UK Landlord Forum / Life

Hi All,
I'm considering in becoming a landlord and I would like some advice on the finance side of the game.
Essentially in my area of the country a 3 bed house can cost you 150k-170k and will rent out for about £550 to £650 pcm.

I simply don't see how a repayment mortgage would be worth doing unless the deposit was considerable.

An interest only mortgage locks-out the capital growth (if there was any).
I'd like to get into landlording in a bigger way as time and money allow but I am struggling to get my head round the idea that it is cost prohibitive.

Can someone advise me how they approach this to make it profitable / worth the risk.
Thanks 

I'd always go for repayment or, at least, and interest-only option that allowed me to make substantial ad-hoc repayments. Otherwise you're not increasing your equity in the property, unless prices rise - and I reckon they're more likely to go the other way in the not too distant future.

Beware of confusing profit with cash flow. You won't be making any more profit with an interest-only mortgage (in fact you'll be making less): it's just that you'll be keeping more of the cash in your pocket rather than reducing the amount you owe.

£650 per month on a £170k property is a gross yield of about 4.5%, which isn't a lot to start with. By the time you've paid tax on that and deducted mortgage interest at, say, 3%, that doesn't leave you much of a return, even before you consider the routine maintenance costs, plus anything unexpected, plus the cost of tenants changing every now and then (advertising costs and void periods), and the original purchase costs - estate agents, solicitors, stamp duty etc. Then, before you know it, interest rates have gone up a bit, house prices have gone down, and you're making a loss and in negative equity.

The only way it'll really be profitable is if you can achieve a better gross yield to start with and/or put down a substantial deposit. Risk is less of a problem if you're in for the long term but, in order to be in it for the long term, you need enough equity to avoid being wiped out in the short term!

Quote from: RSW on October 30, 2017, 07:37:14 PMI'd like to get into landlording in a bigger way as time and money allow but I am struggling to get my head round the idea that it is cost prohibitive.

It's like most things, this game... money begets money. It's sad, and simplistic, but kinda true. If you start off with great mortgage deals - ones where you've put in a 40% deposit and got the best interest rate you can, then you will find that the sums make sense. I work on a set of personal heuristics... for example, after a repayment mortgage is paid I must be getting rent that is equal to that + £200 per month for it to work. Because there are known expenses and unknown expenses and +£200 just makes me feel comfortable.

Now, onto your sums... that £150,000 for around a £550 per month return seems weak to me. My own heuristic on property value for rent (in a good city) is £100,000 will get you £500 per month. However, I have recently started to change that heuristic, because £500 is about the lowest that any good property should rent for (say 3 beds) and you can buy these for less than £100,000. Another example I have at the lower end (a side I'm not too comfortable in being, personally) is £56,000 acquisition and £25,000 on a complete makeover... now renting for £500. That blows my old heuristic out of the water.

I always go repayment. I have expanded the number of properties as the years have gone by but it can be a slow business if you're not willing to go interest only and hell-for-leather. I also have a number I will top-out at (it's a mere 10, and I'm at 8 )... but I also overpay as much as possible on these small mortgages and in due course I hope to reach the point where all of them are mortgage free and I'm not beholden to anyone... that is the dream.

Here's a few examples...

Property value £220,000, mortgage (of £80,000), payment £450 (modest overpay), rent £850.
Property value £202,000, mortgage (of £80,000), payment £800 (overpaying massively), rent £1,200.
Property value £130,000, mortgage (of £41,000), payment £400 (slight overpay), rent £625.
Property value £80,000, no mortgage, rent £500.
Property value £180,000, no mortgage, rent £850.
Property value £210,000, no mortgage, rent £868.

You can see there's no real pattern, but my own heuristics are met each time. If you don't meet your own criteria then don't go into it at all.

And beware the SDLT kicker. Money into a black hole.

Advice? Save up a bigger deposit and start from there. So it may mean a delay.