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

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

8:12 AM, 2nd December 2013, About 11 years ago 16

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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


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Comments

Mark Alexander - Founder of Property118

11:28 AM, 2nd December 2013, About 11 years ago

Reply to the comment left by "Jerry Jones" at "02/12/2013 - 11:08":

Hi Jerry

I think it's horses for courses. Generally I prefer houses and bungalows as that's what's in demand in my area.

I can't get houses and flats to make any financial sense based on my criteria if they are in London, hence I've avoided the area until now. If I was still buying I would certainly consider the types of deal I highlighted in my comment above though.

The research I did took me less than 20 minutes by the way. That said, I did have some core data to go on based on what my stepson had told me about capital values and rents. If you do some similar research in the areas you have mentioned I would be grateful if you would post your findings in a similar format used in my comment.

The high end does generally have a ripple effect on values but I think the very high end London properties which sell to foreign investors at seven figures plus are a bit of a "tulip mania" style bubble - see http://en.wikipedia.org/wiki/Tulip_mania
.

Yvette Newbury

19:22 PM, 2nd December 2013, About 11 years ago

I would choose London every time. With your amount of cash you could get a 65% buy to let mortgage, so get the best interest rate. Choose an interest only mortgage and put all the interest down against your rental income on self assessment. Once you have completed on that flat and it is rented out save the additional rental income (less mortgage and your expenses) and, depending on how much it has cost you to set up that property to rent out, you will soon have enough deposit saved for another property and can apply for another mortgage for an additional property.

If you use all your cash now you may not be able to buy the additional property as quickly, and as the interest paid is set against tax you may as well use their cash rather than yours.

Once you have these two, you may like to save the additional rent towards paying down the interest only mortgages against future interest rate hikes. Put it aside but don't actually pay it towards the mortgage If the increase doesn't materialise, then you will have a nest egg to buy another one. If the increases may you feel uncomfortable though, you will then have the savings to pay your mortgages right down - you can always then extend them again in the future if you find you want to buy another property perhaps.

That's my approach and so far so good!

Mark Alexander - Founder of Property118

20:37 PM, 2nd December 2013, About 11 years ago

What did you think of my suggestion Yvette?

20:55 PM, 2nd December 2013, About 11 years ago

Yes, I certainly agree about the tulip bubble scenario and am nervous about what would happen to the London market as a whole when it pops.

DA10 is the local postcode to Ebbsfleet. Terraced props sold this year in that postcode run from £125k to £175k so it should be posssible to buy something in need of minor fettling below the Stamp Duty threshold. The only one currently on offer is http://www.rightmove.co.uk/property-for-sale/property-41541316.html but that is just Rightmove. Let's assume we need to pay £125k. Property Bee says it's been listed since only the 7th of November but with savings of £150k our friend could be a cash buyer and easily get 10% off this or something similar.

Asking prices for rents vary from £675 for http://www.rightmove.co.uk/property-for-sale/property-41541316.html to £800 for http://www.rightmove.co.uk/property-to-rent/property-28720506.html over five 2 beds so 700 ought to be achievable. At this stage I'd want to chat to some letting agents in the area to get a feel for what they lik to let and what is a realistic expectation. According to Property Bee none has been on for much more than a month, which looks like a buoyant market to me. That makes £8400 per annum gross.

Let's do the numbers: After 6 months it should value to at least £130k if some minor work has been done to add value and if the South-East market carries on upwards. Let's look at a 75% LTV loan based on £130k. That's a £97500 loan and I see TMW offer 4.09% with a £995 fee for a 2 year fix. Let's plug that into the Landlord Calculator. As there is no ground rent or service charge, I am allowing 20% for expenses. A well run house let should manage at least a couple of years between tenant changes so this should be on the pessimistic side:

Property value £130000

Monthly rent £700

Gross rental yield is calculated as 6.46%

The amount of mortgage/loan currently outstanding is £98495

Therefore your LTV has been calculated at 75.77%. LTV stands for "Loan to Value". It is your loan expressed as a percentage of the value of your property. This is also known as gearing. It's important to know this when you are looking at which mortgage products are best suited to your requirements.

Your Gross equity is £31505. Equity is the money you would get back if you were to sell your property after repaying your mortgage, assuming your estimates are correct of course. Note that you would probably have to pay an estate agent or an auctioneer and also a solicitor too so not all of this money would end up in your pocket if you were to sell.

The interest rate you are currently paying is 4.09%

Mortgage cost £140 (based on interest only paid monthly)

You estimate that 20% of your rental income will be required to fund the costs of; insurance, 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). This equates to a monthly cost of £140

Your monthly cashflow based on the interest rates you are paying now is therefore £224.3

Based on these figures your return on equity is 8.54%. This is your net annual cashflow expressed as a percentage of the equity you have in your property. This calculation is also referred to as; return on cash, cash on cash return, return on capital employed/invested, ROC and ROCI. NOTE - if you have zero or negative equity the this figure is not relevant.

This property breaks even when interest rates hit 6.82%

And now you have £97500 back to finance your next investment - probably using a mortgage from th outset if all has gone well and you are now more confident.

Yvette Newbury

20:55 PM, 2nd December 2013, About 11 years ago

Reply to the comment left by "Mark Alexander" at "02/12/2013 - 20:37":

I haven't had a chance to look at the equity loan you mention, but otherwise, yes all good. I completely agree that London properties do not have to cost a fortune. A 2-bed flat opposite mine sold for £100,000 only 2 years ago and rents out at £1,500 a month gross. But on the other hand, recent 2-beds valued at £250-£275,000 are now going under offer in our area for over £300,000 - nearly all under sealed bids, it's scary out there right now in London! I was looking for another property but am now sitting tight until things calm down a bit, Prices are up 15% over one year around here..

Jonathan Clarke

0:06 AM, 3rd December 2013, About 11 years ago

Hi Fran

I`ve invested in Milton Keynes for the past 14 years. If you want to make serious money in property I personally would leverage up. Do it at a pace that you feel comfortable with but leverage up nevertheless. If you are confident in buying one property that makes you money then you have your successful business. All you are doing is replicating that business. Think of it like a franchise maybe. Is there only one MacDonalds restaurant .

So its your fear you have to work on. The figures work we know that. I know that and the banks know that. They are not crazy. They are happy to lend you 75% of a property because they know you are onto a good thing. Gold is quite a good investment to but try getting 75% LTV against gold. It aint going to happen. Property yes. Ensure you have a contingency fund and keep your cash flow positive so you sleep at night.

Interest rates will go up at some point so factor that into your calculations. Its a known fact so deal with it at the outset and it wont surprise you. Stress test your portfolio for different scenarios . Once you have covered every possible angle your fear will ease and excitement will take over.

Fear then excitement . Keep it in that order . Good Luck

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