total newbie

[wrighty72]

Hi folks i'm looking at buying a 2 bed apartment in Warrington for approx 85K it should achieve 550 PCM if not a little bit more. Now i'm brand new to all of this and unsure on a number of things, i dont expect anyone to be able to answer all of these qustions for me but any advice/words of wisdom will be appreciated.

First decison is whether to go interest only take some profit each month and deal wirh renting it out myself or go repayment and pay an agent to manage it totally for me, it would be nice to have the extra income each month on option 1 although i know i will pay tax on it but option 2 means less tax (less profit as well) but hopefully less hassle and possibly a paid for apartment in X amount of years. I appreciate i could go interest only and pay an agent to manage and have a little money now i guess its down to which i want now.....

Secondly insurance, if its an apartment with a service charge i'm assuming (possibly incorrectly) that buildings insurance is covered by the management co but i will need some sort of landlords insurance for the interior of the apartment ie accidental damage etc?

thats it for now

thanks in advance

[Carryon Regardless]

The rental looks good for the value, have you factored in the initial outlays and overheads.

On the insurance my preference is to let unfurnished and contractually cause the T's to be responsible for contents insurance.

Tother stuff is personal choice.

[Richlist]

Warrington.....isn't that the place that they make Wodka ?

Wether its a good yield depends on how near to £85K you end up paying and how acurate the estimated £550 pcm turns out to be. Obviously paying £90K and getting £495pcm paints a different colour.

Are you aware that you can only offset the mortgage interest charges against tax and not any capital repayment element of the loan?

Service charges normally include buildings insurance.

Landlord or contents insurance is entirely option and there is absolutely no 'need' for you to incur the expense.

[Richlist]

On the insurance my preference is to let unfurnished and contractually cause the T's to be responsible for contents insurance.

Not sure how that works !

Even if the place is unfurnished I doubt your tenants can insure your belongings .....even unfurnished places have some contents such as carpets/flooring, curtains/blinds, light/ fittings, cooker, fridge, washing m/c etc etc.

[wrighty72]

apparantly yes this is where they make vodka apartment will cost 83K just adding on poss mortgage fees to get 85, and 550 PCM seems acheivable so in theory i should easily break even and have some for the kitty.

Thanks for the point on the tax offsetting, and thanks for he replies so far

[Richlist]

I certainly wouldn't go so far as to suggest you will break even.

I doubt very much if you have factored in ALL of the costs for financing a BTL and if you aren't getting a profit from income you sure as hell won't be getting much capital value appreciaion.

Why is it that everyone seems to think that they ca make a profit from renting property......lots of people just aren't.

Provide your mortgage size and interest rate and I'll run some figures to confirm.

[wrighty72]

I certainly wouldn't go so far as to suggest you will break even.

I doubt very much if you have factored in ALL of the costs for financing a BTL and if you aren't getting a profit from income you sure as hell won't be getting much capital value appreciaion.

Why is it that everyone seems to think that they ca make a profit from renting property......lots of people just aren't.

Provide your mortgage size and interest rate and I'll run some figures to confirm.

83k property price, 30K deposit so 53K mortgage + approx 2k fees = 55K mortgage @ 4% (3..59% possibly for 1st 2 years) over 20 years = 183 pm interest only or 337 pm repayment

i appreciate i will have to pay tax, property insurance inc rent on time and have maintenance costs but 550PCM sould be enough to cover that?

at the end of the 20 years assuming not to many void periods and any unforseeable problems i have a property worth X amount that someone else has paid my mortgage on?

[wrighty72]

just to add, i understand if i use agents for everything rental wise i appreciate that will cost a fair whack every month but i am at least hoping to be able to find and cv my own tennants.

As i said i am a total newbie so if you do blow my figures out of the water then thats what i need - a good dose of reality!! thanks

[Richlist]

just to add, i understand if i use agents for everything rental wise i appreciate that will cost a fair whack every month but i am at least hoping to be able to find and cv my own tennants.

But agents do far more than that.....eg

They:

* Find tenants

* Check their suitability.....often to your specific criteria.

* Do references

* Arrange AST

* Extra contract clauses

* Rent guarantee insurance

* Guarantor

* Gas certificate

* Electrical safety check

* Inventory & schedule of condition

* Deposit protection

* S21 notice

* Arrange standing order rent payments

* Offer advice and assistance

* Deal with contract renewals

* Often handle problems

* Arrange maintenance/ emergencies

* Carry out regular insprections

* etc etc etc.

[Richlist]

i appreciate i will have to pay tax, property insurance inc rent on time and have maintenance costs but 550PCM sould be enough to cover that?

Perhaps, but that list goes nowhere near to covering ALL of the expenses you will incur.

at the end of the 20 years assuming not to many void periods and any unforseeable problems i have a property worth X amount that someone else has paid my mortgage on?

20 years is a long time and voids & problems are an accepted fact of life with property rentals. They all have to be factored into the overall costs.

Whats the length of the lease ?

[anita.z]

I'd say, don't underestimate the Agents fees. They can do a lot for you but you'll also pay for it. Why not contact a few in the area and see what their charges are? Equally, be prepared that if your tenants sign a 12 months contract and leave after 6 (providing there's a breakclause), the Agent will have charged you a percentage of the yearly rental as their fee and you will not get a refund.... Ouch! Instead, you'll get an unexpected void and potentially another lot of Agent's fees for the next tenancy.....

Be also careful in choosing the right Agent, preferably one with some registration behind them such as ARLA. Even if you let the Agent manage the property and do everything for you - I'd still recommend that you read as much as you can - so that you know what you should be reasonably expecting from an Agent and know to ask the right questions! Familiarise yourself with the basics of Housing Act.

And don't under estimate the voids - you should base your calculations to 10 months income per year to cater for voids.

I wish you luck!

[Grampa]

Dont jump in the deep end to start with. Find a good agent for the first 6 months at least to find your feet and to pick their brains.

Does the service charge fund have a reserve fund in place and are there any major works planned on the block because you dont want a section 20 notice coming through in the six months wanting 4k off each of the leaseholders because a new roof (or something else) is needed.

If there is a management company for the block they may give that info out if you explain you may be buying one of the flats.

[Richlist]

Here's my famous check list:

Ignore it at your peril.....

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.

[Richlist]

Heres my cost breakdown of your purchase:-

Income £550 pcm

£ pcm

Mortgage (interest only) 183

£30K deposit – loss of interest @4% 100

Agents Fees @ 12%+VAT 79

Service charges 100

Annual costs divided by 12 134

Ground Rent 100

Freeholder permission 100

Voids (1 month per year) 550

Utilities during voids 55

Repairs & maintenance(10%) 660

Gas certificate 50

Accountant 100

Totals 134

Expenditure £596pcm

These costs do not include:

EPC certificate

Mortgage arrangement fees

Initial decoration & property preparation / furnishings

Provision for bad debt

Provision for replacement furnishings and fittings

Deposit protection costs

Rent guarantee insurance

Postage, telephone, mobile, ISP costs

Books, print cartridges, cleaning materials

Car mileage, parking

Your time & effort

Income TAX

Etc etc

So Income of £550, expenditure of £596+ = A loss of around £50 per month .

You can replace my figures with yours, if you know them and adjust accordingly.

Doesn't look quite so good now does it ?

[Grampa]

Excellent breakdown Richlist.

[wrighty72]

Thanks folks loads of brilliant info i'll be back soon with more questions no doubt

[dunkgrass]

Hi wrighty

I am in a similair position to you and the figures quoted by richlit list paint a gloomy picture, how ever richlist figures do not include the value of the property increaseing.

Before anyone says house prices are falling lets assume that over the next 20 years prices increase by 3% a year, 1% less than richlist quoted you would loose on your deposit. Then in 20 years your property will be worth £153000. A profit of 68000. That is £3400 a year or an extra £283.33 a month. I know that this still may not make you a profit but surely we need to include these figures some where. Maybe Richlist is trying to put of potentional landlords so he can buy up all the properties?lol.

Go easy on me richlist i to am a novice

Also i have read in several places that house prices double every 10 years, no that would be nice. Dont belive it myself

[Richlist]

Nobody knows what will happen in the future.

The point in question is that past performance is no indication future gains.

You may be right. Most of us that have property would hope that you are BUT, and its a big but.......look around you, try to understand what is happening to the economy and to the changes in social structure.

We are in an economic downturn longer and deeper than that of the 1930's and Europe, the US and Japan all have serious problems. There is a move away from home ownership and Britain is almost unique within Europe in its housing structure.