I’m thinking about buying a house to let, at today’s mortgage rates/rental value the rent would just about cover the mortgage, although I don’t mind covering the shortfall, or alternatively I wondered if I could remortgage my current property( currently mortgaged but plenty of equity but a few years to pay) and pay a decent deposit and then mortgage the rest, which would be best, what’s the current deposit percentage required? Would I pay tax on the rent? I’m nearly 50 by the way.thanks

If the buy to let costs you money per month regardless of where the debt is. Your home or the let property it is not really an investment!!

Doesnt sound like a wise investment to me.

Its not just the rent shortfall but any maintainance comes out your pocket too….

You would be relying on the property growth alone.

Great, the world needs more buy to lets, like it isn’t hard enough for first time buyers already…

If the buy to let costs you money per month regardless of where the debt is. Your home or the let property it is not really an investment!!

It is if you believe it will appreciate in value more than the cost of owning it

OP tax rules are changing which will make offsetting the rent against the mortgage less effectIve, ie your economics will worsen. Also now there is (from April I rhink ?) an extra 3% stamp duty tomoay on second homes/buy-to-let. Generally its cheaper and easier to borrow against your home than with a buy-to-let mortgage. So a compex picture.

dont forget void months, repairs, damage cause by tennants, void rents caused by tenants not paying rent.and being hated by most on here

Affordability rules, alot less interest only lenders, and alot less lending into retirement can mean raising funds on your residential home at 50 years old more difficult. Not withstanding not knowing your current income level.

And dont forget that people on here believe that.buy to let is the route of all evil…..

if you borrow on your home to fund an investment – wont you lose your home if it goes t/u?

Please don’t regardless of the financial situation .

But to let has distorted the UK housing market and trashed communities the length and breadth of the land .

Step away from the market and let some body looking to make a home buy it .

You won’t get a BTL mortgage unless you can show the rent covers the mortgage by 125% – shortly to be increased to 135%.
I wouldn’t. The money’s been made in BTL.

Don’t ask us OP, or your bank, or a financial adviser. Do your own online research. Get yourself a subscription to Moneyweek or the FT and read every article you can find on what they say about BTL and get a feel for what the mood is a) re BTL and b) UK house prices in general.

You’re talking about putting a serious amount of money into single asset class which is widely considered to be in bubble territory (in London and SE at least) and a history of boom and bust both in the UK and worldwide. Worst case you could end up bankrupt if you make the wrong calculations or events go against you, it’s very far from a low-risk punt.

Bear in mind 3 very significant events that have happened already this year re BTL.
1. July budget changes reducing tax relief will take many leveraged BTL landlords from profit to loss and an increase in their personal tax bill leaving them worse off each month and totally dependent on increase house prices to make any money
2. November budget changes making it even more expensive to buy the place in the first place
3. BoE have asked for greater control over BTL lending, calling it a risk to UK financial stability, which will either reduce what you can borrow or increase the cost.

Lenders are already tightening up lending criteria as a result. There’s a widely held belief a lot of BTLers will have to sell up as it simply won’t stack up as a way to make money any longer.

Also, wages are highly unlikely to go up much for the next few years so your tenants’ willingness or ability to increase their rent payments to you if your costs go up is very low indeed.

Worth bearing in mind that BTL was essentially invented by the banks as a way to make more money from their customers by finding a way to get them to borrow even more money than they are already, charging them interest on these massive loans, knowing that if the housing market then crashes, it’s their customers who’re on the hook for the debt, not them…

I’ll let someone else mention the morals of it and general public opinion. Or you could just go and read the comments section of any online news story on BTL.

If the rent is barely covering the mortgage then you need to keep looking or buy in a different area. Ideally you buy below market value, either by getting lucky or adding value after purchase. Buy with around 25% deposit and do you calcs based on 90% annual rent. If that adds up then it should be alright. There’s plenty of doom an gloom out there but population is rising and we aren’t building nearly enough so if you are in it for the long haul and all your costs are comfortably covered you won’t go far wrong. Buy the wrong house and you may lose out though so don’t just dive in.

So you want to use debt to cover your debt???

Didn’t this type of thing get us all in to trouble not that long ago 🙄

If you can’t afford it you can’t afford it

What are you opinions on buying a wreck/doer upper at auction, renovating and selling on for a profit?

Hmm.

You won’t get a BTL mortgage unless you can show the rent covers the mortgage by 125% – shortly to be increased to 135%.

This only applies to interest-only mortgages, where you’re not paying off the capital.
Excluding changes in the property value, you’re probably looking at a 1-2% overall return on investment, which is OK if prices remain stable or intrease. But a bad tenant or a void period could put you badly into the red.

Brooess is right, you need to do lots of reading first, and if you go ahead buy locally. I know of several people who bought cheaply in depressed areas at the wrong time, and lost huge amounts of money.

Hmm.
You won’t get a BTL mortgage unless you can show the rent covers the mortgage by 125% – shortly to be increased to 135%.

This only applies to interest-only mortgages, where you’re not paying off the capital

Eh?

If you’re only covering the interest by 135% you haven’t a hope in hell of repaying the capital…

You would be relying on the property growth alone.

Just buy a bigger/nicer house to live in; nice way to enjoy your money and benefit from house price rises – as obviously they’re going to carry on going up and up….

to answer the financial questions directly, ignoring the moral outrage for a second..

yes, you can remortgage your house to provide a deposit for your btl. Obviously the older you are, the tougher this may be as most lenders want a residential mortgage paid off by retirement. You may have to move lender to do this, and you might find a mortgage broker is useful to sort both the remortgage and the btl mortgage out.

The minimum deposit for a BTL loan is around 25%. however, as alluded to above, other rules come into play. The equivilent of multiples of your income (which applies to residential mortgages) is multiples of the gross (pre-any-cost) rental income. Depending on the lender, these are typically around 125% or 135% and may be based on the SVR rate, rather than the ‘discount’ rate at the start of the product. So for example if the lenders svr is 5% and you’re getting £1000 a month in rent, the largest mortgage you could get is £177k to £192k depending on their rules. There are signs that these rules might be tightening up, so overall its probably best to be on the safe side of this and have a larger deposit available. BTL mortgages typically have worse rates (1% higher) and larger fees (£2k or so) than residential mortgages. If the house is new to the rental market, the surveyor who values the house will put a conservative estimate on how much it’ll rent for, so bare that in mind. On an existing rental, you can use receipts to prove rental income

You do pay tax (at the normal income tax rate – note the income might push you into the higher rate bracket) on the income you receive, but there are allowable expenses you don’t get taxed on. These include basically any cost of running the BTL – including financial fees, insurance, cost of repairing (but not bettering) the house, interest, and so on. The rules around this are changing so if you were a high rate tax payer, you can only claim a 20% discount on the interest paid (ie, today if your income is £12000 a year, and your interest is £9k a year, and you had £1k other costs, you would pay 40% tax on 12k-9k-1k = 2k, or £800 tax. in the new system you would pay 40% tax on 2k, but then (40-20)% tax on the 9k, so an additional £1800 tax (total £2600, or a £600 loss)). This can be mitigated in a bunch of ways – one common one is if your wife isn’t a high rate tax payer, you can put the property and all the accounts in her name, and she only gets taxed on the profit. Another (if you have lots of properties, so probably not for you) is to incorporate into a company. Also, if you have a larger deposit, the amount of interest you pay is less, so this affects you less (however you’re then taxed full whack on a larger figure). Obviously if you have the property in retirement, you’re unlikely to be a high rate tax payer then, so the new rules won’t really affect you.

Its worth doing maths over the long term as well as the short (BTL is generally too risky to be considered a short term investment). over the medium term (5 years or so) interest rates are likely to rise, so you’ll pay more interest. I would assume they’ll rise by 2-3% for the sake of getting your maths right. Its also worth assuming that rents will rise slowly – probably at the rate of inflation so 2% a year on average. This doesn’t seem like much, but it does mean that after 15 years your rent will be 35% higher due to compounding. I would not assume that property prices will rise, but take it as a nice surprise if they do (they do seem to continually rise beyond expectations on the longer (>10 years) term).

There is also a 3% hike in stamp duty for btl properties coming in April. Getting in before that might be a good idea (to save the cash) but it might be a bad one, as certainly round here properties which are prime for rental (near universities for student housing for example) have just jumped up in price by more than 3% anyway. I wouldn’t be surprised if this hike reverses at some point next year. The 3% can be offset against capital gains tax when you sell, providing the selling price is higher than the purchase price.

Overall (and going a little beyond pure maths), btl if you didn’t have a mortgage isn’t much more profitable than shares, and is a lot more hassle. If you do have a mortgague, it can be a lot more profitable due to leverage (ie, if you have a 25% deposit and prices go up by 25%, you’ve made 100% profit), but the downside is there is also more risk (if prices drop by 25% you lose all your deposit, not just 25% of your cash).

In some areas btl doesn’t work out any more, in other areas it does, so research is key. For example, round here (brighton), in a studenty area you can buy a 3 bed house for £300k. if you can get an HMO license (required in this area for lets as a shared house), and you convert the loft (£25k), you can rent out as 5 bedrooms (the dining room is the other one), and have an income of £2000 a month (£400 a room). This is frequently done (to the extend the council are restricting the issuing of HMOs), and is still profitable (mortgage interest on £200k is around £600 a month at the moment, leaving a profit of over £15k before tax once other costs are figured in, on an investment of £125k – well over 10%), however in posher areas the same £300k would get you a 2 bed flat that’ll rent for less than a grand a month – but with much less hassle (student digs need a complete overhaul every year).

then you get onto the moral side, which is more confusing. I think BTL is good, in the right amount (some people, ie students and people in their early 20s would much rather rent than buy regardless) however too much of it is bad (as it stops people buying their own home). Right now we probably have too much, but there are so many properties in the UK (something over 20million I believe) that removing one from the FTB market doesn’t have a significant impact. Its a bit like buying a car with a stupid engine. Yes its selfish and to the detriment of the larger world, but on the grand scheme of things the impact is minimal.

mitsumonkey – Member
What are you opinions on buying a wreck/doer upper at auction, renovating and selling on for a profit?

If only it was that easy…

Do not believe the daft TV programmes or magazines that have you believe it is all profit. I watched a few that costed repairs only, not the purchase and sale costs, claiming profit. Mrs_oab bought a few magazines that show it and cost up – but no cost of plastering, or new windows or heating system (which were clearly done) – just carpet and kitchens and paint. Don’t believe you can get a hose cheap, just because it is a doer upper. I bought a few, knowing what it would cost to do up. No profit, it just means I get a house done the way we want it, with new boiler, kitchen etc.

Also be aware of new rules coming in which will require rented accommodation to meet energy efficiency standards.. so potential additional cost to implement.

We stumbled in to being evil capitalist landlord scum.
My wife’s grandma could no longer cope on her own in her house, which is actually owned by father in law.
Granny moved in with in laws in their ‘too big for 2’ house and we now live in granny’s house, which is nicer and bigger than our flat.
We rent the flat out (rent covers mortgage and fees & hasn’t gone up for the last 4 years even with new tenants).
We have been lucky with tenants, only had one set who although lovely people had a cat (only picked up on 3month inspection but damage done by then) which wee’d all over the carpets, they took it upon themselves to reprint rooms in odd colours etc… That cost us time without it let and money too.
current tenant looks like being long term, fingers crossed so as long as we cover costs I don’t want to make any more cash. It’s a long term thing for us; once mortgage is paid off it starts to give us a bit more of an income that can be pumped into the pension pot….
I’d not do the whole buy to let thing out of deliberate choice and I’d certainly not do it if it meant extra debt. We are lucky that we live in the current place rent free so if we have no income from the flat we could still cover the mortgage etc… Could you say the same if you’d remortgaged to the max in a marginal percentage yield?

Would I pay tax on the rent?

you’ll also need to install mains fed smoke detectors in the main living room and kitchen, carbon monoxide alarm, do a fixed wiring test, a PAT test, get an energy performance certificate, gas safety certificate done. You can’t just buy a flat, stick some tenants in and sit back and collect the cash every month.

And the rules are changing on what mortgage interest you can claim back as a cost. Also Bank of England announced they’re looking at way of curbing BTL mortgages.

If you’re not going to make much profit then it’s honestly not worth the hassle anymore. And as above you’ll need to factor in periods when you may not have a tenant or you need to replace the fridge, or you have a flood, or you need a new carpet. You also need to think about tenant finding costs and fees if you’re using an agent to manage the property.

So in summary I wouldn’t bother.

Colin Chapman once said something along the lines of “If you can just about afford a Lotus, you can’t afford a Lotus.”

With being a landlord, you are taking money and in return providing the roof over someone’s head. You need to have enough of a float, either in real cash or credit, to put unexpected faults right more or less straight away. It doesn’t sound to me like you’re in that sort of position. Doesn’t necessarily mean you wouldn’t get lucky, but I wouldn’t sleep well at night if my tenants were trusting to luck to have a comfortable, secure, safe home.

As for the finance aspect if someone wanted to do this, it’s obvious the government isn’t keen on small time landlords using BTL mortgages and relying on future selling of the property with price inflation to make the numbers work. If you have lots of equity in your own owner occupied home, then re-mortgaging/further advance on this is one way of raising the funds to purchase a property to rent outright. Nowhere near as tax efficient as conventional BTL mortgage, but easiest to get hold funds of for a typical homeowner/employee. As for the regulatory side of things, in most of England, and avoiding homes in multiple occupation, it isn’t onerous. EPC will come with any home you buy as they’re needed to sell. Gas safety cert is £50 ish once a year, Energy efficiency will be more than adequate for the new regs if a house has double glazing, loft insulation and a condensing boiler. Smoke/CO alarms are cheap. Insurance, not so much. Don’t rent furnished, and manage it yourself. If you have to pay an agent, it is their business model to take the profit, same with redecoration and paying tradesmen for non-specialist work.

trail_rat
…buy to let is the route of all evil…..

Isn’t that the A1?

Carney promises action on buy-to-let property market
BTL is probably not such a good idea right now.

project – Member

and being hated by most on here

… well that’s just ruined my day 🙁

The BofE is only concerned about BTL due to the financial risk, it doesn’t give a hoot of whether it is good/bad for non-house owners.

And the risk is probably heightened by budgetary proposals to make it less attractive – imagine a budget in the future that meant that you could set 0% of the income against the costs; selling panic.

http://www.bbc.co.uk/news/business-35108952

tbh We don’t have a BTL (mainly as I saw it as greater exposure to an asset class we’d already exposure too); but as far as I’m concerned the biggest housing problem facing the UK is the lack of property where people want to live, affordable or otherwise.

I bought a few, knowing what it would cost to do up. No profit, it just means I get a house done the way we want it, with new boiler, kitchen etc.

Yes but that was for you to live in, I.e. spending out on a more expensive, higher quality kitchen, fixtures, fittings etc than you would of done if you were selling it.

I think only you know if it is what you want to do. I figure that at 50 you are looking for a retirement ‘vehicle’ in some form.

People continue to slag off evil landlords but forget many moved into property simply to find a way to one day retire. Even more true when the markets crashed and shares weren’t worth the paper they were written on. They saw bricks and mortar as a solid investment.

So you do indeed need to weigh up what you want here. If its a retirement vehicle of some description and not a buy to let for monthly profit but to invest in something you will pay off then maybe that’s not a bad choice for you. I have one and do this, sure theres some hassle and some cost but I remove this with a managing agent and bought in a decent area. I make a small loss but continue to build a retirement fund by paying down the mortgage and after the market bottomed I now have a little more equity.

OP – be very careful taking advice from people who already have BTL. The rules have changed very significantly and very unexpectedly twice this year – and BoE asking for more powers to regulate it hasn’t even happened yet, so what BTL would mean for you as a new entrant and what it has meant so far or will mean for people already in, are two entirely different scenarios.

Do your reading, pick your sources carefully ie. avoid vested interests. The overall sentiment about BTL now is that for the retail investors (ie. the man on the street) it’s dead.

At this moment in time we have no idea what further regulation will be applied in the future and we do not yet know the path and pace of interest rates… but remember that BTL is resented by a large proportion of the younger generation that Osborne needs the votes of, and he badly needs more taxes – landlords are an acceptable target if you’re a populist politician

wonder how many of the “youth” would still be living with parents if it wasnt for the BTL land lord…..

they market wouldnt exist if there wasnt a demand….. but is the demand a result of the BTL or is it a result of the fact that you dont just come across a deposit in 20 minutes…. esp if you dont work by your parents to allow you to live at home to get the deposit

wonder how many of the “youth” would still be living with parents if it wasnt for the BTL land lord…..

My two tenants would still be living at home – my place is a cheap first step out of home, without needing a deposit and when you are a low earner, in first job, without history to get a mortgage.

financial what? /spelling pedant.

Do not believe the daft TV programmes or magazines that have you believe it is all profit. I watched a few that costed repairs only, not the purchase and sale costs, claiming profit. Mrs_oab bought a few magazines that show it and cost up – but no cost of plastering, or new windows or heating system (which were clearly done) – just carpet and kitchens and paint. Don’t believe you can get a hose cheap, just because it is a doer upper. I bought a few, knowing what it would cost to do up. No profit, it just means I get a house done the way we want it, with new boiler, kitchen etc.

Several ‘do-it-up’ houses around ours actually went for more money than an identical ‘aready done’ version. Go figure. Local estate agent I know well said the raft of Sarah Beeney type programmes were driving prices up.

OP – be very careful taking advice from people who already have BTL

I have two btl properties, but I bought one 19 years ago and the other 13 years ago. I wouldn’t do it now though unless you’re intending to go for a very long term investment.

Buying now, making little or no profit on the rent isn’t worth the risk. If you’ve got spare cash stick it in a something like a stocks & shares isa.

matt_outandabout – Member

wonder how many of the “youth” would still be living with parents if it wasnt for the BTL land lord…..

My two tenants would still be living at home – my place is a cheap first step out of home, without needing a deposit and when you are a low earner, in first job, without history to get a mortgage.

Haha, like you’re doing them a service? If landlords hadn’t hoovered up all the cheap first time buyer properties, massively inflating property prices perhaps young people might actually have a chance of buying their own home at a reasonable price. Just a thought 😉

My two tenants would still be living at home – my place is a cheap first step out of home, without needing a deposit and when you are a low earner, in first job, without history to get a mortgage

How noble of you. Whats your real name? Robin Hood?
Jesus.
<soapbox> The system is broken. Houses shouldn’t be a means to make profit / pay for retirement. When even new build “starter” homes are coming in at £180000 there has got to be a problem. The only people who can afford the deposit are those already in the loop.
It winds me up no end when tenants are effectively paying the mortgage for a landlord, who no doubt has a “portfolio” of housing stock.
<off soapbox>

Whether you agree or not with the sentiments of these two posts OP and whether you think it’s fair, or not, remember this is the dominant sentiment amongst your future tenants and the sentiment which Osborne has realised he needs to respond to if he wants to get their votes…

IMO the growth in this sentiment over the last couple of years is one of the key driving forces behind the two big changes he made this year to the viability of BTL… and it won’t go away until there’s been a pretty sizeable drop in house prices – maybe 30% in London/SE and 20% nationwide – because with wages static current prices will remain unaffordable to the younger (<35) demographic who are the future Tory voters. The current older Tory base will be dead in 20 years time…