£90K to invest in buy to lets, best options?

[Toilet Duck]

Hello all,

First time venturing into this part of PH so go easy on me

I know a lot of people on here are landlords/mortgage advisors/financial super powers etc, so I would appreciate some advise on this scenario. If a person owns their own house outright with no mortgage and they are in full time employment and on PAYE, what would be the best way of investing approx £90,000 cash into buy to let properties? This sum of money would also need to cover solicitor fees etc.

Assuming the properties are two bedroom flats ranging between £105K - £125K with monthly rental incomes of circa £600/£650, what would be the "optimum" number of properties to try and obtain? I appreciate that there are many factors that would influence this so its far away from being black and white.

How I see it is that you could do one of two things; either get enough rental income to cover the mortgage(s) in as short as time as possible so that tennants eventually pay the mortgage(s) off and you have a "free" property, or properties (long term gain), or get a longer/interest only mortgage with lower repayments and make a profit on the rental income each month (short term gain).

The first option seems to me to be a better option. Because you would have to pay capital gains tax on any income earned, if you get the mortgage payments as close to the rental charge (e.g. mortgage repayments of £600 per month and rental charge £625 per month), then you wouldn't be "wasting" money by paying tax on any profit, and the mortgage would be paid off quicker. By the time the mortgage is paid off (20 years?) it would make a good income for when you retire.

If you had a longer/interest only mortgage, you would get hit with capital gains tax (40%??) on any profit left after you deduct the mortgage cost from the rental income, and you would never own the property.

What is the "best" option?

I'm also led to believe that which type of BTL mortgage you get for the first property may influence what lenders will be prepared to give you for a second BTL mortgage (in terms of LTV's, interest rates etc)

Of course I could be totally wrong on any number of assumptions I've made above so forgive me if I'm being stupid!

I know its probably impossible to answer this as everyones circumstances are different, but I would apprerciate any advice/opinions.

Thanks in advance

[Sarnie]

You could possibly squeeze 3x 25% out of £90k.

The rent you receive will need to be approx 125% of the monthly mortgage payment eg £500 mortgage payment and you'd need a rental of at least £625.

The first mortgage will be the hardest to secure as you will be classed as a First Time Landlord, the others would be easier.

Edited by Sarnie on Thursday 14th February 17:41

[Toilet Duck]

Cheers for the reply!

Sarnie said:

The rent you receive will need to be approx 125% of the monthly mortgage payment eg £500 mortgage payment and you'd need a rental of at least £625.

Why does it "need" to be 125%? Is it because thats a requirement from mortgage lenders? If so, is that just for the 1st BTL mortgage (do they relax the stipulations for a 2nd BTL mortgage?)?

Sarnie said:

You could possibly squeeze 3x 25% out of £90k.

I assume thats for interest and capital mortgages? If you went interest only, would that mean you could get more mortgages and therefore more properties (not sure if you'd want to do that but just trying to understand)


Thanks

Edited by Toilet Duck on Thursday 14th February 18:15

[Sarnie]

Toilet Duck said:

Cheers for the reply!

Why does it "need" to be 125%? Is it because thats a requirement from mortgage lenders? If so, is that just for the 1st BTL mortgage (do they relax the stipulations for a 2nd BTL mortgage?)?

Thanks

Yes its a requirement of the mortgage lenders and it will apply to all your mortgages going forward. Some lenders are 135%.

[Toilet Duck]

Sarnie said:

Toilet Duck said:

Cheers for the reply!

Why does it "need" to be 125%? Is it because thats a requirement from mortgage lenders? If so, is that just for the 1st BTL mortgage (do they relax the stipulations for a 2nd BTL mortgage?)?

Thanks

Yes its a requirement of the mortgage lenders and it will apply to all your mortgages going forward. Some lenders are 135%.

OK cool, thanks for clarifying. How do the lenders "check" to see what the rental income will be? Do they just go by current data for similar rental properties in the same area? I assume they won't believe what the person applying for a mortgage quotes in case they are trying to sway the lenders decision. Also, would you end up with mortgage problems if you obtain a mortgage but end up with a monthly rental income lower than predicted (if you can't find a tennant willing to pay the estimated rental charge and have to reduce it).

Thanks again for your help, much appreciated

[Sarnie]

Toilet Duck said:

OK cool, thanks for clarifying. How do the lenders "check" to see what the rental income will be? Do they just go by current data for similar rental properties in the same area? I assume they won't believe what the person applying for a mortgage quotes in case they are trying to sway the lenders decision. Also, would you end up with mortgage problems if you obtain a mortgage but end up with a monthly rental income lower than predicted (if you can't find a tennant willing to pay the estimated rental charge and have to reduce it).

Thanks again for your help, much appreciated

The lender will send out a surveyor to value the property and ascertain the rental value of the property. Its this value that the lender will use and not your figure.

For example you might say to the lender that you can get £800 pm but the surveyor might say that it's more like £500. In this case the lender would reduce the borrow available to fit their lending criteria.

Once the mortgage is all up and running, the lender isn't going investigate what you have been getting in rent, as long as you pay the monthly mortgage payment......

[BlueNGT]

Toilet Duck said:

I assume thats for interest and capital mortgages? If you went interest only, would that mean you could get more mortgages and therefore more properties (not sure if you'd want to do that but just trying to understand)


Thanks

Edited by Toilet Duck on Thursday 14th February 18:15

Buy to Let Mortgages are calculated on a Interest Only basis as far as the lender is concerned so has no baring on the number you can amass. The limiting factor on this is Lenders themselves...for example Lloyds Banking Limit, last time I checked, is 3 properties across all brands in the group....others have similar limitations

Lenders gnerally base the Mortgage on circa 125% of the interest only monthly payment - so as Mr Sarnie says £500 per month Mortgage requires £625 per month rental assessment by the surveyor.

Or they can have an underlying rate of around 4.99% that needs to be satisfied by 125%....this means the Mortgage rate might be 3.49% but the rate the lender calculates the mortgage on is 4.99%. In that scenario your Interest Only Mortgage might be £299 per month (£100k @ 3.59%) but to satisfy the lender the rental assessment needs to come in at £520 per month (125% of 4.99%) instead of 125% of 3.59% pay rate.

As a first time landlord you will be restricted to 75% Loan to Value.

Generally purchase prices of over £100k dont stack up well on Buy to Let until you get to much higher values that can command 4 figure rents.

Flats are of particular caution as you also need to factor in Service Charge, and ground rent before calculating your net yield.

Are you doing it for additional income or for capital growth/equity?

[Boshly]

Toilet Duck said:

The first option seems to me to be a better option. Because you would have to pay capital gains tax on any income earned, if you get the mortgage payments as close to the rental charge (e.g. mortgage repayments of £600 per month and rental charge £625 per month), then you wouldn't be "wasting" money by paying tax on any profit, and the mortgage would be paid off quicker. By the time the mortgage is paid off (20 years?) it would make a good income for when you retire.

I'm not an accountant but I believe you are making a fundamental error here. You ate liable for income tax for all rental received over and above any costs you incur on the property. Costs for example can be maintenance, agency fees, accountants costs and interest and bank charges. Now note, this is interest and bank charges, NOT the amount of mortgage you repay. You ate not allowed relief on payments reducing your borrowed capital.

Ignoring other running costs and voids (please don't but just for this example) if your mortgage payment was £600 of which £450 was interest and £150 capital you would need a rental income of £700 to allow for the tax as a 40% tax payer (all rough figures).

You will nly pay CGT when disposing of the property and then after an RPi adjustment (I believe) and will be in the difference if what you paid against what you sold for.

Hope that makes sense and helps.

[Toilet Duck]

Thanks for the latest replies gents

BlueNGT said:

Generally purchase prices of over £100k dont stack up well on Buy to Let until you get to much higher values that can command 4 figure rents.

Is the £100K "limit" not dependant on area? e.g. in London you'd pay that for a parking space in some places. What makes it "not stack up?"

BlueNGT said:

Flats are of particular caution as you also need to factor in Service Charge, and ground rent before calculating your net yield.

Some of the ones I've been enquiring about are freehold so hopefully that will reduce some of the costs.

BlueNGT said:

Are you doing it for additional income or for capital growth/equity?

This is what I am not sure about, I probably didn't explain clearly enough in my opening post. I don't "need" the additional income now (don't get me wrong though, any more money coming in would be great as I can always find things to spend it on!). My original plan was to just get tennants to pay off a mortgage for me so I'm left with a "free" property or properties in 20 years or so. I wasn't bothered about making a profit every month, I just wanted the rental income to cover the mortgage. I was looking at doing that so that I would then have rental income (without a mortgage) to supplement my pension when I retire, or maybe enable me to retire a bit early (I am in my mid 30's). However, I had an informal chat with a mortgage broker over the telephone (an estate agent I went to today arranged it, I had nothing to loose getting more info). He said that on a £125K property, if I put £37.5K down as a deposit, the interest rate would be 3.79% and the monthly interest only payments would be £289, the rental income per month would be around £600 - £650. That got me thinking; should I do that and enjoy a profit now but obviously not end up with a "free" property in 20 years time as the mortgage will never be paid off. I know this was just "over the phone" and in no detail, but it got me thinking. I don't know which is the "best" way of doing this, take the income now or get a "free" property/properties in the long term. When you throw in the tax implications I don't know if that swings it one way or the other. Obviously anything could happen within the next 20 years and I could be dead, but the idea of extra income when I retire is a nice thought. I really don't know what is the "better" way to go about it.

[Toilet Duck]

Boshly said:

I'm not an accountant but I believe you are making a fundamental error here. You ate liable for income tax for all rental received over and above any costs you incur on the property. Costs for example can be maintenance, agency fees, accountants costs and interest and bank charges. Now note, this is interest and bank charges, NOT the amount of mortgage you repay. You ate not allowed relief on payments reducing your borrowed capital.

Ignoring other running costs and voids (please don't but just for this example) if your mortgage payment was £600 of which £450 was interest and £150 capital you would need a rental income of £700 to allow for the tax as a 40% tax payer (all rough figures).

You will nly pay CGT when disposing of the property and then after an RPi adjustment (I believe) and will be in the difference if what you paid against what you sold for.

Hope that makes sense and helps.

Sorry, I was typing another reply when you posted the above so I missed it.

Apollogies if I'm being thick, but are you saying that if the rental income is say £600, you get taxed on the whole £600? I assumed that if the rental income was £600, and the mortgage repayment was £400, you only pay tax on the £200 "profit," and only after you deduct the costs you mentioned (letting agency fees, maintenace costs etc), so may only get taxed on £150 or whatever is finally left.

If I've got it wrong and you are correct, I don't think my master plan will work

[rufusgti]

Toilet Duck said:

Boshly said:

I'm not an accountant but I believe you are making a fundamental error here. You ate liable for income tax for all rental received over and above any costs you incur on the property. Costs for example can be maintenance, agency fees, accountants costs and interest and bank charges. Now note, this is interest and bank charges, NOT the amount of mortgage you repay. You ate not allowed relief on payments reducing your borrowed capital.

Ignoring other running costs and voids (please don't but just for this example) if your mortgage payment was £600 of which £450 was interest and £150 capital you would need a rental income of £700 to allow for the tax as a 40% tax payer (all rough figures).

You will nly pay CGT when disposing of the property and then after an RPi adjustment (I believe) and will be in the difference if what you paid against what you sold for.

Hope that makes sense and helps.

Sorry, I was typing another reply when you posted the above so I missed it.

Apollogies if I'm being thick, but are you saying that if the rental income is say £600, you get taxed on the whole £600? I assumed that if the rental income was £600, and the mortgage repayment was £400, you only pay tax on the £200 "profit," and only after you deduct the costs you mentioned (letting agency fees, maintenace costs etc), so may only get taxed on £150 or whatever is finally left.

If I've got it wrong and you are correct, I don't think my master plan will work

Your wrong I'm afraid.
The 600 pounds is taxable, but you can set the interest of the loan against it. Along with other expenses.
That's how I understand it anyway.

[Boshly]

rufusgti said:

Your wrong I'm afraid.
The 600 pounds is taxable, but you can set the interest of the loan against it. Along with other expenses.
That's how I understand it anyway.

Correct.

Within your mortgage payment, some is interest and some is capital repayment (unless it's interest only in which case...).

It's ONLY the interest part which can be offset, and your lender will give you an annual interest charged statement so you can know the exact interest incurred in that year (in reality in a repayment mortgage as interest is calculated daily, as every payment progresses, the next will constitute slightly less interst and slightly more capital - so that the mortgage ends as zero at the expiry of the term of the mortgage, thus the term 'repaymemt' mortgage).

So in my example in previous post, £600 mortgage payment £450 of which is interest (approx/average) is offset against your rental income. So, from your £700/month rent, no tax on £450. But £250 IS taxed. For a 40% tax payer that's £100 to HMRC (40% of the £250 remaining). Thus a rental of £700 in this example, covers a £600 mortgage payment that is made up of £150 capital and £450 interest.

Please note though, whilst you can roughly estimate interst/capital the actual calculation will be an annual one and incorporate accurate, exact figures.

I re-iterate I have ignored all other costs that you can allow against (make sure yu remember to cover all, such as ground rent, service charge etc) and ignores voids when you may have no rent coming in.

Sorry it may sound patronising (hope it doesn't) but wanted it to be clear.

[Countdown]

Toilet Duck said:

Apollogies if I'm being thick, but are you saying that if the rental income is say £600, you get taxed on the whole £600? I assumed that if the rental income was £600, and the mortgage repayment was £400, you only pay tax on the £200 "profit," and only after you deduct the costs you mentioned (letting agency fees, maintenace costs etc), so may only get taxed on £150 or whatever is finally left.

Rental Income = £600
Mortgage interest = 200
Other fees = £200

Taxable income = £200 @40% = £80tax
Net income = £120

Tbh I think that the stock market is a better investment at the moment.

[z4chris99]

good london locations don't stack up as BTL's on high ltvs at the moment. rather annoying

[eldar]

Don't know where you are based, it may be relevant.

Look for distress sales at the bottom of the market - desperate to sell, quick sale type thing. You need to have the money readily accessible, these tend to be complete within 2 week type stuff. Talk to local estate agents, let them know you have cash, can move quickly and are serious.

My last one was a 2 bed flat in a grotty part of Coventry on a short lease, £30k. Seller had inherited it and had debts to clear quickly. 6k to modernise - bathroom, kitchen and redecorate. Another 8K in a couple of years to extend the lease (15 years left, so difficult to get a mortgage).

Good rental market, its been let for £500 gross a month (£325 nett), value £45k now, £55k with lease extended. No mortgage, so I can cope with tenant gaps ( none so far).

[Zeemax_Mini]

OP said:

Some of the ones I've been enquiring about are freehold so hopefully that will reduce some of the costs.

Unlikely to be freehold if they're flats, more likely share of freehold so will still have yearly maintenance charges etc!

Dom

[Toilet Duck]

Thanks for the further replies, very helpful

z4chris99 said:

good london locations don't stack up as BTL's on high ltvs at the moment. rather annoying

eldar said:

Don't know where you are based, it may be relevant.

I'm in Essex. I've been looking at 2 bedroom flats around Westcliff/Leigh-On-Sea/Southend area.

I've only been looking at two bed flats, not one beds.

eldar said:

Look for distress sales at the bottom of the market

I'm looking at a repossesion this morning. Apparently it needs "some cosmetic work" and its up for £100K. I looked at another flat in the same road last week with someone living there and it was up for £125K (although it was overpriced).

eldar said:

My last one was a 2 bed flat in a grotty part of Coventry on a short lease, £30k.

I honestly didn't know you could buy property that cheap! I've not seen anything remotely close to that price, but that might just be down to the different area etc?

I think I really need to get some specific info to see if the figures all add up; I didn't know you can't offset the capital part of the mortgage aginst tax (not just the interest portion). I need to somehow work out what the figures need to be.

I could always put down bigger deposits (to get smaller mortgage repayments and reduce the impact that the tax has) and reduce the number of properties that are bought, but I assumed the more properties you can get (without stretching yourself financially) the better.

Zeemax_Mini said:

Unlikely to be freehold if they're flats, more likely share of freehold so will still have yearly maintenance charges etc!

Dom

To be fair, most of the ones I've requested details on/viewed are leasehold, but with leases close to 100 years, some have 150+ years left. However, the two bedroom flat I viewed yesterday was 100% freehold. The upstairs flat was leasehold off of that freehold (not sure if I've wordded that correctly but hopefully it makes sense). I've been trying to look for freehold/share of freehold but they obviously command a premium.

Thanks again for all the help, I really appreciate it

[Kudos]

you could buy 3 x places outright in certain areas. Rental of £400-£450/month

You wouldn't live in them, but many will

[S6PNJ]

Toilet Duck said:

I've only been looking at two bed flats, not one beds.

Have you spoken to rental agencies to see what properties they are short of? IE what is the market demanding? I have a number of BTLs and they are all 3 Beds Semis or mid Terrace. Before I bought any of them, I was considering 1 and 2 bed flats. After speaking to the rental agencies in my local town, they were all crying out for 3 bed properties so see what is in demand in your local area before you commit to anything.

[98elise]

Countdown said:

Toilet Duck said:

Apollogies if I'm being thick, but are you saying that if the rental income is say £600, you get taxed on the whole £600? I assumed that if the rental income was £600, and the mortgage repayment was £400, you only pay tax on the £200 "profit," and only after you deduct the costs you mentioned (letting agency fees, maintenace costs etc), so may only get taxed on £150 or whatever is finally left.

Rental Income = £600
Mortgage interest = 200
Other fees = £200

Taxable income = £200 @40% = £80tax
Net income = £120

Tbh I think that the stock market is a better investment at the moment.

I disagree

Our last BTL stacks up like this....

Purchased at 107k with a 26k deposit.
Rents at £650 pcm, IO mortgage is 350 ish.
Net profit is £3.6k
Knock off say £600 for insurance and repairs, leaves 3k profit (my actual costs are lower than that)

Based on the cash invested I'm making well over 10% gross profit. We invest the profits back into the houses, so they are gradually paying down the mortgages. Obviously there is tax to take into account, but thats dependend on the OP's tax position/rates etc.

As the mortgage gets paid down, my % rise.