UK: Rental Properties - Brutal Honesty Required!

[flamingcolacans]

Hi all,

Newbie Mustachian here with a question that I hope some more experienced people can advise on.  I want some outside perspective and potentially some grounding, as I have a horrible habit of getting caught up in an idea and not seeing the downsides before I've committed.  If you have time to read on and give me some feedback, I'd be grateful; be as brutally honest as you want to, I don't mind being told I'm being dumb.

I have a mortgage-free home and a part time job (slightly wobbly health means p/t is best for me - I have to spend my days off sleeping rather than being a badass, but the job pays enough for me to make do, in my fledgeling mustachian ways!)  I am considering taking out a mortgage on my home to purchase a rental property, to give me a small secondary income stream and act as an investment for the future.  The mortgage would only be 50% of the value of my home but would cover the rental property almost entirely.

Having looked at the figures re: what I know about my property, and the rental flat I'm looking at, I can see that subject to approval I should be able to get an 18 year capital repayment mortgage for which the monthly repayments are covered by the rental income while still leaving a fair bit left over to go into my savings.  The maths on the cost of the property and the amount the tenant (who already lives there and wants to stay) is paying place it at a 6.5% yearly return, before price negotiations.

I'd basically like your thoughts on this.  I was very much raised on the "go to uni! get a job! buy a house!" ethos as were most other people I know... I do have ISAs and a handful of stocks so far, and will be continuing to invest quite heavily along the way - but there's something about bricks and mortar that seems lasting and real and therefore kind of inviting.  I just don't want to let that upbringing cloud my judgement regarding this plan.

Something I should note is that I have owned a rental before, a long time ago, due to moving for work and letting out my previous house for some time while I decided whether I was really moving or coming back etc.  So I know some of the ups and downs of dealing with rental properties, tenants, letting agencies and all that... and also I do remember how pleased I was to see the back of my last mortgage, as it seemed like a shackle at the time rather than opportunity.  I am bearing that in mind.

So, yeah.  To get all mortgage'd up and buy a rental, or to Not Do That At All? What do you think?

[waltworks]

6.5% before maintenance/vacancy/other expenses sucks. Google the 50% rule.

-W

[flamingcolacans]

Maybe the area I'm in is not great for rental, but 6.5% is above average for the properties I've looked at based on current sale prices and current rental rates.

I understand the 50% rule but in my relatively short time as a (single-property) landlord, I must've been pretty lucky, because I didn't see anything like that level of loss.  I get that you plan for the worst and then it's a nice surprise when it's not that bad, though.

[arebelspy]

Maybe the area I'm in is not great for rental, but 6.5% is above average for the properties I've looked at based on current sale prices and current rental rates.

I understand the 50% rule but in my relatively short time as a (single-property) landlord, I must've been pretty lucky, because I didn't see anything like that level of loss.  I get that you plan for the worst and then it's a nice surprise when it's not that bad, though.

Yeah, that's called having a small sample size.  :)

In the short term it may run less, especially if it's a newer or just fixed up property (or more - some years my expenses on a particular property may be 100% of the gross - $4500 sewer issues can do stuff like that), but in the long run, especially with capital expenditures (new roof, HVAC, etc.), you'll probably see around there (with some variation, of course - some areas have cheaper taxes and insurance, for example, and it's really a 40% rule if you do your own management).

Always nice to have those years like you've had, so you can put the extra away for the bad years.  :)

[Shandi76]

Which part of the UK are you looking to invest in, flamingcolacans? I am a UK landlady and know you don't get the same yields a US investors look for in real estate. But we also have fewer expenses (e.g. tenants are responsible for paying council tax and utilities in the UK whereas in the US landlords pay the property taxes and sometimes also the utilities, and the type of construction common in the US means more frequent maintenance costs than for most types of U.K. housing stock).

6.5 percent yield is not bad for the UK market. I get 7.2 percent. I used to get about 12 percent on my first rental property but only because I bought it at the bottom of the marke (2001). Deals like that are not coming back any time soon as far as I can see.

[flamingcolacans]

I'm in Northamptonshire, Shandi76. I'd like to stay local to avoid having to shuttle up and down the country every time there's a problem to deal with.

I would like to see greater than 6.5% but that's based on current asking price - being able to essentially buy cash (as far as the vendor is concerned) should allow me a decent opportunity to offer less for the flat and up the percentage a little bit, but I don't think it'll quite get to 7.2%.  It's only flats round here that seem to get that sort of percentage, house rents are comparatively lower.

I just don't know whether I'm taking on more hassle than it's worth. In your position and looking back, would you do what I'm thinking of doing?

[daverobev]

2%, 50% rules DO NOT WORK for the UK.

Remember, in the USA and Canada, the landlord pays property tax, amongst other things. In the UK, insurance is lower, and the tenant pays council tax. Houses tend to be smaller, don't require a new roof every 10-20 years, heating systems are cheaper...

[arebelspy]

2%, 50% rules DO NOT WORK for the UK.

Remember, in the USA and Canada, the landlord pays property tax, amongst other things. In the UK, insurance is lower, and the tenant pays council tax. Houses tend to be smaller, don't require a new roof every 10-20 years, heating systems are cheaper...

There are places in the US where they don't work, and they tend to get less accurate the higher the rent is, as well.

Always run your particular numbers/scenario, don't just use a rough rule of thumb.

When you do run the numbers though, don't underestimate expenses/vacancy/management/etc.

That's why the 50% rule is good, despite it being merely a starting point - it helps people remember (or shocks them into realizing) that expenses can be... expensive.  If your expenses are only 20% of your rent, you're probably missing something.

[frugledoc]

I agree with dave that the 50% rule is not applicable to the UK.

I am looking at buying a buy to let with cash and would be happy with 5 - 6% .

I have looked at properties with around 10% yield but they are in depressing areas where you would get the worst tenants.

Seeing as I don't need the yield now I'd rather buy a nicer property in a nice area and just sit on it with a lower yield for 20 years.

I made large amounts of rental income on a london flat which I sold this year and have rented for 9 years where the yield was 4.5%.  This was despite having to fork out large amounts of charges every year.

[flamingcolacans]

Income-wise, it's going to be around that 6.5% p/a mark, and I'd lose around 2% of that in interest.  Actual numbercrunching wise, even if the costs were in the 30-40% of rental income range (which, outside of freak accidents [which of course need to be accounted for anyway] they shouldn't be), I can cover the mortgage and not be losing money.  I've done the maths, it's just the experience to know whether it's a good idea or not that I lack.

The only thing I'm torn on is whether it's essentially more hassle than it's worth.  I don't know, as I can't nip 10 years into the future and ask myself whether it was worth it or not.  Mind you, if I could do that, I'd probably not be looking at a one-bedroom flat...

[Shandi76]

flamingcolacans, I know nothing about the market in Northamptonshire. My experiences are in Scotland. I have also never bought properties with the intention of renting them out. What I do is buy somewhere to live, then pay off a large chunk of the mortgage and rent it out after buying somewhere else to live. In both instances, it made sense to rent the properties out, and the yield is better than I have been getting from my stocks and shares ISA or ZOPA. I also made a lot of capital gains on the first property (which was one reason I sold it just before the 3 year deadline before capital gains tax would kick in). I haven't seen any real capital appreciation on the house I bought 8 years ago, so it stays rented out to long term tenants.

My current rental is no hassle and I am happy with it. I pay a property manager 9.6% to manage it and it is totally hassle free. They arrange for gas and electrical inspections etc, do a 3 monthly inspection, collect the rent for me, advise me of any required repairs and send me invoices for them... They also did credit and background checks on the tenants, who take better care of the garden than I did, and my former neighbours have no complaints about them. It means I have a lot of equity that is tied up and could potentially be invested in other things. But it is great to have multiple income streams, and my shares are not doing so well at the moment and I don't have any better ideas for how to invest it.

I'm not sure about buying a 1-bed property as you are thinking of doing, unless it is in a desirable part of town. Actually, even if it is, people who rent 1-bed places may be more likely to move sooner so higher turnover. I had problems with my 1-bed property but that was because I managed it myself and it was in a run-down part of town which can result in more problematic tenants (mine had a gambling problem so was often late paying the rent, and was not good at cleaning...) My current rental property is a 3 bed terraced house less than 10 minutes walk from a train station but in a quiet cul-de-sac. Places like that can attract longer term tenants if you are lucky. 3 bedrooms is good as they will probably have young children who they won't want to uproot - as long as you keep the place in a good state of repair and don't aggressively raise the rent level.

I would consider buying in a different part of the country if I knew a suitable property manager in the area. I live 90 miles away from my rental property at the moment, but I know the area as I used to live there and know the property manager from that time. I am thinking of buying another property in the area. I would not buy something in the town I currently live in (other than the property I currently own and live in) as I think the market here is too weak to be a good investment, and would not buy 25 miles north of here as the market there is too overheated with minimal yields. If I were looking for capital appreciation I would take a gamble on a property in or near Aberdeen and accept the low yields and massive deposit required to meet the lending criteria for the rent covering 130% of the mortgage interest, but at the moment I can't justify a place that doesn't make sense without banking on capital appreciation.

[flamingcolacans]

Thanks for  the input, Shandi76, that's exactly the kind of "what I did/what I think" feedback I was hoping for!