Buy to Let purchase – financial advisor says No

by Readers Question

17:03 PM, 9th July 2018
About 3 months ago

Buy to Let purchase – financial advisor says No

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Buy to Let purchase – financial advisor says No

I am thinking about buying a refurbished property originally valued at £680,000 for £635,000 and now have a purchase dilemma.

The rental is circa £1850 which provides a decent yield. The thing is the Stamp Duty is £40,000 which is a significant up front investment.

My Financial Adviser is advising against buying more rental property and believes I should invest the deposit money elsewhere.

I believe that in 5 to 10 years the property will be worth £700,000 or more and I will have received the rental income (its a strong rental location).

It is going to take all my spare cash to buy it.

What are the risks?

Many thanks

Nick



Comments

Paul Shears

21:38 PM, 9th July 2018
About 3 months ago

1. I simply do not have enough information to give an informed opinion on this specific investment.
2. Using my own limited reference points this looks pretty awful to me. If fact it looks so awful that there must be some pretty major negative influences that I am unaware of.
3. Your estimate of a roughly 10% increase in capital gain over a 5 - 10 year time frame makes me wonder where on earth such an low return might be generated and if you factor in the stamp duty this drops to about 4%.
4. Why is the rent so low on a property that is located in an area that has so little potential for capital growth to compensate?
5. Much more detail required here please. Location, number of bedrooms, presumably not a HMO - or is it? No of bathrooms & toilets. Number of associated private parking spaces. Etc Etc.

ahloughlin@gmail.com

7:49 AM, 10th July 2018
About 3 months ago

A simple no.

Sunny K

8:05 AM, 10th July 2018
About 3 months ago

Hi Nick,
Interesting deal. Assuming a purchase price of 680k (Purchase price + stamp duty + other cost), no mortgage, non tax payer status and rent of 1850 PCM, your gross yield will be 3.2%. This is plausible yield for London and south east market but is quite low. Assuming best case scenario of spending 15% on maintenance, net rent will be 1572 PCM and net yield of 2.8%. Some conservative estimates suggest London property may rise by 10% over next 5 years, you total annual yield (rental + capital growth) might be around 5%. This is quite low and most people look for at least 10% total annual yield. You might get better return of some bonds and crowdfunding platforms. This deal might be lot more worst if you need a mortgage, are a taxpayer, have higher maintenance etc. It will be great to have some more information like mortgage requirement, company/personal purchase, tax payer status etc.
Good lucky.
Sunny

Graham Bowcock

8:29 AM, 10th July 2018
About 3 months ago

Dear Nick

Echoing the thoughts of others, it is not clear what you are looking to achieve or why you are doing this and risking all of your spare cash in this way.

Higher value properties in general tend to have lower yields. In my area (north Cheshire) I would expect a house of this value to be achieving about £2,500-£3,000 per month, so your £1,850 looks low.

Have you thought of buying a greater number of lower value houses? That way your risk is spread. If you have the one large house and you are fully committed financially, what happens during void periods or rent arrears? Repairs may well be more expensive on the larger house and, of course, tenants may well be more demanding.

Speaking as a registered valuer I would say ignore the "original valuation" of £680,000. This sounds meaningless - why are you able to buy it for so much less? Answer - perhaps it's only worth what you are paying!

You need to read very carefully and your financial adviser is right to flag concerns. I suggest you speak with local agents about values, rents, yields, etc. to make sure that whatever you buy meets your objectives and be wary about over committing.

Graham

Clint

8:34 AM, 10th July 2018
About 3 months ago

A very definite no if your rental and increase in value are correct. I cannot see a much worse investment.

Laura Delow

9:07 AM, 10th July 2018
About 3 months ago

If you are investing with your emotion firmly locked away in a cupboard & you are just looking at the maths & assuming you don't know something we don't and you're not motivated by something we can't take in to consideration (not a back door residential purchase or a BTL purchase that one day in the distant future you plan to move in to whereby your emotion is key as long as you switch any outstanding mortgage balance to a residential mortgage), then my sums (assuming no monies are needed for works on this property to get it let ready) if buying at £635,000 with a rental income of £1850 pcm work out based on certain assumptions as follows:-
i) you are considering buying this with the help of a mortgage
ii) it's not an HMO (rental affordability calculations are tighter) iii) you are not a higher rate tax payer (= tighter rental calcs if you are)
iv) you won't own 4 or more buy to lets after this purchase whereby you'll be treated as a portfolio landlord (inside leg measurements & much tighter affordability assessments)
v) if you want a fixed (or tracker) rate for less than 5 years (again rental calcs are tighter for non 5 yr fixes) and finally...
vi) you don't have surplus earned income to support higher borrowing
........rental income of £1850 pcm nets down after:-
- 5-6% agent fees unless you take on the headache of self managing = circa £133.20 pcm
- buildings ins & rent guarantee ins costing say £25 pcm
- you save the recommended 20% of annualised rent to cover electrical 5 year checks, yearly PAT tests, yearly Gas Safety Checks, poss repairs, poss voids, adhoc redecoration costs = £370 pcm
= £1322 pm less circa £1,100 pcm mortgage payments = £222 pcm net (if eligible/want the maximum mortgage borrowing of 75% loan to value - see below) on which you'd admittedly benefit from mortgage interest tax relief albeit restricted to 20% by 2020/21.
With regards borrowing potential, £1850 pcm rent (subject to valuers comment) would result in you getting with most lenders if not taking a 5 year fix, a mortgage of circa £323,000 (circa £278,000 if a higher rate tax payer) = a deposit needed of circa £362,000 + £40,800 SDLT (it's possible to get up to 75% loan to value on a decent 5 year Fix if you meet the lending criteria = a deposit of circa £158,750 + £40,800 SDLT = £199,500 + Solcs fee/Val Fees/Lenders Arr fee latter of which can be added)
Based on this example, your answer lies in the question - does the net rental yield plus capital growth merit the capital required to buy today?

Darren Peters

9:24 AM, 10th July 2018
About 3 months ago

Not enough information to go on but assuming no positive or negative factors lurking in the background it's not a good deal. The seller who did the renovation is the one that'll probably make the money on this property. Did you look on the land registry to see the purchase price and when it was bought?
3.5% gross yield - before any taxes, mortgage payments, letting agents, broken boilers & voids - is just not worth it. Not worth tying up the money, not worth your time, not worth your stress. You can get 6% crowdfunding with a first charge on other people's projects for much less work so why take the harder, less lucrative path? Capital growth is a speculation and no substitute for good cashflow.
You say the property is renovated. Even assuming it's a really good job and not just tarted to sell the property, it's better to get a similar property that needs renovation for less money. Then you've added value to the property at the outset, you know the pipework isn't going to start leaking and you've designed everything to be tenant-friendly and tenant-proof. You've documented everything so when something breaks, you know how it's fitted and how to replace.

If you don't want to get into the renovation side, and there's nothing wrong with that, consider that BTL is not completely passive and can drag you in at unpredictable times in your life. Then contrast your 3.5% gross with the return on other investments out there.

Adrian Atkins

11:03 AM, 10th July 2018
About 3 months ago

Which is why you have a financial advisor! If you are not taking his advice, why have one? Save the expense and make your own decisions in that case.

Anthony Endsor

14:40 PM, 10th July 2018
About 3 months ago

Even with what little information is provided here, it has quickly become obvious this is a decision made with the heart rather than the head. If you invest in anything at all, whether it be property or anything else, you just can't afford to let your heart rule. I can see a number of reasons why your adviser has advised against this. You say your adviser has advised against buying more rental property, as if this is advice per se, which if this is the case you certainly don't want to be putting all your cash into a property of this scale. You could buy a number of smaller investments for this amount which would yield a lot more money, but if you have been reading comments on this site over the last year or two, you will see why many people are advising against investing in property at all now. Section 24, Licensing, to name but two reasons. I also think we may be edging towards the top of the mountain with prices now, and the market may well stagnate over the next year or two, meaning you could end up not getting back the price you paid for the property when you come to sell.

Michael Barnes

10:35 AM, 12th July 2018
About 2 months ago

It is going to take all my spare cash to buy it.

That alone would make it a NO in my view.

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