it in 9 years for a £20k uplift, that would be classed as profit for the company and taxed accordingly. You would then be taxed if you wanted to get this money out and 'pay' yourself.
For me, the numbers don't stack up.
So it's a house split into two flats, your relative owns both, lives in the top one and rents out the bottom one? They will sell the bottom one to you so they can pay off the mortgage. Is that right? If so, is the mortgage just on the top flat or the whole property? If it's on the whole property they won't be able to sell half of it to you prior to paying off the mortgage.
The rent isn't 'paying off the mortgage'....... it's interest only so it isn't being paid off.
You have a flat with 100% mortgage, only the interest is being serviced and you make £150 on top which has to cover all your costs. It will take you nearly three years to make enough to cover the stamp duty. In the 9 years you might just break even on the income v's your costs if all goes well and your tenant is happy and doesn't want new carpets or a new kitchen etc, they don't move out and there are no unexpected bills.
You propose to purchase in a company so that you can offset the interest but only £50k will be borrowed by the new company. The other £50k is presumably in your name on your own home so will be more difficult to get the tax relief on.
The only way to 'crystalise the value' is to sell it and hope you can get more than you paid.
If you do it in a Ltd, then as someone else said, there are ongoing costs. You also cannot get access to the money without paying tax on it. So if all went well and you sold it in 9 years for a £20k uplift, that would be classed as profit for the company and taxed accordingly. You would then be taxed if you wanted to get this money out and 'pay' yourself.
For me, the numbers don't stack up.
ThingsBehindTheSun said:
Why would you bother, once you have paid tax on the rent it sounds like you would be losing money each month?
I really don't think the sums stack up for most BTL properties anymore, as someone who has 1 BTL I would rather I had put £20K a year in to an ISA savings account.
Don't forget the capital gains tax when you want to sell it, and the secondary stamp duty you will have to pay to buy it.
Honestly can't see it is worth the grief
This x1000I really don't think the sums stack up for most BTL properties anymore, as someone who has 1 BTL I would rather I had put £20K a year in to an ISA savings account.
Don't forget the capital gains tax when you want to sell it, and the secondary stamp duty you will have to pay to buy it.
Honestly can't see it is worth the grief
Compared to other, tax efficient options, it doesn’t stack up for 9 out of 10 peeps.
DoubleSix said:
This x1000
Compared to other, tax efficient options, it doesn’t stack up for 9 out of 10 peeps.
I've looked into BTL on-and-off for 15+ years. Every single time, I've concluded that the numbers don't really stack up. And doubly so when you consider the additional hassle it brings (from tenants to tax returns etc).Compared to other, tax efficient options, it doesn’t stack up for 9 out of 10 peeps.
More-so when you consider that one alternative is putting the "investment" into a pension wrapper and getting immediate tax relief on it before watching it grow at more than the likely rental yield. Do the numbers and it is almost impossible for bricks and mortar to outperform a pension with tax relief on the way in).
Also worth considering that many landlords (including nearly every one I know) is fedup of the hassle (latest EPC for example) and as such is looking to reduce their portfolio. It could be said that there's never been a worse time to become a small-time-landlord....?
Thanks all.
Definitely needs more thought. As said, I struggle to grasp numbers but yes, a large amount of debt for a breakeven return. People talk about ‘releasing equity’ in houses but actually it means increasing debt!
I will look into limited company costs, I hadn’t thought there was much to it, but surely the offset of mortgage interest is a major benefit?
The house is properly sub-divided into 2 flats with separate titles, so that’s not an issue.
I think probably the value here lies in the intangibles. Effectively doing this means that my mums house is sorted, which has trickle down effects in the future. There will be a future increase in value, and also in 9 years I can retire…lump sum pays off this mortgage, then I have a stable side income from this.
It’s a long term view, but I just need to make sure it can tick over in the meantime. On paper though it’s tighter than I anticipated.
Definitely needs more thought. As said, I struggle to grasp numbers but yes, a large amount of debt for a breakeven return. People talk about ‘releasing equity’ in houses but actually it means increasing debt!
I will look into limited company costs, I hadn’t thought there was much to it, but surely the offset of mortgage interest is a major benefit?
The house is properly sub-divided into 2 flats with separate titles, so that’s not an issue.
I think probably the value here lies in the intangibles. Effectively doing this means that my mums house is sorted, which has trickle down effects in the future. There will be a future increase in value, and also in 9 years I can retire…lump sum pays off this mortgage, then I have a stable side income from this.
It’s a long term view, but I just need to make sure it can tick over in the meantime. On paper though it’s tighter than I anticipated.
carreauchompeur said:
As said, I struggle to grasp numbers
If you're doing anything of this sort, I'd encourage you to invest in some spreadsheet skills - either a taught course of some sort, or googlesheets for dummies/youtube. Getting actual numbers out while being able to play around with your starting conditions and assumptions can stop you digging yourself a financial hole.carreauchompeur said:
There will be a future increase in value
Keep in mind that nothing is guaranteed (I owned property from roughly 1990 to 2000, it spent the vast majority of that time falling in value) and also consider how you will be taxed depending on how you get at that value.carreauchompeur said:
then I have a stable side income from this.
Huge assumption though... the tenant from hell could cost you 6+ months rent, court costs, eviction fees, and a full refurb. Entirely possible for them to wipe out a couple years of rental income, never mind profit. Sure, there aren't many really bad ones out there but they are out there.As someone who has had a tenant not pay for 6 months, sheriff eviction costs, the boiler destroy itself on new-years eve, the need to redecorate every 2-3 years, new carpets every 3-5 years, the insurance, the landlord registration, the weeks between tenancies, the cost of giving up your Sunday as the tenant has both locked themselves out and picked a drunken fight with a neighbour, the gas and electric certs, the inspections, the need to tidy the garden as the person they picked a fight with now encourages their kids and dogs to litter your garden, etc etc etc - run away from a BTL and look at other options.
IMO, with the change in tax and the challenges of being a landlord, BTL is not the return it once was.
IMO, with the change in tax and the challenges of being a landlord, BTL is not the return it once was.
carreauchompeur said:
Agreed, always a risk, but I suppose that’s the game.
It is and it isn't. The issue is one of risk concentration. The situation is quite different if you have one property vs 10 vs 100.I've got an eviction looming. I'm rather annoyed about it but ultimately it'll make no difference whatsoever to my life. I expect I'd feel quite differently if I had one property and, in retirement, got hit with a loss of income and the need to find a load of money to put it right/recover from a problem tenant.
Good thing about this flat is that it’s one of 2 in a house, I believe I am down as freeholder, although if not it’s mum.
Have come up with an alternative plan. Partner comes in as equal shareholder on ltd company. Each put in 15k ish (I would finance this by much smaller increase on my resi mortgage and maybe a bit of savings). Finance remaining 75k on flat for around £350pcm…
This would seem to tie up less capital and with more income…no?
Have come up with an alternative plan. Partner comes in as equal shareholder on ltd company. Each put in 15k ish (I would finance this by much smaller increase on my resi mortgage and maybe a bit of savings). Finance remaining 75k on flat for around £350pcm…
This would seem to tie up less capital and with more income…no?
Edited by carreauchompeur on Saturday 10th May 15:16
LooneyTunes said:
It is and it isn't. The issue is one of risk concentration. The situation is quite different if you have one property vs 10 vs 100.
I've got an eviction looming. I'm rather annoyed about it but ultimately it'll make no difference whatsoever to my life. I expect I'd feel quite differently if I had one property and, in retirement, got hit with a loss of income and the need to find a load of money to put it right/recover from a problem tenant.
Agreed. I do see the risks. We’re in a decent town and I have a good inside line on who might be problem tenants, but see the logic. I've got an eviction looming. I'm rather annoyed about it but ultimately it'll make no difference whatsoever to my life. I expect I'd feel quite differently if I had one property and, in retirement, got hit with a loss of income and the need to find a load of money to put it right/recover from a problem tenant.
carreauchompeur said:
Hi folks,
Relative has a 1bed flat, half of a house, they own the top flat and freehold. They need to pay off their main house mortgage prior to expiry in a few years (which would lead into the realms of equity release etc…yuk)
I would buy flat from them for £100k, which would mean they could pay off house mortgage and it means, for them, that they have someone ‘known’ in other flat. A benefit. Open market value of flat is around £120k I would imagine, maybe slightly higher. Currently rented to stable tenant for £650/month.
I would only look at this part. What is the current market value of the property ? I mean 100 or 120k? if its 120k, why the hell your relatives giving you a big 17% discount!! That is important because, if its 100k, it does have a 7.8% yield, if 120k it is 6.3% Yield. I think I would actually check with an EA or local surveyor to test the current market value and market rent. The current UK risk free rate is 4.5% so you ask yourself, what is the extra risk premium to get this property ? Is it 2% ? than it should generate 6.5% yield at least. - being really simplistic here.Relative has a 1bed flat, half of a house, they own the top flat and freehold. They need to pay off their main house mortgage prior to expiry in a few years (which would lead into the realms of equity release etc…yuk)
I would buy flat from them for £100k, which would mean they could pay off house mortgage and it means, for them, that they have someone ‘known’ in other flat. A benefit. Open market value of flat is around £120k I would imagine, maybe slightly higher. Currently rented to stable tenant for £650/month.
For other parts, LTD and etc etc.. these are all specific decisions, can be done via relevant accountant advice. I would not also bothered about 'tenancy' hassle, it depends on the type and location.
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