just starting - would like some advice!

[gillfletcher]

Hi everyone, I am thinking of buy a flat to rent out as an investment and a new challenge.

I am in the fortunate position of having no mortgage on my own home, and being able to afford to buy a second flat outright. However, I want to work out whether it would be best to buy the rental property outright, or take out a mortgage so that I can offset the interest against the rental income. I don't know how to work this out...you might think that if I don't know how to do this then perhaps I shouldn't be a landlord, and you might be right! It must be to do with comparing the interest (minimal) that I could earn by leaving £200k in the bank, as opposed the benefit of............oh, I'm lost already.

I would be very grateful for any advice from members of this forum as to how to make this calcuation.

thank you in advance.

[Trenners]

Hi Newbie,

If you use your savings (all £200K) to purchase a property then you will NOT need a buy to let (B2L) mortgage. B2L mortgages typically cost from 4.5% upwards (depending on what upfront fees you pay ... and how much deposit you put down on the purchase). So ... by using your savings to fund the B2L purchase you are, effectively, getting 4.5%+ return on your money. That is a good return (compared to the best building society rates at the moment).

However .. you are also putting "all your eggs in one basket/property" and you have a "binary letting business" in the fact that your SINGLE property is either let or empty. When it is empty you earn nothing.

Perhaps a better strategy would be to purchase TWO flats (at £200K each) and put a deposit of £100K down on each of them and borrow via B2L mortgage the remaining £200K.

You will be 50% geared ....... but have a portfolio of 2 properties worth £400K in total. You would be unlucky if both flats were empty at the same time ... and the rental income from 1 property should cover the mortgages for both properties .....

You will have 2 properties that can go up (or down) as house prices change .......

Hope this helps ....

Mark

[gillfletcher]

Hi Newbie,

If you use your savings (all £200K) to purchase a property then you will NOT need a buy to let (B2L) mortgage. B2L mortgages typically cost from 4.5% upwards (depending on what upfront fees you pay ... and how much deposit you put down on the purchase). So ... by using your savings to fund the B2L purchase you are, effectively, getting 4.5%+ return on your money. That is a good return (compared to the best building society rates at the moment).

However .. you are also putting "all your eggs in one basket/property" and you have a "binary letting business" in the fact that your SINGLE property is either let or empty. When it is empty you earn nothing.

Perhaps a better strategy would be to purchase TWO flats (at £200K each) and put a deposit of £100K down on each of them and borrow via B2L mortgage the remaining £200K.

You will be 50% geared ....... but have a portfolio of 2 properties worth £400K in total. You would be unlucky if both flats were empty at the same time ... and the rental income from 1 property should cover the mortgages for both properties .....

You will have 2 properties that can go up (or down) as house prices change .......

Hope this helps ....

Mark

[gillfletcher]

Thanks Mark, that is very interesting.

I see your point about spreading the risk by buying two properties, which I had not thought of, and I know now the meaning of a binary letting business! I need to factor in all the costs of buying too....but there's got to be a better way of making money that leaving it in the building society at the moment, and then paying tax (again) on the pitiful gains at the end of the year.

Thank you for taking the time to reply - definitely something to think about.

Gill

[Richlist]

So ... by using your savings to fund the B2L purchase you are, effectively, getting 4.5%+ return on your money. That is a good return (compared to the best building society rates at the moment).

NO.....thats completely wrong.

1. BTL mortgages can be had for around 3.85% (source: Mail on Sunday 14th August).

2. As you are able to offset the cost of mortgage interest against income tax liability then any mortgage rate needs to be adjusted depending on wether you are a 20% tax payer or a 40% tax payer. Its never as simple as you are suggesting.

3. If the OP has left £200K languising in a building society account he probably needs to see a good independant financial advisor to discover better home(s) for his money. Most people are aware that 5%+ is currently available tax free with Gov bonds.

4. Very few people can make a profit on new BTL purchases with existing economic conditions.

[Trenners]

I totally disagree with Richlist!

Although the cheapest B2L mortgage might well be 3.85% (source Mail on Sunday etc) .... it depends on deposit available, individual financial circumstances etc etc etc ... and for the purposes of answering the question ... a plan for a 4.5% interest rate is not unreasonable.

The adjustment of income tax against the mortgage interest is irrelevant. By example, if rental income is £6000 per annum and expenses (mortgage interest, maintenance, fees etc) is £3000 per annum then my PROFIT is £3000. This profit is subject to 20% or 40% tax .... not the mortgage interest relief which is simply deducted from the profit.

Cash is a good position to be in at the moment ... unless you like riding roller coasters at the London Stock Exchange.

Like all investments, buy cheap ... sell high. Of course you can still make a profit from new B2L ... you just need to choose your investments wisely, make sure the yield covers the mortgage expenses / maintenance costs and then wait 15+ years to sell the property and reap your capital growth.

Mark

[Carryon Regardless]

I feel the future for anyone in the BTL industry is brighter for those with no or low borrowings.

For those with low interest things are nice now but there is a great expectation of change, I would be happy if we follow the Americans and stay low for the next two years but that's a lot to expect.

Taking on new borrowings although coming down as an initial expense is still expensive,

fixed interest may look attractive but for how long will it be attractive.

Doing a cost feasibility isn't difficult but many forget such things as the cost of deposit, arrangement fees, legals, surveys, initial property set up costs, voids.....

Assuming there will be recovery of property prices, and remember nowt is certain, then there are some very good buys out there. Buy carefully and factor in ALL costs and the return can be attractive, more so without mortgages.

[gillfletcher]

Thank you all for your thoughts, I really appreciate it.

Just for the record, I don't have a great deal of money langushing in a building society - I'm not quite that stupid! My savings are in a mixture of cash, tax free Govt investments (savings certs etc.) and equity funds, but as you will be aware none of these offer great returns at the moment. I could free up £200k to invest in property no problem, still leaving me with more than the same again in my existing savings homes. So really just testing whether best to pay up front for the BTL or go the mortgage route in terms of best use of the money.

Looking at some of the other threads on here, the horror stories about some tenants are not encouraging. I'm learning a lot though.

thanks again

Gill

[Richlist]

Here's my list of recommendations.......nothing about mortgages though!

Updated 11^th Jan 2011

1. Get References.....bank, employer and previous landlord.

2. Take out rent guarantee insurance.....it’s not expensive.

3. Get a home owning guarantor. Carry out reference checks on the guarantor. Give the guarantor a copy of the AST. Make sure the guarantor document is drawn up as a deed.

4. Don't let to people with pets or children......the risk of them giving you problems are big.

5. Don’t let to anyone under 18 (minors). Draw up your own limits….I prefer nobody under 25.

6. Don't let to smokers........you won't get rid of the smell.

7. Don’t do Company lets.

8. Don’t let to anyone on Housing Benefits.

8a. If you do choose to let to applicants on Housing Benefit CHECK that your mortgage & freeholder (if your property is leasehold) allows it.

9. Don't let to anyone who isn't working full time.

10. Inspect properties every 3 months.

11. Only let initially on a 6 month AST.....that way you can both part company after 6 months if you don't get on.

12. Use a reputable Lettings Agent OR one who has been recommended OR do it yourself (only if you know what to do).

13. Meet your tenants personally. Make sure you ask all the right questions and gauge whether they are right for you.

14. Protect the deposit in one of the official schemes.

14a. If you have a dispute with your tenant(s) over deductions from the deposit remember…..you can either go through the DPS adjudication process OR take the tenant to the Small Claims Court for recovery of your losses where you may have a better chance of success.

15. Issue a section 21 notice as soon as the deposit has been protected.

16. Make sure there is a detailed inventory & schedule of condition……signed by both parties.

17. Remember its a business....so avoid emotion & being overly sympathetic to your tenants.

18. Read as much as you can about renting & letting i.e. educate yourself.

19. Don’t let to anyone who doesn’t speak or understand English.

20. Don’t forget that you will need an Energy Performance Certificate (EPC)…….before you market the property.

21. Don’t forget to get an annual Gas Certificate.

22. You are responsible for ensuring anything electrical in the property is safe so consider getting the electrics checked professionally….and any appliances you provide.

23. Try to avoid having your property classified as an HMO……meeting regulations is expensive and time consuming.

24. Make sure all adults living at the property are on the AST & any other documents.

25. Minimize your income tax liability by claiming all the expenses you are entitled to…..most people don’t and therefore pay more tax than they should.

26. If one of the owners is a higher rate tax payer consider splitting the beneficial income other than 50:50 to take advantage of the lower tax payer rate.

27. Keep all capital expenditure receipts/ invoices to minimize CGT liability on disposal.

[Sarah987]

Here's my list of recommendations.......nothing about mortgages though!

Updated 11^th Jan 2011

1. Get References.....bank, employer and previous landlord.

2. Take out rent guarantee insurance.....it's not expensive.

3. Get a home owning guarantor. Carry out reference checks on the guarantor. Give the guarantor a copy of the AST. Make sure the guarantor document is drawn up as a deed.

4. Don't let to people with pets or children......the risk of them giving you problems are big.

5. Don't let to anyone under 18 (minors). Draw up your own limits….I prefer nobody under 25.

6. Don't let to smokers........you won't get rid of the smell.

7. Don't do Company lets.

8. Don't let to anyone on Housing Benefits.

8a. If you do choose to let to applicants on Housing Benefit CHECK that your mortgage & freeholder (if your property is leasehold) allows it.

9. Don't let to anyone who isn't working full time.

10. Inspect properties every 3 months.

11. Only let initially on a 6 month AST.....that way you can both part company after 6 months if you don't get on.

12. Use a reputable Lettings Agent OR one who has been recommended OR do it yourself (only if you know what to do).

13. Meet your tenants personally. Make sure you ask all the right questions and gauge whether they are right for you.

14. Protect the deposit in one of the official schemes.

14a. If you have a dispute with your tenant(s) over deductions from the deposit remember…..you can either go through the DPS adjudication process OR take the tenant to the Small Claims Court for recovery of your losses where you may have a better chance of success.

15. Issue a section 21 notice as soon as the deposit has been protected.

16. Make sure there is a detailed inventory & schedule of condition……signed by both parties.

17. Remember its a business....so avoid emotion & being overly sympathetic to your tenants.

18. Read as much as you can about renting & letting i.e. educate yourself.

19. Don't let to anyone who doesn't speak or understand English.

20. Don't forget that you will need an Energy Performance Certificate (EPC)…….before you market the property.

21. Don't forget to get an annual Gas Certificate.

22. You are responsible for ensuring anything electrical in the property is safe so consider getting the electrics checked professionally….and any appliances you provide.

23. Try to avoid having your property classified as an HMO……meeting regulations is expensive and time consuming.

24. Make sure all adults living at the property are on the AST & any other documents.

25. Minimize your income tax liability by claiming all the expenses you are entitled to…..most people don't and therefore pay more tax than they should.

26. If one of the owners is a higher rate tax payer consider splitting the beneficial income other than 50:50 to take advantage of the lower tax payer rate.

27. Keep all capital expenditure receipts/ invoices to minimize CGT liability on disposal.

[Sarah987]

Thanks for this, Richlist. My holiday home for let is in France but a lot of this still applies - very useful info for any landlord. Point 25 is a good one - I have actually just posted on this site that am currently looking into the tax relief situation re capital allowances that a friend's adviser said that I am probably eligible for. I think it's claiming back tax on things done on the home to improve it such as air conditioning which i have just had instaled.

[miniminer]

well, I really enjoy the commentary from some of the experienced landlords on this forum. Since I am a yank from Indiana,USA, many laws and processes are very different than in the UK but you guys over there have the 'big dog' reputation in letting property and i like to learn from your experience ....hope you all let me shadow you on this forum to learn stuff......back to the question of paying cash vs. financing....if you pay cash, you will have the power to draw good tenents with lower rents if you have to just in case the economy keeps diving.... whereas even a 4% interest loan has its pricing floor.(hard to let something under your costs for very long)......I'm a newbie also and for me, trading cash for hard assets like property is good advice in any country....i worry every day over here about hyperinflation and the horror stories of Zimbabwe, etc that come with it....take care.