Is this a good investment?

[Andrey]

I’m buying a house this month in County Durham from a property company, £35000 cash, rent £368 per month.10% management. Property comes newly refurbished with tenant. Then refinance after 6 months, due to low value only 1-2 lenders will lend against it. I was at an event today, spoke to a property trainer, he said it’s a bad investment, that I won’t be able to get the money back out.. what do you think about it? Already paid reservation fee

 

[FWL]

If we do the rough figures, you will be earning gross rental income of £3974 per year after management charges. It is conceivable that within 10 years, assuming minimal increase in mortgage rates and a gradual increase in rental income, you could have the property paid off. Whether you could then use that as collateral to acquire other properties, even on a relatively low LTV, is may be an option worth considering?

The rental income on the property is in excess of 10% per annum even taking into account the 10% management fee. It is unlikely the property will increase significantly in value and there may be a relatively small pool of potential buyers further down the line. However, is it fair to call this a cash cow with a rental income of more than 10%?

 

[Andrey]

If we do the rough figures, you will be earning gross rental income of £3974 per year after management charges. It is conceivable that within 10 years, assuming minimal increase in mortgage rates and a gradual increase in rental income, you could have the property paid off. Whether you could then use that as collateral to acquire other properties, even on a relatively low LTV, is may be an option worth considering?

The rental income on the property is in excess of 10% per annum even taking into account the 10% management fee. It is unlikely the property will increase significantly in value and there may be a relatively small pool of potential buyers further down the line. However, is it fair to call this a cash cow with a rental income of more than 10%?

Management fee will be £40 to be exact leading to a gross rent of £328. The exact net yield would depend on which mortgage I can get (if I can get one) and the tax I have to pay. Due to the limited mortgage options available I am buying this in my own name not through ltd company so I can apply through Clydesdale which only lend to individuals (I’m a 40% taxpayer at the moment but my aim is to leave my job in a few years when I have a small amount of rental income putting me in a lower tax bracket).I am mainly investing for cash flow. The area has high unemployment and will be rented to DSS most probably, the property is fully managed and there is a high demand for rental homes from what I understand.

My main concern is that due to the value being under £50K it will be difficult to borrow against it. Clydesdale bank said they can lend against it after 6 months though I would need to go through a full application process and lenders have strict criteria which change regularly so nothing is guaranteed (they said I can borrow approximately 70% and the monthly payment would be £70 or so). The only other lender I am aware of is Together Money which charge a higher interest rate leading to a payment of £170 per month or so. I am buying it through a company called Readylet which will also fully manage it.

I am looking for something to provide cash flow long term so ideally I don’t want to sell it but I am concerned about leaving all the capital in the deal. It would be much better to get £328 per month return on £8750 if I can borrow 75% against the £35000.

You mentioned that I may be able to use this property as collateral to acquire other properties, could you please elaborate a bit more on how that would work? This is my first BTL.

 

[Karen R]

There are commercial lenders that will lend to you as a private individual and first time landlord, even on a property of this low value. Rates would be circa 5.35% pa they would want rental income to cover the mortgage repayments to 125% and the tenant to be on a formal AST agreement and they will consider up to 75% LTV.

 

[realdeals]

Hi @Andrey

Once you have paid off the mortgage on the property you should be able to use it as some form of collateral on a mortgage for another rental property. There may also be an opportunity to remortgage (might be difficult) and use the funds raised as a deposit on a more expensive rental property. Once you have paid up the mortgage there are in theory many ways that you can use the asset. Mnay people make the mistake of running a debt free rental portfolio when this may not be the most sensible course of action - purely from an investment perspective.

Mortgage interest relief is being phased out and as a higher rate tax payer you will be hit hardest - however, you can still offset mortgage interest against income if your properties were held in a company. Have you ever considered transferring your assets into a company? Maybe have a chat with your accountant?

 

[diyhelp]

If you assume , in a worst case scenario, it is a cash cow then in theory you could have it paid off in say 12 years or so. It must surely be worth something - even if just £20k - when using it as security for another investment further down the line?

This investment may not be attractive to those who want to be active in the market, but long term you will not get 10% on a savings account!

 

[Jason D.]

No, I think yes it is a good investment and you should buy this property.