Buy to let

[mogul]

Is it a good time?

I've been offered a 2 bed flat by a relative in a well known and fairly affluent part of the SE. Still yet to have a chat to see if there's any movement on price. Figures are as follows:

Purchase price £300k
Deposit £100k (from my savings)
Mortgage £200k

Work required circa (new kitchen, painting etc) £10k

Typical rental £1300 (gross) in that block currently, and seems there is no problem renting currently.

Answers from those who know would be appreciated

[scotal]

Make sure you do your homework.
Big question do you want to tie up £100k for a long time.
Can you handle it if prices in the area level off, or fall (Remember property is qwuite illiquid)

Are you looking at it as a long term investment, or a quick buck (Property should always be seenas a long term thing. Not everyone has looked at it that way, they are generally the ones who are getting hurt.

BTW, YHM.

[Piglet]

Don't forget to take the tax on rental income into account.

[mogul]

scotal said:

Big question do you want to tie up £100k for a long time.

Not fussed about having 100K tied up for a very long time currently

scotal said:

Are you looking at it as a long term investment, or a quick buck

Long term, 10 -15 years maybe?

Piglet said:

Don't forget to take the tax on rental income into account.

Do you pay tax on the entire rental income? I have commercial property which I own and run my business from and although my accountant lets me know what my tax bill is, essentially (and simply) I thought you would pay tax on the rental income less any fees, expenses and interest charged on the loan?

haworthlloyd1 said:

to state the obvious that is a 4.8% yield on a price of 320k (After stamp duty, buying costs and new kitchen) and it is getting £15600 pa gross.

then bear in mind the landlord normally pays service charge which could be say £2500 pa which brings your actual income down to £13100 and if you are paying 40% tax you will be down to around £7860 per annum. (we haven't taken into account void periods, letting agents fees etc)

Service charge currently £1200 PA - yes, a 40% tax payer currently. Don't forget the 15% to an agent as well.

haworthlloyd1 said:

therefore i think it is quite pointless to be honest - you would be gambling on house prices increasing to make some kind of profit and now due to the new cgt rules in april 08 you will be paying 18% of the gain in tax regardless of how long you have held it.

If I view it as a medium to long term investment, the property will have appreciated and the mortgage paid by a 3rd party (that's the way I'm trying to think)

haworthlloyd1 said:

Surely a stressful way to try make some cash?

Possibly

It also depends if I can strike a deal with the current owner and save sufficient to justify the risk.

As a medium to long term view it can't be a risk..........can it?

Edited by mogul on Saturday 13th October 16:25

[mogul]

Just to clarify.....

I don't view this as a get rich quick scheme, but a long term investment.

Essentially someone else paying the mortgage and in 15 - 20 or so years having a property certainly worth something significantly more than it currently is and then also providing an income (hopefully at the same time as my commercial buildings)

I will need to take professional advice but the nuts and bolts are

£15540 rental income
£1200 maintenance charges
£2331 Letting fee

Net income £12009 (then less any unseen costs)

£200k mortgage say at 6.5% currently (yet to investigate current BTL 'best buys'

40% tax payer - what will my tax burden be? (which will help me budget on shortfall)

Hope that makes some sense?

[superlightr]

I would also look carefull at what sort of block it is in. Some of the early ones 1960's are going to need major money spending on the structure, clearly the later the less at this present time/near future.

[superlightr]

Also for the same sort of money 280-300k you can buy a semi or detached house in Sussex which will earn you between 1000 to 1200 a month with no maintenance fees (apart from what you want to spend) and Im sure a friendly letting agent here will offer about 9% + vat management fees. if its in the Haywards heath/Burgess Hill area. :me:

Edited by superlightr on Saturday 13th October 16:48

Edited by superlightr on Saturday 13th October 16:49

[M400 NBL]

Personally I would buy a house for that kind of money. I used to have a btl flat that I now live in, but ground rent is around £300/year and also includes buildings insurance.

Where in the SE is it....roughly?

[David_s]

Would you really invest more than £300k to get a return of £12k per annum, 4%?

That won't even cover the interest only payments on a £200k mortgage, let alone capital repayments and loss of income on the £100k deposit. Paying tax on your 'profit' won't be an issue on those figures.

[mogul]

M400 NBL said:

Personally I would buy a house for that kind of money. I used to have a btl flat that I now live in, but ground rent is around £300/year and also includes buildings insurance.

Where in the SE is it....roughly?

It's in Weybridge, Surrey.

It was of interest and this is the reason why I posted here - to get feedback

[M400 NBL]

David_s said:

Would you really invest more than £300k to get a return of £12k per annum, 4%?

That won't even cover the interest only payments on a £200k mortgage, let alone capital repayments and loss of income on the £100k deposit. Paying tax on your 'profit' won't be an issue on those figures.

Depends on the IR. 6% interest only on £200k is £1k. If he can rent it out for £1300/month and NOT use a letting agent, and NOT buy a flat, it may be worth it. If the IR's are too high, he may as well earn 6% or so interest on his £100k.

[mogul]

M400 NBL said:

David_s said:

Would you really invest more than £300k to get a return of £12k per annum, 4%?

That won't even cover the interest only payments on a £200k mortgage, let alone capital repayments and loss of income on the £100k deposit. Paying tax on your 'profit' won't be an issue on those figures.

Depends on the IR. 6% interest only on £200k is £1k. If he can rent it out for £1300/month and NOT use a letting agent, and NOT buy a flat, it may be worth it. If the IR's are too high, he may as well earn 6% or so interest on his £100k.

But even if I end up paying 10% of the mortgage on a monthly basis and the balance is paid by someone letting the property (assuming it is always let), and in 20 years I pay 18% CGT it's still a worthwhile investment surely?

On the other hand, if I invest £100K in a building society at an average of 6% then it's going to have a value somewhere in excess of £220k after 20 years (plus compounded interest that I can't calculate).

That would give me assuming the mortgage is paid off and the property is worth as said £500k a net positive balance of circa £280k CGT of £36k (?) leaving a profit of £244k.

The other side of the coin is that I could have by then sold my current house, rent out my 2 commercial properties and be living abroad somewhere in the sun in a fully paid up sun drenched property and the pad in Weybridge becomes a base in the UK paid for by a third party?

[David_s]

mogul said:

M400 NBL said:

David_s said:

Would you really invest more than £300k to get a return of £12k per annum, 4%?

That won't even cover the interest only payments on a £200k mortgage, let alone capital repayments and loss of income on the £100k deposit. Paying tax on your 'profit' won't be an issue on those figures.

Depends on the IR. 6% interest only on £200k is £1k. If he can rent it out for £1300/month and NOT use a letting agent, and NOT buy a flat, it may be worth it. If the IR's are too high, he may as well earn 6% or so interest on his £100k.

But even if I end up paying 10% of the mortgage on a monthly basis and the balance is paid by someone letting the property (assuming it is always let), and in 20 years I pay 18% CGT it's still a worthwhile investment surely?

On the other hand, if I invest £100K in a building society at an average of 6% then it's going to have a value somewhere in excess of £220k after 20 years (plus compounded interest that I can't calculate).

That would give me assuming the mortgage is paid off and the property is worth as said £500k a net positive balance of circa £280k CGT of £36k (?) leaving a profit of £244k.

The other side of the coin is that I could have by then sold my current house, rent out my 2 commercial properties and be living abroad somewhere in the sun in a fully paid up sun drenched property and the pad in Weybridge becomes a base in the UK paid for by a third party?

The rent that you are getting isn't even covering the interest only payments on £200k, which would be about £13k per year at 6.5% (£18k per year repayment over 20 years), and you would be losing another £5k/£6k gross in lost interest on your £100k deposit. So it would cost you about £18k per year (about £23k if you are actually buying the property rather than just paying interest) and you're getting about £12k back, not taking into account the risk of empty periods, non-payment of rent, damage and essential maintenance costs. Not to mention, the not insubstantial risk of property prices taking a short/medium term dip in the near future.

The only way it makes sense is if you believe that property prices only ever go up, and go up significantly.

Edited by David_s on Saturday 13th October 19:15

[mogul]

David_s said:

The rent that you are getting isn't even covering the interest only payments on £200k, which would be about £13k per year at 6.5% (£18k per year repayment over 20 years)

Rental income £15540 which is more than mortgage payments

David_s said:

and you would be losing another £5k/£6k gross in lost interest on your £100k deposit. So it would cost you about £18k per year (about £23k if you are actually buying the property rather than just paying interest) and you're getting about £12k back, not taking into account the risk of empty periods, non-payment of rent, damage and essential maintenance costs. Not to mention, the not insubstantial risk of property prices taking a short/medium term dip in the near future.

The only way it makes sense is if you believe that property prices only ever go up, and go up significantly.

But if you assume 90% or even 80% of the mortgage payments are met by a third party, the flat will eventually be paid for and become a worthwhile asset. I'm not trying to talk myself into this but I'm trying to understand why assuming a third party pays that % of the mortgage it can't be a worthwhile long term investment ( again!)

If this is not the case, how does BTL work as on this occasion the purchase price, deposit and rental all seem reasonable.

What would be a typical money making BTL scenario?

[Piglet]

On an interest only mortgage the third party isn't paying any of the capital, it's only paying the interest...You still need to pay the capital amount at the end of the term or on sale.

The only way this generates you money is if the price of the property increases in value over and above the amount that it is costing you to buy and run.

[mogul]

All very interesting and thanks for your posts here

Obviously something lots to think about

[David_s]

mogul said:

Rental income £15540 which is more than mortgage payments

Using your figures, your net rental income is £12,009, the gross is irrelevant.

mogul said:

£15540 rental income
£1200 maintenance charges
£2331 Letting fee

Net income £12009 (then less any unseen costs)

mogul said:

If this is not the case, how does BTL work as on this occasion the purchase price, deposit and rental all seem reasonable.

What would be a typical money making BTL scenario?

Buy to let worked very well 10 years ago, it doesn't work as well today. When I bought my first a £60k property was worth about £600 per month rent, the same property today is worth about £170k and generates about £700 per month rent. The percentage yields have fallen through the floor and the chances of significant capital appreciation fallen similarly. The boat has sailed...

[Dico]

Apologies for the thread hijack.

If property prices have leveled (they certainly seem to have done), and this 18% tax thing in April 2008 is coming our way what would be the best thing for our OP to invest his £100,000 in?
I knew nothing about this cash grab thing in April, and was thinking of selling a rental property anyhow. Seems this thread may just hurry things along.
So, I will lose ALL the taper relief etc if I don't sell before April 2008? Surely this isn't right? The market is going to be flooded!

£100,000 spare. What would you do? Pay your residential mortgage off maybe?
Boreing as hell but safe.

David_s said:

The boat has sailed...

Time to abandon ship!

[Eric Mc]

I am sure that the old Indexation Relief (which ended on 5 April 1998) and its successor, Taper Relief (which commenced on 6 April 1998) will still apply to assets which were purchased in the past. It would be grossly irreponsible for a Chancellor to retrospectively cancel tax reliefs that have been in existence for nigh on 40 years.

My take on the new rules is that assets disposed of after 5 April 2008 will still be eligible for Inexation/Taper Relief up to 5 April 2008, after which these reliefs will not apply.

I may be wrong - but if I am, this would be one of the most devastating tax changes ever introduced in the UK.

Edited to make major correction -

It looks like my assumption may indeed be wrong. The examples given by the Revenue seem to indicate that Indexation/Taper Relief is gone completely.

This is terrible news for anyone who has held an asset for many years.

Say you bought a Rental Property in 1985 for £40,000 and sold it on 5 April 2008 for £240,000. The simple gain would be £200,000 but this would be seriously reduced by indextion and taper relief applied over the period from the purchase date in 1985 and the sale date in 2008. Potentially, the reduced gain would be chargeable at 40% although that was not always the case as there was no fixed rate of CGT. All the taxpayer did was apply his top rate of Income Tax to the taxable gain. If he was a basic rate tax payer, some (or possibly even none) of the gaimn would be taxable at 40%.

In this example, if the property was sold on 6 April 2008, the entire £200,000 gain will be taxable in full at 18%.

Edited by Eric Mc on Sunday 14th October 10:29

[Dico]

Estate agent here I come!

Thanks for the info guys. I really was unaware.