Is 100% buy to let leverage a good idea or not?

by Readers Question

5 years ago

Is 100% buy to let leverage a good idea or not?

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Is 100% buy to let leverage a good idea or not?

I’m looking to do my first time buy to let by releasing c. £25,000 -£37,000 equity from my main residence and the remaining £75,000 to £113,000 on a buy-to-let mortgage to buy a 2 bed property costing c. £120,000 to £150,000. Is 100 percent buy to let leverage a good idea or not

Mark suggests always having 20% cash in the bank but that would mean delaying my purchase by 2 years.

Looking for advice on whether to get going now or keep saving?

Regards

Clod Hopper

Comments

Mark Alexander

5 years ago

Hi Clod

This is a good question to be asking, especially now the property market appears to be moving up in value again.

If you wait two years there is a chance that you will miss out on a growth spurt. You could also miss out on a crash though, none of us can predict the future with 100% confidence.

These are a few question to ask yourself.

1) Do you have a sufficient income to support any possible negative cashflow and if so, how secure is that income?
2) If your first ever tenant became a tenant from hell and wrecked your property, paid no rent for 12 months and cost you up to £1,000 in legal fees to evict how would this impact your finances?
3) Could you afford a new boiler if the one in the property was to break down?

If you are not confident that you could deal with all of the above then you would be taking a bigger risk than perhaps you should.

I know a lot of people who got into buy to let with 100% leverage and did very well though. They had bags of surplus income and chose not to invest the money into pensions. They had a lot of equity in their own homes and released that by remortgaging with the knowledge they could release more if property values didn't completely plummet. They used the funds raised by remortgaging as deposits on buy to let properties and raised buy to let mortgages to fund the rest. They had negative cashflow but it was affordable. The properties doubled in value after 10/15 years and they had made a massive return on their investment which in real terms was only the negative cashflow they had supported from their disposable income.

Therefore, my advice is to weight up the pro's and cons. If it goes well that's fantastic. If it goes badly and you end up having your home repossessed and making yourself bankrupt then you only have yourself to blame.

The remainder of my strategy, especially the lettings strategy used by my entire family is of course still available to you. If you would like to read my brothers version of the letting strategy used by the Alexander family see this link to his business >>> http://lettingagentsonline.co.uk/free-guide-to-finding-perfect-tenants-for-a-fiver/
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Vanessa Warwick

5 years ago

Hi Clod Hopper,

As is often the case in property, you can have your cake and eat it. 🙂

Buy a property in need of refurbishment at a steep discount.

Force the appreciation through the refurb.

Six months later, apply for a further advance up to 75% of the new value, and pull out your initial cash. Replenish your savings ...

Voila!

Omar

5 years ago

I am very new to this whole concept of buy-to-let. Whilst I agree there are many pitfalls, I also know of many success stories. I am 29 years old, I bought my property during the crash in 2010, and have seen the value of my 2 bed maisonette in London go up by 40k. I am thinking of taking out 30k in equity, and using that as a deposit on a buy-to-let in Manchester, with a purchase price of around 100k. I am hoping to get 3 bedrooms, and hopefully make around £850 a month before fees etc.

As I live in London I hope to use an agency to basically do everything for me, so I imagine they will be taking around 15% off that. That still will give me enough of a return to cover my BTL mortgage and also the monthly amount for my 30k advancement.

I imagine I wont make much in the way of capital gains for a property in Manchester, but income enough to pay off the property. With a big student population and young professionals, coupled with my 100k constraint, I feel this is likely to be my best bet.

Any thoughts or suggestions would be greatly appreciated.

Omar

Mark Alexander

5 years ago

Reply to the comment left by "Omar " at "10/09/2013 - 09:44":

Hi Omar

I think Manchester has fantastic prospects and will see capital growth as more businesses follow the BBC out of London.

You don't need to pay anywhere near 15% for full property management. Check out what £24.99 pcm + VAT buys you via this thread >>> http://www.property118.com/full-property-management-from-just-14-99-a-month/34413/ Since starting the discussion Property118 acquired shares in the company and I have been appointed a non-exec Director.

I also recommend you to read the articles in the Advice section of this website.

Hi Mark, I have a similar question - would your answer be the same?

I own a 3 bed flat in central london with no mortgage or other loans, now worth 550,000. In 10 years' time or therabouts, I would like to be able to buy a family house in central London, of the size & location which is now priced at about 1,500,000.

I am thinking about taking out a buy-to-let mortgage on my flat at about 60% ltv, and an additional mortgage on a new flat, to buy a second property which is worth 575,000 and has great potential to add value via refurbishment. The second mortgage would be at 40% ltv. This would mean we would be fairly highly leveraged and exposed to quite a bit of interest rate risk, which we are nervous about.

I would let the first flat to cover all mortgage expenses on the buy-to let (I think interest only - do you agree?). I would pay back the other mortgage with capital repayments, so that I can recover the full amount, plus the investment I put into it to refurb and add value. My plan would then be to sell both flats to invest in a family house in 10 years time. As per your advice, I would also consider interest-only on this property.

This is my first time considering property investments of this sort, but I would consider continuing to invest in buy-to let if it works well.

I'd appreciate your thoughts and those of others on the forum.

Many thanks

Neil Patterson

5 years ago

Hmmm,

100% leverage would be a fantastic idea against the property business as you would get an infinite return on capital invested.

However releasing money from your main residence is really like using your own cash only riskier as your Home is at risk if you do not keep up your mortgage payments.

Under FCA rules you should not accept advice from anyone regarding your residential mortgage unless they are suitably qualified and have completed a full fact find with you.

From your question I am guessing that if you proceed with this purchase you will have no surplus cash saved.

What happens then if you can't rent it out, get a void period, tenant goes bad, boiler breaks, roof leaks, get condensation and mold (very topical) need new white goods etc etc etc the list is endless.

You might say what are credit cards for, but the risks are high if you invest in property with no financial back up.

I have helped thousands of BTL investors in the past and this is the most common way of getting into financial difficulty.

Please heed this warning as I have been doing this in some form or another since 1993.

Mark Alexander

5 years ago

Reply to the comment left by "Owner > buy to let - er?" at "10/09/2013 - 14:26":

If you haven't already read the 14 articles in the Advice section please start here >>> http://www.property118.com/landlords-buy-to-let-property-investment-strategy/

Given that you have had the financial resource already to pay off your existing mortgage and amass access to significant capital I think your position is completely different but in some ways very similar.

Just don't leave yourself short of resource to fall back on. Remember that life is full of surprises and not all of them are nice ones!

I can also recommend this IFA/mortage broker >>> http://www.property118.com/member/?id=314

Reply to the comment left by "Neil Patterson" at "10/09/2013 - 14:36":

Thanks Neil,

I would have a small buffer of cash in the form of savings, and I would be releasing enough equity to cover the refurb on the second flat and provide a comfort level on the repayments. I would ensure that repayments on the BTL were well under the rent level as far as possible. And the cash released on my new primary residence would be only 30-40%.

Does this change your advice at all?

Many thanks

Mark Alexander

5 years ago

Reply to the comment left by "Owner > buy to let - er?" at "10/09/2013 - 15:12":

Just in case you have not seen them, we have two calculators on the website which you may find useful.

The first calculates yields, returns, viability and break-even interest rates - see >>> http://www.property118.com/landlords-buy-to-let-property-investment-strategy/calculating-rental-yields-and-returns/

The second is a buy to let mortgage sourcing tool - see >>> http://www.property118.com/buy-to-let-mortgage-calculator-2/

If you would like to leave a donation to support the running costs of this forum please see >>> http://www.property118.com/donations/
.

5 years ago

Why don't you guys ask some people who HAVE gone bankrupt what their advice would be? I had no bills for 2 years then £18,000 in 3 months and insurance refused to pay. I learned my lesson just in the nick of time. I barely survived and the impact on my family life was terrible..

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