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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: modusoperandi303 on March 24, 2013, 10:01:11 PM

Title: Rental property investment check up and the uk house price bubble?
Post by: modusoperandi303 on March 24, 2013, 10:01:11 PM
Sooooo I have been looking into buying in to a property in my local area in the uk and wanted to make sure that I have the mathematics behind the project in order to see whether I have the (potentially) correct margin of error calculated.

My situation is currently that I rent in a 7 person house at 391 per month (which has increased from 360 last year) in a small southern English city called Oxford with two large universities who's student population accounts for 40000 of the local population 165000 as of 2011 (25%!). The students by an large come from a wealthy backgrounds and it is not uncommon for parents to purchase homes for students to rent out to friends. There is a rule for the local student population which is that the students have to live within 6 miles of the university located right in the heart of the city centre which does mean that cheaper homes sell faster but there could be opportunities. I would like to be able to purchase a home and live in it for one year before moving out leaving the rental property financially self sufficient and a sound investment.

(I have looked at buy to let mortgages but the minimum deposit requirement for buy to let mortgages is at 25% of the house price which I will come to in a bit.)

The current idea I have been trying to work out is what price would constitute the 'right' one by Buffet standards and not a bargin price a la Benjamin Graham.


Current up front costs:

Additional purchasing costs: 2000 ( for the lawyers and one off purchasing expenses furniture...)
Stamp duty: 1% of house purchase costs below 250000 3% for above 250000.01p
Insurance:130 per annum
Deposit on a 10% mortgage: see below
Repayments on 25 year mortgage: see below
Council tax: (known as band b for type of house I would be purchasing) 1229.79
Income tax on rented rooms: 20% after 4250 per annum
You also need a license to rent rooms to 5 people or more so its 4 bedrooms would be the maximum.


Maintance costs are a unknown to me as I have no experience with home owner ship but I have read in early retirement extreme by Jacob Lund Fisker which state that it can run between 30% to 40% of yearly income?


rental Income per 10ft by 10ft room: 350 * 4 = 1400 per month * 12 = 16800 per annum.

All of the above is calculated without having to do any major renovation to a property.

So the current estimated annual costs to purchasing the house would be:

Year one costs without mortgage: 5869.79
year one profits without mortgage: 16800-5869.79 = 10930.21

Subsequent annual cost without mortgage: 3869.79
Subsequent annual profits without mortgage: 16800 - 3869.79 = 12390.21

So to earn a 10% return on a property in the post year one hit the annual costs of owing the house plus the mortgage would be 11637.19. Leaving 11637.19 - 3869.79 = 7767.40 for the mortgage, meaning I could afford to purchase a house for 147000 + a 10% deposit of 14700 making the house price I would be aiming at 161700 (which is close to the UK national average house price 162924).

Here is where I think I have got something seriously wrong the average quoted house price is currently for a small terraced house is quoted from 270000.00 on some of the cheaper streets to 350000.

With out a massive drop in prices I think I will have to drop the idea all together unless if I purchase a house at a loss and rent rooms to cover a certain proportion of the costs. Moving to a cheaper area is a current no no as I am a contractor who can only work at firms in a specialized niche which are local to the area. Moving east brings me closer to london which would enquire higher costs and moving south, west and north would add an extra hour minimum to my commutes as house prices do not drop to the national average under that driving distance.

So do you think I have identified a place where there could be a price correction in the next few years? or do I bite the bullit and start getting a house purchased regardless of the opportunity cost or do I wait seeing as I am only 25.

I would like to thank those who have taken the time to read this far in to this post as it is very long.

 
Title: Re: Rental property investment check up and the uk house price bubble?
Post by: Another Reader on March 24, 2013, 10:18:42 PM
You have not accounted for vacancy and collection loss nor repairs and capital improvements.  Applying the 50 percent rule of thumb, the free and clear capitalzation rate is 8,400/270,000, or 3.1 percent.  If you have 7,767 in principal and interest payments, you won't make anything on this property in cash flow.  This is NOT a good investment in my opinion.
Title: Re: Rental property investment check up and the uk house price bubble?
Post by: Taffy on March 24, 2013, 11:11:29 PM
Buy to let in Oxford at current prices? Not a chance!
Title: Re: Rental property investment check up and the uk house price bubble?
Post by: Prof Penny Pincher on March 25, 2013, 05:49:09 AM
Also while you may not need an hmo license you will almost certainly need planning permission, and that can be tricky and often has a cost.