First timer – buy cash or take buy to let mortgages?

by Readers Question

8:12 AM, 2nd December 2013
About 7 years ago

First timer – buy cash or take buy to let mortgages?

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First timer – buy cash or take buy to let mortgages?

I’m so glad I found this forum as I have been trying to decide for months what I should do – buy a property outright or take out a mortgage and buy to let ….

I have a property I bought (and live in) in central London – no mortgage now, worth roughly £400k. I have savings of around £150,000 but am nervous about taking out a mortgage.

Ive been toying with the idea of buying a couple of properties for say £50k each (outside of London) and holding onto them as long term investmests. However, looking around as I have been doing I think I could get a London property for £250k. So my questions really are: First timer - buy cash or take buy to let mortgages?

  • Should I use the cash to buy these properties and thus steer away from banks and mortgages (renting them out)?
  • Should I get a mortgage on my salary and buy a property for £250k and use some/all the cash as deposit?
  • From the forums it looks like I could get BTL mortgages and set about more properties?

My biggest fear is loosing the savings or taking a risk on interest rate charges next year or so….

Lots of questions!

It seemed straightforward in the beginning but the more I delve into the options the more I’m going around in circles!

I would just like to get started!

Any help or pointing in the right direction would be a massive help.

Many thanks

Fran

Comments

Mark Alexander

8:48 AM, 2nd December 2013
About 7 years ago

Hi Fran

I can understand how complex all of this stuff can be to a newbie, it took me 20 years and I still learn new things every day. There is no rush, take your time to understand the business before you jump in both feet first. Mistakes can be very costly in the property business. BEWARE guru’s charging fees for “get rich quick” property courses. There are lots of very slick conmen out there and it all starts with a free seminar.

To make life a bit easier for myself, and to save answering the same questions over and over again, I created a series of article entailed “How To Become A Landlord” which covers all the basic fundamentals including the questions you have raised and much more. Please see >>> http://www.property118.com/how-to-become-a-landlord/60765/

Have a good read and then do your research into various areas. London properties need not cost a fortune. My stepson is living in Charlton whilst he is at Uni and walk to the University of Grenwich daily. He shares a two bed flat with his girlfriend and a house mate and they pay £950 pcm. The capital values are circa £150,000 giving a gross yield of 7.6%.

I have run these figures through our Landlords Calculator and based on a 60% mortgage with the Principality Building Society at 1.99% the figures come out as follows.

Purchase price £150,000

Deposit £60,000

Mortgage £90,000

Rent £950 pcm

Gross yield 7.6%

Allowance for other costs £237.50 pcm. This is 25% of rent to be used as a budget for costs of advertising/letting, management, Gas checks, maintenance, ground rents, service charges and void periods (lost rent due to arrears or when the property isn't let.

Monthly cashflow £563.25

Return on capital invested = 11.27%. This is your net cashflow expressed as a percentage of your capital invested (excluding borrowings and any capital growth)

Breakeven interest rate 9.5%

After an initial 6 months you could look to withdraw £30,000 of your capital through an Equity Loan, see >>> http://www.property118.com/equity-finance-for-buy-to-let-landlords/44713/ This would not affect your monthly payments and would increase your return on capital invested to 22.54%.

You can find properties like this in SE7 6PX. See our Property Research Tool for more details and also to use the landlords calculator I used to provide the above figures >>> http://www.property118.com/property-search-tool/

I wish you well and please feel free to post further questions.
.

9:14 AM, 2nd December 2013
About 7 years ago

Hi Fran,

The general consensus is that the true way to wealth through property is to LEVERAGE!

Leverage other people's money ... the banks to fund 75% of the purchase ... and the tenant's money to pay the rent to service the mortgage.

On Property Tribes we have a very helpful thread called "Get gearing to get rich" which explains in wax crayon the power of leverage in BTL.

http://www.propertytribes.com/get-gearing-get-rich-c-jonathan-clarke-t-6955.html

With regards to buying a property in London or two cheap properties up North, I would say London every time.

It's a very stable and potentially growing market and properties closer to home in an area you know are always going to be less hassle than something miles away where you have no clue about the area.

If you are of a slightly cautious nature, why not buy at 50% LTV and then you can sleep at night knowing you are covered for interest rate rises etc?

Property is not a case of "one size fits all", so be sure to make it work on your terms and for your circumstances.

The best way of doing that is to spend a lot of time doing due diligence and research and leveraging the knowledge and experience on forums like P118 and Property Tribes. 🙂

Gareth Thomas

9:41 AM, 2nd December 2013
About 7 years ago

If you've got zero experience being a landlord/landlady I strongly suggest before you buy ANYTHING that you go on a course run by the National Landlords Association to see what's involved first.

Then if you're comfortable you can deal with your legal responsibilities and the agents (as you have to manage them too so best you know what they don't know!) start by buying ONE property first and cut your teeth on that one.

Mark Alexander

9:57 AM, 2nd December 2013
About 7 years ago

Reply to the comment left by "Gareth Thomas" at "02/12/2013 - 09:41":

Presumably you are referring to the Landlord Accreditation course Gareth?

I believe this costs £150 and is excellent value for a one day course.

It's not just the NLA that run these and many of them are passportable. Also see http://www.londonlandlords.org.uk/portal/index/ and the much cheaper online version run by The Guild of Redidential Landlords https://www.landlordsguild.com/quick-links/services/accreditation/ which sadly isn't passportable as there is no way of other schemes being able to verifty who sat at the end of the PC to complete the course.

For landlords in the Midlands see http://mlas.org.uk/

for Wales see https://www.welshlandlords.org.uk/

and for the North see http://www.rla.org.uk/lanetwork/landlord_area.shtml?a=accreditation
.

Jerry Jones

10:31 AM, 2nd December 2013
About 7 years ago

London seems to me to be another world and one I don't like or understand, driven as it is by overseas investors at the top end. If the international situation changes they may no longer have the incentive to buy in London.

Why not look at buying in the commutable bits of North Kent? Not far from home but on the face of it, numbers that work more like the Midlands or North. My suspicion (from owning four of them) is that 50 grand houses in the North are more trouble and not as profitable as they look at first sight. If I were starting again I'd pay slightly more and get better houses and tenants, in places where it is easier to let. I think I'd be looking at paying 70-80k.

Maybe look at 60% mortgages on 150 grand props so as to have plenty of protection against rising rates?

Mark Alexander

10:35 AM, 2nd December 2013
About 7 years ago

Reply to the comment left by "Jerry Jones" at "02/12/2013 - 10:31":

Hi Jerry

I'm not sure whether you read my reply but 60% mortgages on £150k properties is achievable in London and these properties are unaffected by the top end international buyers.
.

10:37 AM, 2nd December 2013
About 7 years ago

Hi Fran

At some point you are going to need to make a decision on whether to manage the properties yourself or to use a letting agent to manage them for you. There is, however, a hybrid scenario which you should at least consider. Please take a look at the article linked below.
.

Jayne Owen

10:52 AM, 2nd December 2013
About 7 years ago

Hi Fran,

There is little I can add to the comments already made, other than to query whether you would prefer capital gain or cash flow, or a combination of the both. Buying in the south east will be better for capital gain, and you can get cash flow as well as Mark has pointed out. Further north and west, cash flow might be better (depends on where you look), capital gain much slower, but you will be able to buy more cash flowing properties with your money.

Buying closer to home is always a good idea for the first couple of properties at least, until you find your feet as a landlord. Even if you outsource lettings and management to an agent, there will still be things that need your attention.

Like Gareth and Mark suggest, I would also recommend becoming an accredited landlord - the cost for a 1 day course is negligible compared to the amounts involved in property investment, and you will be aware of landlord responsibilities from day 1.

Jerry Jones

11:08 AM, 2nd December 2013
About 7 years ago

Reply to the comment left by "Mark Alexander" at "02/12/2013 - 10:35":

Do you not think that the whole market at all levels gets pulled up by the top end stuff? I suppose it's arguable that it pushes some mid-range people down into the lower end stuff. But this is presumably a flat. I'm very firmly a house investor for a variety of reasons, mostly to do with control of my investment. I know there are terraced houses to be had around Ebbsfleet, Northfleet and similar at that figure, although it's not an area I have researched beyond the very basic numbers.

Fran Mathews

11:10 AM, 2nd December 2013
About 7 years ago

Thanks folks - excellent advice.

Yes I will definitely go on a landlords course and understand the responsibilities involved.

I am happy to invest now for the long terms and ensure the rent pays the mortgage/covers cost but expect to have a rainyday fund for extras that might go wrong.

Ive been looking around penge/lewisham areas and possibly take a punt on abbey wood environs. Would prefer to buy a house as it may be more manageable.

Area wise, i know milton keynes a little bit and understand there may be more growth in that area..

Thanks for all the advice, I continue to research!

Fran

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