Another BTL question
Discussion
Sorry, a similar question to Supercommuter’s thread currently running on BTL.
We’re considering a flat which will yield about 3.5% after landlord costs, we will have to pay 2nd home stamp duty. It will be purchased in my wife’s name who is retired, draws no pension and has no income. We won't need a mortgage on the flat, have pensions, savings, maxed ISA’s.
We know the current owners of the property, and also have a tenant who is also known to us ready to move in. It’s in a sought after development, when they come up for sale they don’t hang around long.
Despite reading lots of recent negativity around BTL and given the overwhelming response so far to Suppercommuter’s thread, I’m obviously a little concerned that I’m missing something.
To me it still makes sense…………….
Thanks for any advice.
We’re considering a flat which will yield about 3.5% after landlord costs, we will have to pay 2nd home stamp duty. It will be purchased in my wife’s name who is retired, draws no pension and has no income. We won't need a mortgage on the flat, have pensions, savings, maxed ISA’s.
We know the current owners of the property, and also have a tenant who is also known to us ready to move in. It’s in a sought after development, when they come up for sale they don’t hang around long.
Despite reading lots of recent negativity around BTL and given the overwhelming response so far to Suppercommuter’s thread, I’m obviously a little concerned that I’m missing something.
To me it still makes sense…………….
Thanks for any advice.
3.5 pc is a pittance yield. Also if you have never owned a flat in anything other than a large development think about
1) the service charge (it never goes down and you are always a few inches away from getting shafted)
2)the ground rent - what does the lease say about it increasing?
3) lease extension costs
4) local authority letting licence - do you need one ? Our council charges a grand for 3 years (I think)
5) you might not need a mortgage but the person who buys it off you might do- what's the yield going to be then if the purchaser has a mortgage? Less than the 3.5pc I'd say. Why bother for say a 2pc yield?
6) the government don't like landlords and will find new ways to shaft them
Despite all of the above I will probably be buying some very cheap buy to let property in the not too distant future. They'll be in a limited company though, no mortgage, and will be fairly liquid i.e if it doesn't work out I'll put them in an auction and probably wouldn't lose much.
1) the service charge (it never goes down and you are always a few inches away from getting shafted)
2)the ground rent - what does the lease say about it increasing?
3) lease extension costs
4) local authority letting licence - do you need one ? Our council charges a grand for 3 years (I think)
5) you might not need a mortgage but the person who buys it off you might do- what's the yield going to be then if the purchaser has a mortgage? Less than the 3.5pc I'd say. Why bother for say a 2pc yield?
6) the government don't like landlords and will find new ways to shaft them
Despite all of the above I will probably be buying some very cheap buy to let property in the not too distant future. They'll be in a limited company though, no mortgage, and will be fairly liquid i.e if it doesn't work out I'll put them in an auction and probably wouldn't lose much.
triple5 said:
We’re considering a flat which will yield about 3.5% after landlord costs, we will have to pay 2nd home stamp duty
How does that 3.5% look if you deduct the stamp duty over 10 years (or however long you want to hold it for)?Does that include vacancy (2-4 weeks a year) and maintenance?
triple5 said:
It will be purchased in my wife’s name who is retired, draws no pension and has no income.
This is where you are probably going to do better than most. The tax asymmetry (i.e. 40-45% on income with no deductibility of interest) makes BTL uneconomic for most taxpayers.In the scenario that you have all the main investments in position and under control then an unleveraged BTL is arguably a diversification play and makes perfect sense.
I think the important step is to make sure you are buying the right investment within that sector. You’ll be putting all the eggs in one basket so you need to do a lot of work to ensure it’s the right purchase. Personally, I wouldn’t fixate on the stamp duty over paying real attention over ensuring the right price and then minimal running cost risks.
The yield does look low but then many people are used to seeing property yields from a leveraged position. Also, it’s a matter of perspective as 3.5% is a big number in central London while a tiny number for a seaside slum landlord.
Of all the things that ring alarm bells it’s the two key bits of info that you know the seller and you know the potential renter. I think that has terrible potential ramifications.
You’re a cash buyer who is looking to procure an investment. That means you need to pay the lowest price and are fully armed to do exactly that. You almost certainly won’t be doing that if buying from someone you know. That’s a real investment hit.
Same with the rent. You want to maximise yield and that is done by minimising costs and maximising the amount paid by the tennent. If you have a relationship with the tennent then that becomes almost impossible and potentially that person actually wholly controls your yield whether they intend to or not.
I personally would find a property that neutralises the huge cost of being a nice person rather than buying one that guarantees screwing tourself.
I think the important step is to make sure you are buying the right investment within that sector. You’ll be putting all the eggs in one basket so you need to do a lot of work to ensure it’s the right purchase. Personally, I wouldn’t fixate on the stamp duty over paying real attention over ensuring the right price and then minimal running cost risks.
The yield does look low but then many people are used to seeing property yields from a leveraged position. Also, it’s a matter of perspective as 3.5% is a big number in central London while a tiny number for a seaside slum landlord.
Of all the things that ring alarm bells it’s the two key bits of info that you know the seller and you know the potential renter. I think that has terrible potential ramifications.
You’re a cash buyer who is looking to procure an investment. That means you need to pay the lowest price and are fully armed to do exactly that. You almost certainly won’t be doing that if buying from someone you know. That’s a real investment hit.
Same with the rent. You want to maximise yield and that is done by minimising costs and maximising the amount paid by the tennent. If you have a relationship with the tennent then that becomes almost impossible and potentially that person actually wholly controls your yield whether they intend to or not.
I personally would find a property that neutralises the huge cost of being a nice person rather than buying one that guarantees screwing tourself.
princeperch said:
3.5 pc is a pittance yield. Also if you have never owned a flat in anything other than a large development think about
1) the service charge (it never goes down and you are always a few inches away from getting shafted)
2)the ground rent - what does the lease say about it increasing?
3) lease extension costs
4) local authority letting licence - do you need one ? Our council charges a grand for 3 years (I think)
5) you might not need a mortgage but the person who buys it off you might do- what's the yield going to be then if the purchaser has a mortgage? Less than the 3.5pc I'd say. Why bother for say a 2pc yield?
6) the government don't like landlords and will find new ways to shaft them
Despite all of the above I will probably be buying some very cheap buy to let property in the not too distant future. They'll be in a limited company though, no mortgage, and will be fairly liquid i.e if it doesn't work out I'll put them in an auction and probably wouldn't lose much.
Most of that is irrelevant as the tenant pays most of those costs. I don’t even know what you are trying to say at point 5. 1) the service charge (it never goes down and you are always a few inches away from getting shafted)
2)the ground rent - what does the lease say about it increasing?
3) lease extension costs
4) local authority letting licence - do you need one ? Our council charges a grand for 3 years (I think)
5) you might not need a mortgage but the person who buys it off you might do- what's the yield going to be then if the purchaser has a mortgage? Less than the 3.5pc I'd say. Why bother for say a 2pc yield?
6) the government don't like landlords and will find new ways to shaft them
Despite all of the above I will probably be buying some very cheap buy to let property in the not too distant future. They'll be in a limited company though, no mortgage, and will be fairly liquid i.e if it doesn't work out I'll put them in an auction and probably wouldn't lose much.
If the tenant stays long term then it can still be advantageous.
The additional stamp duty is a killer at the moment I’d wait to see if there is anything in the budget about this as it’s killing the sector. Get rid of it and hundreds would pile back in.
3% is poor but beats cash in the bank. BTL can still make sense as part of a diversified investment and people still take comfort with bricks and mortar over stocks and shares.
BoRED S2upid said:
Most of that is irrelevant as the tenant pays most of those costs. I don’t even know what you are trying to say at point 5.
How do you get your tenants to pay service charges, ground rent and lease extension costs? Question is whether those have been considered when calculating the 3.5% net yield. Point 5 is important and is really a comment about whether the capital value of the property is sustainable in the long term if it doesn’t make sense for an investor to purchase.
BoRED S2upid said:
princeperch said:
3.5 pc is a pittance yield. Also if you have never owned a flat in anything other than a large development think about
1) the service charge (it never goes down and you are always a few inches away from getting shafted)
2)the ground rent - what does the lease say about it increasing?
3) lease extension costs
4) local authority letting licence - do you need one ? Our council charges a grand for 3 years (I think)
5) you might not need a mortgage but the person who buys it off you might do- what's the yield going to be then if the purchaser has a mortgage? Less than the 3.5pc I'd say. Why bother for say a 2pc yield?
6) the government don't like landlords and will find new ways to shaft them
Despite all of the above I will probably be buying some very cheap buy to let property in the not too distant future. They'll be in a limited company though, no mortgage, and will be fairly liquid i.e if it doesn't work out I'll put them in an auction and probably wouldn't lose much.
Most of that is irrelevant as the tenant pays most of those costs. I don’t even know what you are trying to say at point 5. 1) the service charge (it never goes down and you are always a few inches away from getting shafted)
2)the ground rent - what does the lease say about it increasing?
3) lease extension costs
4) local authority letting licence - do you need one ? Our council charges a grand for 3 years (I think)
5) you might not need a mortgage but the person who buys it off you might do- what's the yield going to be then if the purchaser has a mortgage? Less than the 3.5pc I'd say. Why bother for say a 2pc yield?
6) the government don't like landlords and will find new ways to shaft them
Despite all of the above I will probably be buying some very cheap buy to let property in the not too distant future. They'll be in a limited company though, no mortgage, and will be fairly liquid i.e if it doesn't work out I'll put them in an auction and probably wouldn't lose much.
If the tenant stays long term then it can still be advantageous.
The additional stamp duty is a killer at the moment I’d wait to see if there is anything in the budget about this as it’s killing the sector. Get rid of it and hundreds would pile back in.
3% is poor but beats cash in the bank. BTL can still make sense as part of a diversified investment and people still take comfort with bricks and mortar over stocks and shares.
romeogolf said:
I also don't understand point (5), but the tenant does not pay the service charge, ground rent, lease extension cost, or for any required licences. They are all landlord costs.
Ok fair points shows my complete lack of knowledge when letting flats. I’ve never done it probably for these reasons, when renting a house all costs are paid by the tenant (bills and council tax) apart from occasional maintenance and tax the rest is profit. BoRED S2upid said:
The additional stamp duty is a killer at the moment I’d wait to see if there is anything in the budget about this as it’s killing the sector. Get rid of it and hundreds would pile back in.
WTF? You actually think the budget might make BTL more attractive?!?!? Hahhahaha!There are no votes in miwyonaaaaire landlords continuing to fleece the new Conservative voters of more of their benefits, if the budget changes anything it'll be to ADD a premium to a purchase (especially on a personal purchase basis).
Macron said:
WTF? You actually think the budget might make BTL more attractive?!?!? Hahhahaha!
There are no votes in miwyonaaaaire landlords continuing to fleece the new Conservative voters of more of their benefits, if the budget changes anything it'll be to ADD a premium to a purchase (especially on a personal purchase basis).
Quite right too. BTL is a transfer of wealth from the poor (tenants) to the affluent and idle (landlords). The fact that it attracted a state subsidy for so long is ridiculous.There are no votes in miwyonaaaaire landlords continuing to fleece the new Conservative voters of more of their benefits, if the budget changes anything it'll be to ADD a premium to a purchase (especially on a personal purchase basis).
Macron said:
BoRED S2upid said:
The additional stamp duty is a killer at the moment I’d wait to see if there is anything in the budget about this as it’s killing the sector. Get rid of it and hundreds would pile back in.
WTF? You actually think the budget might make BTL more attractive?!?!? Hahhahaha!There are no votes in miwyonaaaaire landlords continuing to fleece the new Conservative voters of more of their benefits, if the budget changes anything it'll be to ADD a premium to a purchase (especially on a personal purchase basis).
The OP is an example of the exact type of landlord required which is the non leveraged, well funded investor. It’s this type of person who represents market stability rather than the toxic instability of the highly leveraged speculator.
The downside is that the market doesn’t represent such easy stand alone returns as it did in the post mid 90s debt fuelled gambling bonanza but the market still stacks up very well for the well funded seeking diversity of assets or other long term, no speculative reasons.
No one wants gamblers speculating to excess in the largest market that most Britons will ever be exposed to or more importantly the asset values that underpin the entire UK lending market and our consumer habits.
All that’s really changed about BTL is that you firstly need to have deeper pockets to take part and secondly the additional taxation incentivises other investment markets ahead of it. This just isn’t a bad thing.
Using this post to comment on something separate from another post above, ultimately the tennent pays for everything including ground rents, lease extensions etc. It’s merely a case of whether they pay them directly on top of their rent or whether the charge is contained within the rent.
At a yield of 3.5% it’s not going to take much effort at all to push that negative for certain years. This is why buying smart and using your cash buying power to force the purchase price down is essential and why so is maximising your tennent payments.
On a yield for yield basis, a bank account paying 1.5% is a higher return than a property investment with a notional yield of 3.5%. The latter is variable and not likely to rise rapidly but can go negative for extended periods and also has capital at risk. And of course there is also political risk to always factor in as property is theft and landlords are the first to be put on trains along with Spurs fans.
The compensation for this is the assumed capital uplift that it is an asset that’s value will hold against currency devaluation whereas cash is obviously intrinsically at risk of devaluation and I think that has good merit within a balanced portfolio of asset classes?
Thanks for contributions so far, apologies if I don’t answer all questions.
I wasn’t aware of the possible need for a letting licence, need to look into that one.
Sorry, I miscalculated the yield, it’s actually 4.5% reducing to 4.1% if I include the stamp duty/10 years.
4.5% includes ground rent, buildings insurance and maintenance fee. We would need to cover repairs such as the boiler breaking down and so on.
DonkeyApple, I fully get the “knowing the seller and potential renter”, and while this remains a concern it does have some upside. I know the property will be in good order, and I can also probably say with greater confidence than other landlords, that I’ll have less chance of tenant issues.
So our thinking is that we're not necessarily chasing the best yield, but simply considering it on the basis that it would be fairly safe.
I wasn’t aware of the possible need for a letting licence, need to look into that one.
Sorry, I miscalculated the yield, it’s actually 4.5% reducing to 4.1% if I include the stamp duty/10 years.
4.5% includes ground rent, buildings insurance and maintenance fee. We would need to cover repairs such as the boiler breaking down and so on.
DonkeyApple, I fully get the “knowing the seller and potential renter”, and while this remains a concern it does have some upside. I know the property will be in good order, and I can also probably say with greater confidence than other landlords, that I’ll have less chance of tenant issues.
So our thinking is that we're not necessarily chasing the best yield, but simply considering it on the basis that it would be fairly safe.
triple5 said:
....and I can also probably say with greater confidence than other landlords, that I’ll have less chance of tenant issues.
Son/Daughter: ‘Mum, Dad, do you mind if I skip the rent this month as I’ve a holiday coming up.’ Father: ‘Er, no. You’re an adult now and you’re not renting your mother’s and my investment so you can just stop paying rent whenever it’s not convenient.’
Mother: ‘Why are you be so harsh? It’s just a few months rent. Of course it’s ok darling.’
Point 5). Just because the yield just about stacks up for you, doesn't mean it will for anyone else. You might change your mind and want to sell it on at some point, possibly in the near future. The investment proposition still needs to be as attractive as possible to the next bloke who's going to buy it.
I still don't understand the attraction with buying a single / small portfolio of property directly and managing it personally, then getting shafted by the taxman, over buying shares in Property Companies / REITS.
Stamp duty is 0.5%.
A professional management team managing a valuable portfolio will do so more effectively than any individual.
If a REIT, 90% of rent is passed straight to shareholders in the form of dividends.
If held in an ISA, they are tax-free, or if in a SIPP are tax-free/deferred.
Shares are liquid and can be converted into cash any time, against having to market or auction a property.
One can review / rebalance across geography and/or asset classes (residential / offices, etc) easily rather than limiting one's choice to resi nearby because its cheapest.
Stamp duty is 0.5%.
A professional management team managing a valuable portfolio will do so more effectively than any individual.
If a REIT, 90% of rent is passed straight to shareholders in the form of dividends.
If held in an ISA, they are tax-free, or if in a SIPP are tax-free/deferred.
Shares are liquid and can be converted into cash any time, against having to market or auction a property.
One can review / rebalance across geography and/or asset classes (residential / offices, etc) easily rather than limiting one's choice to resi nearby because its cheapest.
princeperch said:
Point 5). Just because the yield just about stacks up for you, doesn't mean it will for anyone else. You might change your mind and want to sell it on at some point, possibly in the near future. The investment proposition still needs to be as attractive as possible to the next bloke who's going to buy it.
So long as the yield is the average for that type of property in that area then it’s not an issue. DonkeyApple said:
princeperch said:
Point 5). Just because the yield just about stacks up for you, doesn't mean it will for anyone else. You might change your mind and want to sell it on at some point, possibly in the near future. The investment proposition still needs to be as attractive as possible to the next bloke who's going to buy it.
So long as the yield is the average for that type of property in that area then it’s not an issue. princeperch said:
And that's the point. There are flats where I live that cost 50k less than other flats but they will still rent for exactly the same weekly amount. Don't overpay for the flat if it's a property you are buying to let. You make your money on property primarily when you buy it, not when you sell it.
Absolutely. Few people have the potential for the biggest turn of their life than when they buy a property. It’s always about the purchase. But the OP seems to have their head screwed on so I don’t think there is much need for highlighting too strongly that storming in and hurling a premium over market and then using a man maths rental and uplift spreadsheet to justify being a punter is a big risk here?Gassing Station | Finance | Top of Page | What's New | My Stuff