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I am a UK resident and home-owner with a mortgage that is 2.5 times my pretax annual salary.

Having investigated the price of my home now since I bought it, I was pleasantly surprised by the return on investment from the increase in house price alone.

This makes me think that a rental property would be a good investment because the rental income, even through a letting agency, would more than cover the mortgage payment and I could accrue more in the returns from the rise in property price.

My understanding is that I could borrow another 2 times my salary on a mortgage and this makes sense since the returns far outreach the costs.

Is there anything that else that I need to consider? Risk? Credit rating? Anything else I'm not seeing? I can't seem to find a downside.

Edit: Thanks to all the contributors. Something to think about, indeed.

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    Welcome! Can you clarify? Are you asking about borrowing more on your primary home ( a second mortgage) or simply buying a rental property with a mortgage on it?
    – JTP - Apologise to Monica ♦
    Jan 23, 2021 at 17:41
  • Yes, it does, unless you have special reasons not to… and unless there's something hiding in the wording "a second mortgage on a second property…" Discounting the pros and cons of any particular property, almost no investment will give you a better return and if it does, it will almost certainly come with much more risk. Why not talk this through with a certified financial advisor, who is bound by law to give you "best" advice?
    – Robbie Goodwin
    Jan 24, 2021 at 22:58
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    It's also worth noting that there are more costs to owning and renting a property than mortgage interest and agency fees alone, as well as rental income not being as certain as many seem to expect.
    – CMaster
    Jan 25, 2021 at 16:41
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    Just to clear up a few misconceptions / incorrect terminology. A "second mortgage" usually means a second mortgage taken out on the same property that you already have a mortgage. Buy to let mortgages are based primarily on the rental income value of the property, not your own income. You might be expected to prove some income but that is just a matter of being creditworthy. You aren't expected to be able to cover the mortgage payments from your salary.
    – JBentley
    Jan 25, 2021 at 22:09
  • If you have enough money then you might try to increase your first mortgage, so the debt on your home increases, while the rental property is completely yours.
    – gnasher729
    Jan 26, 2021 at 14:18

7 Answers 7

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Risks?

  • Your tenant may not pay rent. Eviction is often a long and costly process. And in the worst case the tenant will leave your property heavily damaged
  • The region may fall out of favour and the house depreciates.
  • The building may not have seen the necessary maintenance in the past and you will be spending a lot of money soon to repair a broken heating, leaking roof, etc.
  • The building may burn down or get otherwise destroyed and the insurance will not pay all of it. Or you are fighting for a long time to get your insurance to pay. All while you cannot collect any rent of course.

Buying a property to rent out can be a good investment if the fundamentals are positive: a region with a healthy housing market and a building in good shape at the right location at a reasonable price. Unfortunately, you will not be the only one looking for this, so these properties are hard to come by.

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  • The UK is an island. It's hard to go wrong with property there...
    – vikingsteve
    Jan 26, 2021 at 14:03
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    Why? What makes an island different from any other nation? Growing your nation through conquest has pretty much fallen out of favor over the last decades. Developed land is a limited resource everywhere but actually only a small fraction of all land available. And do not forget, real estate deals have two parts: a piece of land (that may or may not increase in value depending on the location) and a building that always ages and depreciates if you do not invest money to maintain it
    – Manziel
    Jan 26, 2021 at 14:21
  • @Manziel: You're right that "island" isn't the right descriptor, but vikingsteve's point still stand that the UK being an island gives it a finite amount of real estate. You're correct that non-islands also run into these issues when their borders don't change, but it doesn't negate vikingsteve's point, it just extends it even further.
    – Flater
    Jan 26, 2021 at 14:46
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    You are under the assumption that a finite amount of land automatically means that it will always appreciate in value. There is not only supply (which is not as limited as you think) but also demand which means it depends on the demographics of a region. If people are leaving a region (for example because its main industry dies) land will depreciate in value. Of course there are more effects. People might not need to live close to work if they only commute once a week and might instead choose to live somewhere nice instead somewhere close, for example. This topic a way more complex
    – Manziel
    Jan 26, 2021 at 15:03
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For a buy to let mortgage you will typically need at least 25% deposit and it will be a higher interest rate than a residential mortgage.

Also you need to factor in that you may not have the property occupied 100% of the time, and that you will have maintenance costs on the property as well.

Bottom line: being a small time landlord can make a small return, but nothing like as large as it sounds like you may be imagining, and there is risk.

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If you are a higher-rate taxpayer, or your income from the rental (gross — you can’t deduct the mortgage interest, though you can deduct other costs) would push you into the higher-rate bracket, be aware that as of last year you’ll only get a 20% tax credit for your buy-to-let mortgage interest, but you’ll be paying 40% (or more for very high incomes) tax on the rent that you receive. That’s quite likely to move you from profit to loss. https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782

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  • Last time I read the law on this it seemed to me that it is not possible to actually make a loss (i.e. pay more tax than your profit). But it is definitely possible to wipe out all your profit.
    – JBentley
    Jan 25, 2021 at 22:13
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Other answers already cover a lot of the risks, but I wanted to focus on this sentence:

rental income, even through a letting agency, would more than cover the mortgage payment and I could accrue more in the returns from the rise in property price.

Any gain accrued from an increase in the value of the property can only be realised when you sell it. So as a long-term investment, it may well be profitable - but in the short term, you need to have a source of funds to pay the many and varied costs associated with owning a rental property.

It's common for buy-to-let mortgages to be interest only, because the monthly payment for repayment mortgages is often too high to make much monthly profit (if any). You will need a contingency fund to pay for emergency repairs, or a new boiler, or rewiring when the electrical inspection report shows a serious issue, or simply to cover the costs when the property is empty - so how are you going to pay for that?

My understanding is that I could borrow another 2 times my salary on a mortgage

BTL mortgages are normally computed based on (a) the expected rent, and (b) your salary - though in my experience, it is the former that dominates. So you're not wrong, but I'd argue that the expected rent is the more important factor.

But before you even get there, you're going to need a deposit. BTL mortgages cost more than residential ones, and the best rates tend to be found when your loan-to-value ratio is 60% or below. So do you have a 40% deposit?

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I would offer some general broad advice:

Say you are getting 1 or 2 rental properties in the UK. (So this does not apply to someone who owns streets full of rental properties!)

  1. The income and costs from the rental as such are not of much consequence one way or the other.

  2. The whole entire issue at hand is capital gains.

It could be that area of the UK, that in 20-30 years the price has increased incredibly.

If that is the case, with the leverage you have had an enormous, epic, lifetime win. Hero move. You're a rich man. Great.

On the other hand - it could be that in 20-30 years, the price is pretty flat or has just gone up a little with inflation. In that case it's a bust - the whole exercise was a wash and pretty much pointless.

Unfortunately that's what it comes down to.

You are really just making a play on:

... "will the price increase greatly in the next 30 yrs or so?" As you know, that is incredibly true in some or many cases (in the UK and elsewhere), but you can think of plenty of places where it wouldn't work out.

So unfortunately it's one huge guess on future prices in that particular area.

Owning real estate is:

  • crap if the price is flat or only increasing a little.

  • spectacularly awesome if the price is heading north.

It's a big bet.

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I did something similar a couple of years ago. In my case my residential (and only) home had gone up in value so I had some equity. I also realised the home we were living in had potential income as a student property, being close to a university, so we simultaneously acquired a rental property and also released enough funds from the equity to move home by 'flipping' our residential home. We remortgaged the current home and its residential mortgage into a buy to let mortgage at 75% of its NEW valuation. After paying off the residential mortgage, we had enough cash left over to to pay the deposit/fees for the new residential mortgage on our new home. The whole venture was funded purely from the released equity in our previous home and we now have a student rental property providing extra income for our family.

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Buy To Let used to be a no-brainer. But be careful. The wind is changing. Tenants' rights are growing. Regulation and licensing are becoming increasingly expensive. Punitive taxation for those perceived as 'rich' is just around the corner. Unless you have cash available, investment property may no longer be an easy money-maker.

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