I have a chance to buy a flat on buy to let.

its a complex situation but it would be very convenient as it would mean we own all the residential flats (3) in my building. ( thats the entire top floor) The location is fantastic for an urban location

However the numbers are very marginal and it requires huge loans. (£300 000 ish) we would end up with two properties with 75% buy to let interest only mortgages on them but the rentals would cover the repayments assuming we get ten monthly rentals a year.

I am looking at this for a medium term investment – something towards the pension pot. However basically we would only get the capital growth no monthly income.

I can get variable rate mortgages at 3.75% which makes the sums look good or 5.5% fixed when the sums are much tighter ( as the repayments are higher)

So – in the current climate would you stretch to buy on a buy to let? Fixed or variable rate?

Ta

Screw the price down substantially.

There’s more price slippage to come.

BTW that’s putting all your eggs in one basket.

However basically we would only get the capital growth no monthly income.

This sounds like the important part. What sort of period are you looking at? Given the uncertainty in the market at the moment it is likely that in the short to medium term your capital growth could be zero or even negative. If you factor in all your costs for the purchase and administration, and look at the risks then I’m not sure it makes sense if it’s really that marginal.

Clearly there may be some benefits of owning all of the residential units, but your entire investment is also locked up in the same place – with the same risks/exposure.

Whilst in terms of management effort three units in a block may sound efficient in portfolio terms its very risky.

Especially as you say: However basically we would only get the capital growth no monthly income

Without getting surplus income to amortise your loans yoou are reliant on the capital growth to make your return. If you are exposed to just one market thats not that smart.

I own a buy to let in London, my own house in Worcestershire and hold shares in property companies, house builders then other FTSE companies in my ISAs to give a wider portfolio exposure to my savings and investments. This years ISA will probably be in Utilities and Banks. All for medium to long term holds.

In terms of BTL yields my own flat (and recently corroborated by some analyisy ive done for a client on 1,400 flats) net yields (that is after operating costs and transaction costs) are in the order of 3.5% in London*.

That’s not great (although it’s better than in the shires). But it also reflects the problem of over-gearing – 75% LTV with a 3.5% income yield means that your interest rate has to stay below 4.8% ish to keep above water unless you can count on rent inflation, and Id be cautious about that. I havent increased my tenant’s rents for 3 years (mainly because Im a nice guy but also because he’s a good tenant and for the sake of £50 a month increase in rent Id rather keep him)

* work out what it is for the flat you’re looking at if you think it’s that much different to London.

BTW thats not to say that I wouldnt BTL right now, but Id probably look at lower gearing (50% max) so that I cant get wiped out in a short term capital value fall, and would then just extend my hold until equity returns and recover losses.

Have you factored in what happens when interest rates return to the normal sustainable level.
On £300K a 1 or 2 % rise in rates will have a significant effect on the repayments and the rent might not cover it . Rent rises are annual and are dictated by market forces.

Unless you have the money in the bank (gaining little interest) probably not the best investment, factoring admin, rates e.t.c

Looking at keeping it ten years. Its a fantastic flat but the owner is only going to sell at top price. Otherwise she will rent it out. Limited market tho as its a big flat but loads of stairs – however one of the best flats in the area.

The larger flat would have a £210 000 mortgage on it costing £750 – 900 pcm ( roughly depending on fixed or variable rate) and rental of around £1000 pcm, the smaller one £90 000 with a payment of around £400 pcm and a rental of £500

of course i would expect rentals to increase over ten years

that data gives you an “Interest Cover Ratio” (ICR) of around 1.1 to 1.2

If you’re interested, none of the banks nor clients I meet for work (in the commercial world) would accept less than 1.5 ICR in this market.

I wouldnt be comfortable at much less than this figure either unless I could get a 5-10 yr fixed rate that had an initial ICR around 1.25 and there was eveidnce that there wasnt local pressure on rents to fall in the short term.

Stoner – I dinnae understan’ what you mean by 3.5 % income yield. Please help a financial incompetent

Edit – intrest cover ration- the amount the rent is more than teh interest?

At variable rates now the sums are good – but the higher figure is a fixed rate at 2% above what it is now

Would you make the same investment in a different property across town on the same numbers right now? If not then you’d be investing for sentimental reasons. Would you put the same money into a (hypothetical, well run) managed property fund? If all of these add up to yes, then go for it. What’s your plan for the end of the mortgage when the loan is to be repaid?

TJ have you factored in all the other costs associated with renting out a property?

Maintenance fees for the flat (ground rent)
Ongoing maintenance costs over and above the ground rent
Landlords insurance
Any other insurance policies associated, e.g. one on the boiler

Also, do your calculations take into consideration the total likely revenue generated in a year or are they just looking at it on a monthly basis? It looks like you’re assuming a 10 month rental period which is a reasonable way to assess the ‘investment’ but you could find that there are periods where you have say a two year occupancy, followed by a three month wait for the next tenant. Overall the investment would still work, but you’re then into financing the mortgage from your own cash for a three month period. It’s important to know how long you could go on financing the mortgage yourself for whatever reason. This is especially important when you come to sell the flat because you would have to assume that the flat will be vacant while you’re marketing it (although it doesn’t have to be this way) and therefore you could be financing the mortgage costs for maybe six months.

If you’re just holding for capital appreciation, then you should think about the risk you’re taking and the likely level of return. How long is medium term? If it’s less than five years then my opinion (and it is just an opinion) is that you’re being way too optimistic; if it’s more than 10 years less than 15, then that would seem realistic. Also the rate of the mortgage is one thing, but BTL mortgages tend to have very high set up costs, sometimes as much as £1500. You can offset these costs against any profit made.

When you do sell, you’ll be taxed on the profits. I am not sure if it would be treated as a capital gain or as income but remember that returns on pensions savings are not taxed (and indeed you get tax relief on savings) until you draw them down and then it would be at the lower rate of income tax.

There is still a heck of a lot of uncertainty for everyone. Have you run through the worst case scenario – you lose your job and you lose your tenant at the same time? What are the consequences, how long could you finance the costs for etc?

Think of it like this. If you’re only hoping to make a capital appreciation return, then that’s a big risk. If the rental income makes any kind of profit over and above the interest and ongoing management costs, you’re taxed on that; if it doesn’t make any kind of profit, then you’re holding a very expensive, very illiquid asset in the hope that it appreciates and appreciates enough to cover not just the costs of buying, owning and selling, but enough also to justify the risk.

So how much return is enough to justify? Hard to say without really quantifying the risk, but it’s high so maybe 6-7% would be the minimum to hope for? Is there much evidence that the return will be that high year on year? Bear in mind that you need that for each year you’re holding it, not just total return. If you made 7% return over five years, that ends up being the square root of **** all on a yearly basis.

I am a forced landlord as a result of meeting my now wife and not selling the property I owned. It can be a major headache as it’s not the kind of thing you can easily exit from and there tend to be very high costs associated with doing that, which then means you end up staying in when perhaps you should cut your losses and exit.

Capitalsim TJ you are letting the side down
It is risky as you have th efollowing risks/assu,ptions – any of which being wrong screw you
1.you can rent the flats
2. the property price will increase
3. rents will be greater than interest payments
4.can you sell it at the end?
5. can you service the mortgage if you have no one renting?
I am not sure you will achieve all these for 10 years. Given stoners estimates of earning potential that is alot of risk for very little gain IMHO

IMHO prices will fall or be stable for a while now. You can only sell houses if new people join the market, these new people’s earnings are not sufficient to buy the average house [in some cases any house] therefore they cannot enter the market therefore the market is in danger of collapse/reallignment.

By the time you have factored in the insurance for the property . The gas servicing , plus any one of a myriad of potential expenditure ( Cooker , boiler, fridge , freezer, carpets on sale /re-let as tennants tend to be less careful you will be on a looser. With margins that low , unless you can get a better , longer fixed rate you will be very close to break even .

Plus factor in potential loss of rent , tennants not paying , professional fees for any PAT testing , mtg arrangement fee s

I can see the appeal , but there must be better places for your money

Mine.- mtg £330 / income £540. hth .

With it being in the same stair the management stuff is easy and it is a fantastic flat in a fantastic location

In ten years? sell up all 3 properties and take out the equity.

Even after doing the huge mortgages to buy the 3rd flat i would have £200 000 equity in the original flat.

I have to go out now but any more thoughts is helpful

Ta chaps

yield is the ratio of income to capital.

your net income yield is your annual rent less costs of e.g. buildings insurance, service charge, management fee, annual effective agency fee, void rent (i.e. deduct expectations of no rent in a normal market), possibly annualised capital expense such as carpet/decoration/kitchen refresh divided by the total capital cost of the asset acquisition (Price + fees + SDLT)

London lettings turnovers average around 20-30% pa, i.e. people move once every 3-4 years. However that is an average across furnished and unfurnished lets and Id say unfurnished trunovers are great than that.

So you could work iut out a bit like mine:

Gross rent = £1083pm x 12 = 12,996
less
Service charge (incl insurance) = 1,300
Management fee @ 5% = 650
One month void in every two years = 500
7% agency fee in every two years = 450
Refresh costs = 200

Net income = 9,896 pa

divided by capital cost + SDLT + fees

(275,000 x 103% + 500 ) = 283,750

= 3.5%

In ten years? sell up all 3 properties and take out the equity

But that’s selling 3 properties in the same place. Might be straightforward, but could also be difficult.

With it being in the same stair the management stuff is easy and it is a fantastic flat in a fantastic location

Get rid of the emotion and start thinking of it as a simple, cold business opportunity.

Get rid of the emotion and start thinking of it as a simple, cold business opportunity.

these lefties have too much empathy for the commercial world 😉

Also remember that if you are looking at around a 10 year outlook, the chances are interest rates will probably be way higher in the next few years and if you don’t get capital growth you’ll end up with massive mortgage payments which you won’t be able to cover by rental increases.

Then if a tenant moves out and you can’t rent or sell the flat you’re in a world of financial trouble.

I’m sure you asked the exact same question a few months ago.

I’d be more worried about getting a nightmare tenant, causing the other to leave, or become difficult to find new tenants and making your own place hell. With the bad tenants I’ve had previously, one would not affect the others since they are spread around town.

these lefties have too much empathy for the commercial world

Be careful!!! 😉

TJ I was all set to send you some calcs but stoner has done it. On his numbers I wouldn’t do it as it doesn’t look like a good return. Relying on capital growth only is what has killed lots of potential BTL investors returns. As others said you need to get beyond the romance of owning the whole floor and look at it as a cold business decision.

BTW, with respect to stoner, the yield is misleading in a way as although you are buying for 300k you are borrowing the capital. So your deposit is geared, and as an investment you might prefer to consider looking at the yieled as a percentage of what you invest – ie your deposit. It will look like a considerably healthier percentage return.

I’d be more worried about getting a nightmare tenant, causing the other to leave, or become difficult to find new tenants and making your own place hell. With the bad tenants I’ve had previously, one would not affect the others since they are spread around town.

This is a meaningless fallacy (sorry) the people next door could be mentalers whether you own next door or not, the risk is the same.

Ta chaps – plenty of food for thought. I have to say you are not giving me the ammunition I need to persuade Mrs TJ its a good idea.

Mr Tall – hence considering fixed rate mortgages although what I have been offered right now is fixed at 2% above normal variable rate. At the variable rate I could get right now the sums are much much better – hundreds a month profit but clearly thats no basis to gamble on as rates must rise

I am certainly factoring in a rate rise of 2 %+ in 5 years and having 2 months of no rent each year

Yeah! Yeah! Yeah! Have you forgotten, it’s a nice flat! 🙄

I have been going through mortgage applications, they were running an affordability test at 7%. Interest rates are definitely going to rise considerably.

Most of the banks are now gouging buy-to-let customers by an extra 1-1.5% on a standard deal.

I would be very careful, the rental market/interest rate equation doesn’t have to move too far before you will start having to make up mortgage payments out of your own pocket.

TJ,

Unless the fixed rate is for a 10 year term, future interest rates are still a major factor in your decision unless you are expecting decent capital growth or the ability to make capital payments.

IMHO, BTL works best on smaller properties as the yields tend to be higher than on £300k+ properties as the rents are usually proportionately higher and the capital sums involved are lower (although at the lower and of the market you’re more likely to get problem tenants).

As with any investment, there’s a risk/reward payoff but it does seem you’d be putting all your eggs in one basket.

BTW, with respect to stoner, the yield is misleading in a way as although you are buying for 300k you are borrowing the capital.

toys – the use of a yield in the industry is handy as a comparison for cost of funds. You are talking about geared returns which I would be cautious of using in this instance as it masks the susceptability of this investment to interest rate risks (I call it the “trumpet of possibility” 🙂 – graph returns as a function of rental growth/interest rate costs and LTV and you’ll see what I mean… )

long term (ungeared) total returns would actually be net yield + rental growth in perpetuity + capital growth in perpetuity which crudely might be considered to be 3.5% + RPI swap + RPI swap = 8.5% but that’s a very long hold to get anything like that return… especially if its a ground rent LLH as thats a wasting asset.

Ta chaps

There is no ground rent – its freehold, major buildings works completed so no roof bills likely, in the last ten years the flat has doubled in price or more than, in 20 yrs its 6 times what it was.

because of the flat and the location the odds of capital rise are very good

odds of capital rise are very good

lets hear these odds then bookie….
😉

How bouyant is the market for 1,000pcm rentals, or as you said around 1k? Even if the figures look good on paper, is the market big enough to keep you in the big money?

toys – the use of a yield in the industry is handy as a comparison for cost of funds. You are talking about geared returns which I would be cautious of using in this instance as it masks the susceptability of this investment to interest rate risks (I call it the “trumpet of possibility” – graph returns as a function of rental growth/interest rate costs and LTV and you’ll see what I mean… )

I agree totally I always take account of interest rate movement in my calc of geared yield. Also the deposit gearing yield is much more susceptible to changes in costs. A mate of mine bought btl’s on 95% mortgages back in the crazy days, he argued that the smaller the deposit the higher the gearing (true) but even replacing a boiler ruined his profit.

I’m Harry Cautious anyway as we always work on the possibility of int rates going to 10%. You can’t find BTL properties that will tolerate 10% any more, hence I haven’t bought anything. All mine have got masses of equity, I can currently still be profitable at 16% base rate, but then we have lifetime trackers on all our btl’s of 0.7% over base, and managed to buy low in the late 90’s and early noughties 😀

I’m Harry Cautious anyway

mine’s ungeared 😉

We’ve just refinanced (@50%) the development loan we took to build the barn. Mrs S (also boring finance person like me) and I disagree on the yield curve so we’ve split the mortgage in two – her half is fixed @ +3% for 2yrs then SVR, my half is fixed for 5yrs @ +4%. It’s a riot of fun and laughs in our household 🙂

Haven’t read the whole thread yet but this line jumped out at me:

I am looking at this for a medium term investment – something towards the pension pot. However basically we would only get the capital growth no monthly income.

Unless you’re getting the place very very cheap I wouldn’t count on capital growth for some time. If the rental yield is only enough to cover the mortgage what will you do if house prices drop 10 or even 20 percent? Have you factored in repairs, void periods etc?

IMPO prices are going to go down for some time, wether that’s in nominal or real terms is the gamble. We’re actually house hunting now but only because we actually need more space and I’ve put the missus off for the last three years! I’m expecting to lose money on it, even in the medium term, but don’t have a whole lot of choice and it will be our home. I wouldn’t invest in property now, in 2-3 years maybe but not now.

mine’s ungeared

Ungeared as in you have no finance on your btl?

Our first BTL was making 18% gross yield (income/purchase price) in 2000, now it makes 20.1% gross yield on what we owe as we re-mortgaged but rents are up somewhat since then too..

I wouldn’t invest in property now, in 2-3 years maybe but not now.

Trying to predict the future is madness, just do your sums on what today has to offer, factor in Stoners “trumpet of possibility” and decide. Unless you have done a full analysis then you will never know if sitting on your money means you will miss out, or if you should go and invest..

Ungeared as in you have no finance on your btl?

yup.

In summer 2007 I felt that the market was topping out so was about to put the flat on the market, but Id only had my new tenant in for a few months and didnt want to give them a load of upheavel so held back. Idiot 😉

So we’ve decided to just hold on to it. Quite wierdly though the flat has continued to show some capital growth and is now worth more than it was in summer 2007. Still will probably hold on to it for a while. We bought it in 2001 for about £175k so IRR has been about 5%pa 9%* ungeared since then. No amazing, but nice and steady and relatively low stress.

I finally managed to make the most of my market call when I bought the barn site development plot for a good price at the very bottom of the market (Summer 2009)

* Doh! Who’d hire an analyst who cant do his sums right? 😉

major buildings works completed so no roof bills likely,

That’s not the only expense. Kitchens, bathrooms, carpets? A new boiler would cost £1000’s (and unless it’s new will probably be needed inside your 10 year timeframe).

Would you let furnished or unfurnished? Expect to repaint the place every 5 years(?) or less to keep it smart. Furniture will likely start to look tatty at a similar age – tenants never look after things as well as you would. Appliances (Fridge/washing machine/dishwasher) only have a life of about 5 years.

in the last ten years the flat has doubled in price or more than, in 20 yrs its 6 times what it was. Because of the flat and the location the odds of capital rise are very good

So maybe all the price rises have happened….past performance is not a guide to the future. You could gamble that the area will outstrip others but as pointed out – all your eggs in one basket on that so if it goes the other way you’re down on them all.

From experience over 10 years in London –

One month void in every two years = 500

Looks very conservative – if you’re assuming new tenants every 2 years it’s hard not to have a gap of at least a few weeks so this is best case, not a contingency.

7% agency fee in every two years = 450

7% would be nice…could easily be 10%. And most charge for extensions as well (though you can usually negotiate a lower rate for them) I’d assume 7% p.a. on average.

Refresh costs = 200

What can you buy for £200? The Gas Safety Check will cost you half that. If you’re renting furnished you’re allowed to set off 10% of the rent against maintenance/replacement of furnishing – that’s a better guideline.

I wouldn’t base anything on current variable rates – on this investment you really need to fix unless you’ve got a lot of cash to pick up the losses when rates, inevitably, rise. It’ll take a lot of willpower to keep funding annual losses on this in the hope of capital gains that probably won’t come through for some time longer.

I’d not touch it – good luck.

From experience over 10 years in London –

One month void in every two years = 500

Looks very conservative – if you’re assuming new tenants every 2 years it’s hard not to have a gap of at least a few weeks so this is best case, not a contingency.

7% agency fee in every two years = 450

7% would be nice…could easily be 10%. And most charge for extensions as well (though you can usually negotiate a lower rate for them) I’d assume 7% p.a. on average.

Ive had two lots of two weeks void in 6 years. But its an attactive flat for tenants which is why we bought it in the first place. (and one month of £1000pm rent void every two years is….£500pa)
My lettings agency agreement is 7% of first years rent and no renewal fee (I hate renewal fees, theyre unconscionable. I threatened to remove the Co’s agency and management work if they continued to charge me one)

as for refresh, most capital refresh should be factored into the yield IMO (asset maintenance), but you’re right, if you were to do it properly you would amortise a full refurb on a 10 yr deprec cycle into your calcs. £200 covers deep clean, gas cert and a lick of paint by me.