Buy to let query
Discussion
I have a flat currently valued at £250k, mortgage at £191k on which I am paying £800pcm interest. Rent is £1080pcm (£250pw)
We rejigged the mortgage in March to a fixed rate at 4.99% for three years but there was a pretty hefty fee on it. The best bit was that they only wanted 115% interest cover.
There are a few other costs such as gas certificate, buildings insurance and basic Sky package (to compensate for TV reception mangled by the proximity of Canada Tower)
I make money on it because (1) it is a converted house so there is no management company or managing agent (2) we deal with lettings ourselves (3) we are taking a long term view and are unlikely ever to sell.
We advertise in Loot (£20 per week) and so far we have had five lots of tenants through and every one has been back to back - no empty periods at all.
Admittedly it is beautiful to look at!
My take on it is long term. Generally house prices track incomes rather than RPI and if the Govt and BoE are to be believed we should be on course for 4.5% capital growth long term (2-2.5% inflation and a similar figure for growth in the economy). Add to that the 5.5% income yield and you get a pretty good return.
If you put in 15% equity and get 4.5% on the value of the whole property your return on capital is 30%
In the short term there probably will be better investments but we lived in the flat and reversed out of it. Taking into account the fact that we therefore got full main residence CGT relief to the value at which it went to BTL and we saved on the agents commission I haven't seen much else around that could have beaten it over three years. We left £45k in equity in it, have taken out £12k since then and if we sold now we would clear another £55k. I make that a net return over nearly four years of about 13% per annum.
We rejigged the mortgage in March to a fixed rate at 4.99% for three years but there was a pretty hefty fee on it. The best bit was that they only wanted 115% interest cover.
There are a few other costs such as gas certificate, buildings insurance and basic Sky package (to compensate for TV reception mangled by the proximity of Canada Tower)
I make money on it because (1) it is a converted house so there is no management company or managing agent (2) we deal with lettings ourselves (3) we are taking a long term view and are unlikely ever to sell.
We advertise in Loot (£20 per week) and so far we have had five lots of tenants through and every one has been back to back - no empty periods at all.
Admittedly it is beautiful to look at!
My take on it is long term. Generally house prices track incomes rather than RPI and if the Govt and BoE are to be believed we should be on course for 4.5% capital growth long term (2-2.5% inflation and a similar figure for growth in the economy). Add to that the 5.5% income yield and you get a pretty good return.
If you put in 15% equity and get 4.5% on the value of the whole property your return on capital is 30%
In the short term there probably will be better investments but we lived in the flat and reversed out of it. Taking into account the fact that we therefore got full main residence CGT relief to the value at which it went to BTL and we saved on the agents commission I haven't seen much else around that could have beaten it over three years. We left £45k in equity in it, have taken out £12k since then and if we sold now we would clear another £55k. I make that a net return over nearly four years of about 13% per annum.
So if flats in a certain area typically rented for £700pcm then working back from that, dividing by 120% would give £590pcm.
Pro rating your mortgage of 190,000/800*590 = £140K as the size of mortgage servicable by that rent? Sound about right?
Pro rating your mortgage of 190,000/800*590 = £140K as the size of mortgage servicable by that rent? Sound about right?
Edited by rsvmilly on Tuesday 1st August 16:34
My mortgage is with Birmingham Midshires who only needed 115% which gives some more flexibility.
On the basis of a price of £140k I would have thought that rent at £600-650 would be achievable - something approaching 5.5%
That would allow a full 85% ltv.
The catch is that there is a 1% fee and then you have the transaction charges as well.
If the property is in a block with centralised maintenance etc you could easily be paying another £50pcm for service charge. Then unless you manage it yourself there are agents fees at 10% plus VAT - another £60 per month gone.
With repayment of roughly £500pcm on the mortage and another £100+ going out on service charge and agents it is unlikely to show any returns in the short term. That's where the current pessimism comes from.
I am in the fortunate position of having a flat 400 yards from my current home and having a background in property which helps me take out the professional middle men. Otherwise the margins are so tight that, in answer to the original question, nobody makes any money out of it unless capital values go up. At the moment you might as well try to read the tea leaves on whether that is going to be the case for the next two or three years.
On the basis of a price of £140k I would have thought that rent at £600-650 would be achievable - something approaching 5.5%
That would allow a full 85% ltv.
The catch is that there is a 1% fee and then you have the transaction charges as well.
If the property is in a block with centralised maintenance etc you could easily be paying another £50pcm for service charge. Then unless you manage it yourself there are agents fees at 10% plus VAT - another £60 per month gone.
With repayment of roughly £500pcm on the mortage and another £100+ going out on service charge and agents it is unlikely to show any returns in the short term. That's where the current pessimism comes from.
I am in the fortunate position of having a flat 400 yards from my current home and having a background in property which helps me take out the professional middle men. Otherwise the margins are so tight that, in answer to the original question, nobody makes any money out of it unless capital values go up. At the moment you might as well try to read the tea leaves on whether that is going to be the case for the next two or three years.
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