UK Landlord Forum / Life

Hi,

I was just wondering what other's opinions are on this topic.

We are looking at buying another 2 x properties in the Portsmouth area.

With all the costs involved and the finance (we are financing the deposit as well as the mortgage) we only come out of it with £200 net profit per house.

The gross rental yield works out at 5.7%.

The prices are very inflated at the moment and this is a 2 year savings project so not sure about the capital growth as uncertain we would get the same price again.

It's about £145k for a 2 bed that needs no wrk with a rental return of £700pcm.

I would be grateful for some encouragement or feedback from others as I feel very uncertain as to wether I'm doing the right thing.

Are other investors buying at the inflated prices we are seeing down south?
Are they totally financing or cash buyers?
Should I be bothering for this kind of return?

Your experience would be greatly appreciated if anyone would give me some advise.

Gross yield on a flat seems low as there are lots of uncertain costs, such as service charges etc.  You can get much higher and lower yields in different parts of the country but if that's not practical to you then that's out.  As well as gross yields I also look at ROCE.  Return on capital employed.  The way I look at it is, I have my £30k deposit, I put it into a house, what return am I getting on that 30K?

Now seems like a good time to buy a house as everyone's doing it and the press are reporting X amount of increase.  There's certainly a trend for it.  Unfortunately, as they say, if you follow the trend you are too late.  If you think the market is overheated and you're paying over the odds, don't do it, don't be one of the suckers.

There are alot of people sailing close to the wind with regards to margins, there WILL be an interest rise, there will be lots of people snapping up properties for less than the previous owner paid for them.  Do you want to be a snapperupperer or a previous owner?

A £200 net rental profit doesn't sound too bad at all, to me.

However, the fact that you are financing the deposit and the mortgage scares me no end. It implies you have no savings and no back-up. What will happen if you need to fund a void or a major repair - like a £1,600 boiler replacement? Are you prepared and able to do those kinds of things? Basically - if you don' t have funds for the deposits, do you have any contingency funds at all?

That said... I own a property outright that brings in £550 per month... £220 is ostensibly tax. Of course, I have some expenses - but, sadly, I've actually had just over £2,500 worth of unexpected expenses in year 1 with the current Tenants - shower, washing machine, fridge freezer and boiler (all broken, no idea how!) so please be very careful with your sums.

My next BTL (I'm being patient) will be a house for around £100,000 and I will put down around 40% deposit to try and get the best mortgage product I can - repayment. I don't think I could contemplate "total financing" - it sounds too dangerous for me. I am also sure others will look at things differently, so see what feedback you get.

I missed the bit about the total financing.

That's got to be a pure suckers move surely?   

Sounds like you're chasing a dream that's been drummed into the general public, a dream that could easily turn into a nightmare. 

No is the answer to your question.

NO

No

Its nor worth it.

Although if you would like to do the same thing near me, and then run the risk of having to sell in a hurry at a discount, I would say yes, YES fill your boots.

If you have a banking or accountancy qualification you wont  get the fact that what I wrote was true and a joke..

Your gearing is suspect, your returns unsure, and your ability to understand the market you are entering in circumspect....  No need for the ' in you are a knob there!

Sorry...... But fuck sake, Premium bonds would be better.....

Hello there,

Thanks for the responses! 

Hi Riptide, the property is a house so no maint and ground rent to consider.
The deposit funds + costs are coming from equity release from our other mortgage free property.
So with all the monthly payments (on both the mortgage & the deposit) and management fees taken into account there will be £200 net profit.
Yes we could look at other areas but we picked portsmouth because that's where are other rental property is, plus I have negotiated a 5% management fee with our property management company if we get two more on with them.

Hi Hippogriff, we have a couple of thousand in savings that can be used in emergency but the plan is just to bank the rental profit so after a while there will be a pot of money there that we can use to cover voids or repairs.
Also in my costs calculation i've factored in the purchase of white goods so they will all be new.
Plus the property is immaculate inside so hence the steeper price  but I've picked this one on purpose to hopefully minimise costs.

Riptide, If we were financing with a lump sum of cash based on your ROCE calculation  we would be investing £41250 and getting about 5% annual return, is that better or worse than a savings account or other investment opportunities? 

My main worry I suppose is we're fixing for 2 years and at the end of that period we will sell, what if the capitol growth is zero and we only break even, or even worse the price goes down.
Plus in two years the interest rates will have definitely gone up in which case reaffixing (only an option if we can't sell) will probably reduce our small net profit to nothing!!

It's these risks that make me think is it worth it, I take it from your responses that other investors wouldn't take these kind of risks?
If so how does anyone make a start if they don't have 40k in the bank?
Anyone else know of better areas we might consider?
Should I wait for the prices to become less inflated?

Has anyone got a crystal ball!?      



We're buy

I think maybe also it seems like such a rubbish return as we have a mortgage free property that gives a net rental return of £750 a month!!

I must be on drugs!  Definitely thought I read flat somewhere! 

The C in my ROCE was just cash, whereas your's is from raising funds so has it's own costs aswell, is that factored into your calculation?  I'm not sure what's good or bad to be honest and landlords seem to pick the right figures that make them feel the best about their investment, i.e using a gross figure instead of a doom and gloom worst case scenario/void period net figure. 

My gross ROCE which is my deposit I put in minus the monthly interest on the loan (i.e the monthly profit) X 12 = £3564/£19,625 X 100 = 18.6% so to me my £20k is giving me 18% instead of the piddling amount it was earning in a savings account. 

If you look at this thread

https://www.landlordforumproject.co.uk/landlord-advice-help/newbie-some-advice-please/

The guy is trying to purchase for £55k and the rental income possibly might be £525, which seems decent.

Wow that is a good return!!  Maybe I should be looking up north, but not too sure the DSS is for me.  Although I was interested to look into the HMO side of things.  Maybe for working individuals. What are your thoughts on the HMO side Riptide?

lol Yes your right about how everyone has there own way of calculating the figures that suits them 
I'm more of a try to calculate the worse case scenario and then hope that it's a bit better than that. 

If I apply my rose tinted glasses and do the positive calculation I'd be thinking Im almost performing a magic trick by making money that produces money produce more money. i.e.) the house we already have pays us £750 a month, we borrow some money from it, buy another house that then produces a further £200 a month. Not only that we could borrow a bit more and double the £200 to £400 a month....

Still it all boils down to the risk I suppose, are other people doing what I'm considering or am I mental!?

Is the other half gonna say 'I told you so"? 

if the £41250 were cash that we had kicking around then ROCE would be  net monthly profit after loan costs x 12 = £4524/£41250 x 100 = 10.9%....hum that's not looking as good as your 18%. 

And the next guy will make mine look poor.  It's all just figures and the only person who can figure out what's best is the person with the money!  My gross yield is 7.6%.  On another forum some posters were saying it's not worth it for them unless it's at least double figures.  As I said LL's pick the figure that makes them feel best.  Wonder why I worked out my ROCE? 

I'm with you on DSS but there must be some good ones.  Not sure on HMO, if the house was setup for it in the first place (extra rules and regs etc) then would be worth doing.  No experience of it though so don't know if the T turnover is much higher than 'normal' lets?

Quote from: Olliebear on June 09, 2014, 09:42:01 PM
I think maybe also it seems like such a rubbish return as we have a mortgage free property that gives a net rental return of £750 a month!!

I misunderstood where you were financing the deposit from, sounded like a personal loan/credit cards etc.  What you're proposing is perfectly normal for LL's to expand, and if that's your plan then you should do it, just maybe looking further afield? 

Quote from: Olliebear on June 09, 2014, 09:31:55 PMIf so how does anyone make a start if they don't have 40k in the bank?

I'm a Steady-Eddie type, so I would say people shouldn't really make a start until they've amassed some actual savings. I would say the same about starting any type of business... and this is a business, right? Sure, you can get loans for businesses, but it isn't advisable for everything that goes into a business being a loan or imaginary money. However, I now see that you're backing this up with an asset - your mortgage free property - so that's a different ball game.

So, your plan is that maintenance bills will be low. I'm guessing you've researched your market and won't fall foul of voids. Will you be using an Agent, is there money to be saved there? It seems you're looking local to you, so I'd be assuming you're self-managing. What kind of mortgage are you getting? Interest only? £200 per month could disappear with a void when you are liable for Council Tax etc. (if that's how your Local Authority works, as mine does).

Other than this I'm not in much of a position to give my thoughts... I don't buy properties short-term (with the intention of selling in 2 years) like you are doing... I would buy a property to let out and then keep it, I'd also have a repayment mortgage so I can eventually own the property outright... when I'm old and decrepit (my properties won't be) and whatever pension I have coming my way (likely a big pile of little) I will have solid, dependable, income where I won't be beholden to a mortgage company, interest rates... or even voids (well, not too much). That said, I only have 2 properties let out, but my target is 4 or 5.

Mr Hippo speaks allot of sense.

He does but he's not a Sr. Member only a full one!

Hi  Hippogriff,

The properties are in Portsmouth and we live in Milton Keynes.  So logistically it's a real pain.  However I choose Portsmouth as it's more affordable prices than Milton Keynes with not much difference in rental.  Plus I've made a deal with the management company to get them fully managed for 5%.  This is on the condition that we get a further two properties on with them.  (they are already managing one for us).

I've researched the area quite a lot and I'm hoping to target tenants of a certain type  and therefore minimise voids.

The mortgage is interest only Buy to let @ 3.89% (which I'm not ecstatic about) with a 25% deposit raised from equity in the house, also at 3.89%
I don't like the mortgage advisor much so I'll be getting comparables soon.

Are you using repayment buy to let mortgages on your properties?

I'm thinking the only we I can increase net profit in my situation is by buying cheaper...or better interest rate.

What kind of rates are you getting?
What kind of monthly net profit would you feel comfortable with? 

Quote from: Olliebear on June 10, 2014, 09:59:04 PM
What kind of rates are you getting?
What kind of monthly net profit would you feel comfortable with? 

I can get you a 2.99% fixed for 2 years but the fees are 2.5% of the loan.  It's all a balancing act between the rate and the fees.  I'm looking at what the SVR's are for people now as they will be higher when the fixed rate ends.

Allot of the BTL lenders are using 7% affordability rates of interest, this should be directional. i.e. if rates were 7% would you be loosing your shirt, having a bath, blissfully profitable?

Hi  boboff

Yes they have cracked down on the affordability side of things.

If the rates went up to 7% we would be screwed. That's why it's a 2 year project as I'm hedging my bets that the interest rates will probably only go up about 1% in the next few years!!  It's all a gamble isn't it!!

Riptide I'm jealous of your 2.99% we still have a fee of £999 on ours.

They always get their money one way or another don't they.  I don't like the mortgage advisor, he's whole of market but I still feel he's pushing us in a certain direction as it benefits him more.

Quote from: Olliebear on June 11, 2014, 07:40:48 AM
Hi  boboff

Yes they have cracked down on the affordability side of things.

If the rates went up to 7% we would be screwed. That's why it's a 2 year project as I'm hedging my bets that the interest rates will probably only go up about 1% in the next few years!!  It's all a gamble isn't it!!

Riptide I'm jealous of your 2.99% we still have a fee of £999 on ours.

They always get their money one way or another don't they.  I don't like the mortgage advisor, he's whole of market but I still feel he's pushing us in a certain direction as it benefits him more.

I wasn't saying I've got a 2.99%, I broker mortgages amongst other things.

I am reading your posts and I admit to being rather nervous about your plans. I'm certainly no expert - just enthusiastic about all this Landlording lark and having some semblance of a Plan for myself - but I would urge caution. The risks are worth it if the rewards are there... but what you're saying doesn't seem to be implying great rewards are possible... in fact, it seems like it's somewhat hinged on the deal the Letting Agent has given you.

I'm sure it's not - of course - but it's been mentioned more than once as being a reason.

I fear that the Letting Agent - who carries zero risk in this scenario - is influencing you towards over-extending a little bit. Am I reading that incorrectly? I hope so.

For me - I have one unencumbered property and one with CTL... that's at 2.64% (I just paid my lender a one-off £85 fee for admin. to convert it from residential to CTL). For the next property I will be doing repayment BTL, yes, but I'm not lined-up for actual rates comparisons yet... I've had a chat with a Broker and seen it's all easily possible... I am taking my sweet time about finding the right property.

I am quite a fan of having rental properties near where you are located... not at the other end of the country... because it allows me to not have an Agent involved, beyond initial Tenant Find, as that's what I want... the learning experience. The challenges  (there are many, as we all know) and the rewards.

In your case - I think I would be taking a big deep breath (which is what I think you're doing by writing on this forum, all good).

I don't know what your long term goal is but generating a yield of 5.7% is a great in this economic climate. But as some of the members have mentioned you will have to think about the costs e.g. LL insurance, lettings fee if you dont do it yourself, tax on the income etc.

I myself have recently decided to sell out of equities and purchases my first BTL where the yield is close to 10%. But I don't want to sell for the short term, instead opting to remortgage after the capital has appreciated enough for a deposit on a new property.