6

I'm a first time buyer, living at home, on a good salary of around £25k and with no major committments.

I would like to get a mortgage and get on the ladder, but I'm quite content living at home, and have plans to go and work abroad in the next 5 years or so, therefore I'm not desperate to get into my own place.

I'm thinking, would it be a good investment to apply for a buy-to-let mortgage, and to rent a place out?

Around my area there are maisonettes going for around £100k in good areas, my target tenant would be first time renters / young couples

Ideally I would like to charge enough rent to cover mortgage payments (in an ideal world) but if not I can pump in some extra out of my monthly salary to make it up, the utilities etc would be down to the tenant

Is this even possible? Or am I completely living in a dream world?

  • 2
    "Ideally I would like to charge enough rent to cover mortgage payments" -- I must be missing something. How does this being a landlord make any sense at all if you charge less in rent than you pay in mortgage? – bstpierre Sep 22 '10 at 11:52
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    @bstpierre: ignoring any expectations of capital gains, you only need to cover the mortgage interest with rent, not the repayment element, to be in profit (as well as the mortgage interest you actually also need to consider the forgone interest on any deposit you put down). – Ganesh Sittampalam Sep 22 '10 at 21:05
  • @Ganesh Sittampalam - Thanks for the clarification. I was conflating positive cash flow with profit... – bstpierre Sep 22 '10 at 22:48
7

£25k may be enough, but there are some other things to consider:

  1. Rentability. How rentable is the area that you're looking at? Use http://www.upmystreet.co.uk/ to check out the rentability of that location. If it's not in a rentable location, your rent won't cover the mortgage sufficiently. Being the only rented property on the street will upset the neighbours to a degree as tenants generally aren't interested in integrating with the local community as they are often transient.

  2. Owning a property costs money. Not just to buy it (think £6k in various fees and charges), but you also have to fix the roof, the windows, the plumbing, etc. Your rental yield needs to cover the mortgage PLUS the maintenance costs. Is there a ground rent due to the free holder? What happens when they decide to do major restructural work and charge you a proportion? Do your research.

  3. Liability. As a landlord, you're liable for various things. You have to get buildings insurance (mortgage insists on this) but I'd advise looking into Landlords' liability insurance too - if the roof falls in and maims your tenant, can you afford to pay out?

  4. Investment term. Not all sectors of the market are as buoyant as others, so you may have to have this property for at least 5 years to see some equity gains. Can you afford to be without this money for 5 years?

From my own experience, you will have to subsidize the property until the mortgage is ticking over, the rental yield consistent, the problems all fixed and the tenants stable.

If you decide to go ahead, my top tip is to decorate the property throughout in the usual neutral Magnolia, don't splash out on fixtures and fittings, and offer the property in a clean-and-tidy unfurnished state as tenants with their own belongings have turned out to be more careful.

6

I'd first check if I'd qualify for a BtL mortgage at the moment - I'm one of these 'accidental landlords' and while I have equity in my UK property, I don't have enough to qualify for a BtL mortgage. In June you were looking at around 20%-25% downpayment for one.

Also, keep in mind that if you are abroad you will have to have a local agent to let out the property and that'll cost you part of the rental payment. Most of the ones who I talked to charged between 10%-15% of the gross rental, plus additional fees for background checks, finding tenants and whatnot.

That aside, I think one of the deciding factors is how long you'd expect to keep the property. I would not expect any appreciation in value for quite a while and potentially, I'd expect that the house will lose value for a while. IIRC it took about 10 years or so after the last house price crash until prices recovered to the same level.

Now that we've got all of this out of the way, I have a few concerns about this idea. First, even if you can pull together a 25% down payment for the house (plus all the costs involved in buying a house), you'll take on debt in the order of 3 times salary on the speculation that you might get enough in rent (after the agent's commission etc) to cover the mortgage. What are your plans if that doesn't work out? You'll most likely not be able to cover the BtL mortgage and the rent or mortgage on your own place with your income. That's a heck of a lot of risk for not very much reward.

Second, do you have an emergency fund in place that would cover the mortgage for a few months if you're out of work? Or pay for a new roof when the tenants are fed up with covering the whole attic with buckets?

Basically, I think that it'll be a close call to purchase a 100k property with a 25k downpayment as your primary residence on your income and I think you might be signing up for a whole lot of financial pain if you put all your 'investment' eggs in a single, house-shaped basket.

3

I bought - and rented - and left the UK. 25 years ago.... I am still overseas.

My house - has trebled in value (Warning: Past rises may not reflect future rises).

My house has been rented for 22 years - I pay on average 14% + VAT to the agency. I paid the loan off in 6 years.

Since then the rent has been paid into a savings account (living overseas you can not have a UK pension plan).

House prices may fall a little - and 100K is a good starting point on the ladder.

It has worked well for me ... What would I have done otherwise ? Spent the $$$$ on slow horses and fast women (as the saying goes).

2

Doesn't sound unreasonable to me, from a financial standpoint. Many I know have done what you are considering, and with success. However, it would be wise to do a market analysis to see if there are sufficient tenants seeking residence that will support the investment. Some places are still very lucrative, but many are under water and landlords are losing money each month, either with an empty property or with less income than expenses.

Though, the real question is "do you want to be a landlord?" This will involve finding and removing tenants, maintaining the premise and managing the bills for the place.

2

Given the state of the mortgage market in the UK, this is unlikely to be a good ideal unless you can put down close to 50% of the price.

Less than 25% deposit and you will find it very hard to get a mortgage. However at 25% you are likely not to be able to cover the interest payments when interest goes up (you will have some voids!).

Given that we are unlikely to have much capital growth in house prices for a long time, I think “buy to let” only works if you can get a very positive cash flow.

However as the returns on putting money in the bank is so low, buy-to-let can gives much a better income if you can do it without much of a mortgage.

1

Like many commentators I believe UK house prices are likely to fall over the next few years, so you could lose money on the value of the property. Current rents may exceed current mortgage payments, so you might think you can offset the drop in value, but that situation might change.

http://www.housepricecrash.co.uk/

  • 1
    A website full of people 'willing' the market to crash again isn't really going to have that much influence. The last crash was caused by people having mortgages they couldn't afford and then banks securitizing these (bad/sub-prime) mortgages without knowing quite how mis-sold they were. – JBRWilkinson Sep 24 '10 at 9:39
  • @JBRWilkinson: We will just have to wait and see then. – Michael Burrows Sep 24 '10 at 10:06

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