Buy to Let - House or Flats?


S

shaun

Hi,

I am trying to build a buy to let portfolio. I have a house worth
£170k / £175 and £55k / £60k equity. It generates £675pcm in rent
and I have an interest only mortgage of £540pcm. I bought the house
for £137k 2 years ago and spent £15k on refurbishing.

The problem is I am unable to use the equity in the house as I cant
remortgage because the rental income isnt sufficient to match the value
of the property. My financial advisor says I should sell and buy 2 / 3
flats as the rent incomes are inline with the property values. My
accountant says I should keep the house a for few more years as the
transaction costs would wipe out any profits.

Any advice would be greatly appreciated.
 
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R

Ronald Raygun

shaun said:
I am trying to build a buy to let portfolio.
Why? More to the point, why now?
I have a house worth
£170k / £175 and £55k / £60k equity. It generates £675pcm in rent
and I have an interest only mortgage of £540pcm. I bought the house
for £137k 2 years ago and spent £15k on refurbishing.

The problem is I am unable to use the equity in the house as I cant
remortgage because the rental income isnt sufficient to match the value
of the property.
Yup. Your rent is only 125% of your mortgage payments (presumably
interest-only) and that is a typical lending limit.

Your loan seems to be for £115k, and so your interest rate is
about 5.635% which is not bad going.

Your yield is only about 4.7% which isn't brilliant, and might
be more if your valuation is optimistic, but are yields on flats
(as opposed to houses) in your area really bigger than that?
By enough of a margin to make a major investment decision?
My rental flat (in Edinburgh) has about the same yield as your
house, although to be honest I have no idea how accurate my
estimate of its value is.
My financial advisor says I should sell and buy 2 / 3
flats as the rent incomes are inline with the property values.
What does "inline" mean?

One way of extracting a bit more equity is to find a tame letting
agent and dangle a carrot in front of him. Suggest you would use
him to market/manage your next property. Then get him to write a
letter "to whom it may concern" (to be shown to your lender)
expressing the opinion that your house should fetch a rent of
£775. You don't actually ahave to put the rent up to that,
but the agent's opinion will let you borrow more. £100pm extra
is £1200pa which is 125% of £960 which represents the annual
interest on an extra £17k of borrowing. That ought to be enough
to get you an 80% mortgage on an £85k flat.
My
accountant says I should keep the house a for few more years as the
transaction costs would wipe out any profits.

Any advice would be greatly appreciated.
If your "financial advisor" is the person trying to flog you more
loans, I'd be more inclined to trust your accountant more.

Do you own your home? Could extract equity from *it*?
 
M

marmurr1916

shaun said:
Hi,

I am trying to build a buy to let portfolio. I have a house worth
£170k / £175 and £55k / £60k equity. It generates £675pcm in rent
and I have an interest only mortgage of £540pcm. I bought the house
for £137k 2 years ago and spent £15k on refurbishing.

The problem is I am unable to use the equity in the house as I cant
remortgage because the rental income isnt sufficient to match the value
of the property. My financial advisor says I should sell and buy 2 / 3
flats as the rent incomes are inline with the property values. My
accountant says I should keep the house a for few more years as the
transaction costs would wipe out any profits.

Any advice would be greatly appreciated.
 
M

marmurr1916

Hi,

Sell it - buy cheap flats in Aberdeen or Dundee - check out these sites
for an indication of prices and potential rental incomes:

www.aspc.co.uk (Aberdeen Solicitors Property Centre - covers Aberdeen
city & county)
www.tspc.co.uk (Tayside Solicitors Property Centre - covers Dundee &
surrounds)

Check out rental levels for 1-bed flats with local letting agents -
their estimates will probably be slightly conservative - you could add
around 5% to their figures.

Good luck!
 
M

me

In message said:
Hi,
Sell it - buy cheap flats in Aberdeen or Dundee - check out these sites
for an indication of prices and potential rental incomes:
www.aspc.co.uk (Aberdeen Solicitors Property Centre - covers Aberdeen
city & county)
www.tspc.co.uk (Tayside Solicitors Property Centre - covers Dundee &
surrounds)
Check out rental levels for 1-bed flats with local letting agents -
their estimates will probably be slightly conservative - you could add
around 5% to their figures.
Good luck!
Personally, I wouldn't buy something to rent out in an area I didn't
know, or that was too far away for me to be able to take over in case
something did go wrong. In this thread we are talking about turning one
let property into two, so I presume its rather essential to get it
right, which is easier to achieve in your own area, where you know what
local demands are. Another thing to consider if looking at 1 bed flats
is they may produce a higher yield but their value tends to be more
volatile.
 
M

marmurr1916

Personally, I wouldn't buy something to rent out in an area I didn't
know, or that was too far away for me to be able to take over in case
something did go wrong. In this thread we are talking about turning one
let property into two, so I presume its rather essential to get it
right, which is easier to achieve in your own area, where you know what
local demands are. Another thing to consider if looking at 1 bed flats
is they may produce a higher yield but their value tends to be more
volatile.
Hello everybody,

I've lived in Aberdeen since Sept. 2003 and I first invested in the
area in 2001. By now I know the city and surrounding towns quite well
and would be more than happy to give advice to anyone about investing
in Aberdeen. Just post here or email me.

I take your point about 1-bed flats, although there are still
reasonably priced 2-bed flats available in Aberdeen. Like many larger
Scottish cities/towns, a very high proportion of the population live in
flats, a much higher proportion than in equivalently sized English
cities/towns. Scottish people are therefore much more used to living in
flats than English people. Here in Aberdeen, the norm is for many
people in their 20s (and now up to early/mid 30s) to live in flats
until they decide to have kids. There is also an excellent rental
market with two Universities, a large hospital and lots of people
working in the oil industry looking to rent. Yields are excellent
(some of the highest in the UK) and property prices increased on
average 18% last year alone (and have been increasing in double figures
annually for the last 5 years at least). Another advantage is the ease
and speed of property purchase/selling under the Scottish system
compared to the English system.

Investing in well-presented flats in 'good' areas close to the city
centre, the University of Aberdeen, or the main hospital (Aberdeen
Royal Infirmary) would be a wise move; trust me I've done it!

I wouldn't worry too much about not being close enough to Aberdeen to
manage the property. I previously lived in Ireland and had no problems
with properties managed by a local leasing agent - just make sure that
you get a thorough, experienced agency who spend time and effort to
select good tenants. You can ask the agents to put you in touch with
current clients so that you can check the standard of their service.
Any good agency should have no problem with such a request.

One final point: a lot of people base their opinions of buy-to-let on
their experiences with more expensive properties in larger English
cities, and make judgements about the UK buy-to-let market based on
these experiences. Just remember - there is NO UK buy-to-let market!
Each market is local and different and just because there are problems
in some places doesn't mean that all places are having the same
problems.

Again, good luck!
 
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F

Frank

You could sell your house and buy it back in 2 years once the value has
fallen to about £80K?
 
N

Nebulous

marmurr1916 said:
Hi,

Sell it - buy cheap flats in Aberdeen or Dundee - check out these sites
for an indication of prices and potential rental incomes:

I'm not sure Aberdeen is a good idea. It is awash with rental properties.
Twenty years ago it was quite common to get £450 p.c.m. for a one bedroom
flat. My daughter is currently renting a 3 bedroom granite flat for that
amount. The landlord could get more, but he doesn't want the hassle of
registering as an HMO, so he lets it to two people instead of pushing for
more.

Its also much more difficult to manage it yourself if you are a long way
away, as I presume the OP is.

Neb
 
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M

marmurr1916

Nebulous said:
Twenty years ago it was quite common to get £450 p.c.m. for a one bedroom
flat. My daughter is currently renting a 3 bedroom granite flat for that
amount. The landlord could get more, but he doesn't want the hassle of
registering as an HMO, so he lets it to two people instead of pushing for
more.

Its also much more difficult to manage it yourself if you are a long way
away, as I presume the OP is.
There are a lot of rental properties, but there are also lots of people
renting. The number of new immigrants from the new EU member states is
very high, the increase in student numbers at the two Universities, and
increased numbers of staff amongst big public sector employers (many of
these staff aren't paid well enough to afford to buy), along with the
fact that it takes the average Scottish FTB over 4.5 years to raise a
deposit (probably longer for Aberdeen), means that rental demand
continues to hold up well. Rents are holding steady: there haven't
been any big increases over the past few years (just in line with
general inflation), but neither have there been any falls.Current
rental levels for 1-bedroom flats are anywhere from about £280 up to
£475 depending on the area and the quality of the individual flat.
Your daughter's landlord doesn't sound very professional - he could get
much better rents if he registered the place as a HMO and kept it in
better condition (I assume its a student flat), although your daughter
has nice cheap accommodation!

There's no need to manage a property yourself - get an agent. True,
their fees will eat into your profits, but considering the rental
returns (recent national suvey shows that Aberdeen has near the best
rental returns in the UK), and potential capital gains (18% average
price rises last year; rises in double figures for previous five
years), its worth a punt. You can check the history of individual
properties on this site:

www.nethouseprices.com

The site's free to use and gives information on actual selling prices
for England, Wales and Scotland from 2000 onwards. You can trace the
sales price history of individual properties (just make a note of its
Title Number) - I've done this for several properties and was
pleasantly surprised by the level of increases in sale prices over
these five years.

Of course this could all change, but that's a risk that you'll face in
any property market, and Aberdeen (and Dundee) are a hell of a lot less
risky than Bulgaria etc!

All this assume of course that the OP is looking to invest for the long
haul and not just looking to make the elusive quick buck.
 

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