Borrowing/gearing to expand BTL portfolio

by Readers Question

11:10 AM, 30th March 2015
About 4 years ago

Borrowing/gearing to expand BTL portfolio

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Borrowing/gearing to expand BTL portfolio

I’m on the verge of rapidly expanding my BTL portfolio. I’ve had one on the go since 2011, bought my second in 2013 and am just about to exchange contracts on a 3rd property. However, this time I’ve borrowed some of the deposit. Borrowing gearing to expand BTL portfolio

I’m up in Yorkshire and the returns on 2 bed houses/flats are pretty good- 15% yield before tax. I’m looking to release equity from my own house, plus a personal loan to fund two more purchases this year.

What I’m wondering is – of those of you with portfolios of 5 or more properties, did you borrow/gear-up to raise deposits?

Any advice/words of warning for me?

I am looking to cut back on some of my day job duties (lots of weekends and I have a young family now) and expand my portfolio to give a serious income.

Any help/advice on this would be great.

Many thanks

Rob



Comments

Mark Alexander

11:16 AM, 30th March 2015
About 4 years ago

Hi Rob

My advice is don't over-stretch yourself, property investment is a marathon, not a sprint, so plan for the worst and hope for the best. 15% gross yield is incredibly high, what risks have you considered?

Most people borrow/gear-up to expand their portfolios, it makes sense to do so, especially when the portfolio remains cashflow positive.

Just bear in mind that when you do eventually decide to sell up the CGT is based on the difference between the original purchase price and the eventual sale price. There is a tipping point whereby it becomes impossible to sell if your debt plus CGT liabilities are greater than your property value. Many landlords are not even aware of this issue until they come to sell and by then it is too late to do anything about it.
.

Adrian Hyett

12:24 PM, 30th March 2015
About 4 years ago

Hello Mark, can you explain your comment on CGT /debt and difficulty in selling a bit more please?

Regards

Ade

Mark Alexander

12:35 PM, 30th March 2015
About 4 years ago

Reply to the comment left by "Adrian Hyett" at "30/03/2015 - 12:24":

Yes I will give you an example ...

Let's say that in 1997 I purchased a flat for £30,000.

In 2007 is was worth £90,000 and I remortgaged it to 85% LTV, i.e £76,500.

The value dropped dramatically during the credit crunch but is now back to where it was in 2007, i.e. £90,000.

If I were to sell this property I would obviously have to pay off the mortgage which would leave me with £13,500 less legal fees and estate agents fees so let's call it £11,000 net.

However, I would have CGT to pay on the £60,000 capital gain at 28% which equates to £16,800 so I would be left £5,800 short!
.

Rob Clark

17:44 PM, 30th March 2015
About 4 years ago

Reply to the comment left by "Mark Alexander" at "30/03/2015 - 11:16":

Hi Mark. Thanks for the advice so far. 15% is how I've worked out the yield- based on deposit size and rental returns allowing for annual costs such as insurance, gas safety certificate etc. Also allowing a budget of £250 per year for other expenses. I have to admit that in the 6 years I've been a landlord (I dipped my toe in for 2 years in 07) the only big expense I've had is a new water cylinder and I've never had an empty property. (Touch wood). Also- the 2 lets I currently have DONT have an agent as I manage them myself.

All properties are bought in joint names with my wife so we get a combined £22K CGT allowance.

Any words of wisdom are most welcome. I really am looking to build a sustainable business model.

Rob.

Mark Alexander

20:27 PM, 30th March 2015
About 4 years ago

Reply to the comment left by "Rob Clark" at "30/03/2015 - 17:44":

Hi Rob

I think you might mean that you are getting an "ROCI" (Return On Capital Invested) of 15% at current mortgage rates. You can test this using our landlords calculator - see >>> http://www.property118.com/calculating-rental-yields-and-returns/

If you are borrowing the deposit you should factor this into your calculations as well of course.

Unless your properties are very high yielding I doubt very much that you will make much net income at all based on effectively 100% finance. On that basis I can't really see how you will be substituting your earned income.

You also need to factor in interest rate rises etc.

I'm not saying that what you are doing is a bad thing in the long term but in the short term I cannot fathom how buying extra properties will solve your immediate objectives of spending more time with your family.
.

Rob Clark

21:21 PM, 30th March 2015
About 4 years ago

Hi Mark

The 2 current properties are paying me £260 each a month gross. The one I'm about to exchange on will be break even until I pay the loan off- that should take 12-18 months. Once the loan is paid, the latest property will pay £300 gross.
I guess I'm asking about the best/quickest/most efficient way to get to a large enough portfolio to allow me to reduce my day job hours.

Mark Alexander

21:33 PM, 30th March 2015
About 4 years ago

Reply to the comment left by "Rob Clark" at "30/03/2015 - 21:21":

Hi Rob

Maybe I'm the wrong person to ask, it took me 20 years. Then again, I do have very expensive tastes! LOL
.

Rob Clark

21:37 PM, 30th March 2015
About 4 years ago

Reply to the comment left by "Mark Alexander" at "30/03/2015 - 21:33":

Lol- I've just read your biog- all good stuff! It's all relative I know and will depend on numerous factors- but I wonder how many properties experienced landlords consider is "the right amount" or enough to live comfortably on?

Mark Alexander

21:53 PM, 30th March 2015
About 4 years ago

Reply to the comment left by "Rob Clark" at "30/03/2015 - 21:37":

Hi Rob

It's a very personal thing, no different to asking people what their favourite meal or the best car is.

As for number of properties, it's a bit like Monopoly, I'd happily swap all of my houses for a hotel on Park Lane. Don't get hung up on number of properties or judge yourself by what others have achieved, just focus on your own objectives. One thing I can assure you is that as you make progress your goals will evolve. In the beginning most are motivated by material things such as house, car, holidays, financial security etc. Once you've achieved those things you will want different things and you will also regret making some of the sacrifices you will undoubtedly have made to get what you want. It's true, we got have everything but striving to do so makes people who they are. We all want different things if course!
.
.

money manager

11:55 AM, 31st March 2015
About 4 years ago

Re the CGT problem, subject to constraints e.g. a lender you can shift the asset between the two of you at any time before a sale if that is advantageous. Between marrieds/CPs that is not a CGT event and the other half picks up the original base costs plus whatever costs/enhacements can be claimed. The advantage springs from the two CGT rates of 18% and 28%, the gross gain is added to income and the rate applied to whatever tier falls within the basic or higher rate bands accordingly.

A thought, you mentioned insurance in the context of costs so presume you refer to to B&C, lanlord''s etc. I don't place life assurance on our mortgages (lower gearing and later in life) but in highly geared/young family situation it mightvbe wirth considering

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