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Equity into buy to let?

tntcoder

tntcoder

tntcoder

Soldato
Joined
7 Apr 2004
Posts
4,211
Hi,

Say you have 50% of your mortgage paid off on the right side of 30. What are peoples thoughts on removing say 20k equity and putting it into an ~80k studio apartment buy to let mortgage.

My thoughts being that 80k mortgage with 20k deposit would be maybe £300 a month. That's likely rentable for £500+ and assuming you can find tenants easily enough, after a few years your 20k input has hopefully grown somewhat.

I'm probably simplifying things massively here, but is it quite common to remove equity and 'put it to work' or does it make more sense just to sit on it and keep the interest payments on the primary mortgage low?

I guess the main hurdle would be if you decided to move house, then likely all equity would need cashing in for the new house.

Thanks!
 
In your costs include the additional cost to your mortgage.

Flats are a pain , BTL lenders don't like anything over 5 storeys, they are a pain to sell and can come with hidden 'management' or 'repair' charges.

We were looking at a few some time ago but cold feet, they are still for sale now, unless they are special they do take a while to sell which isn't great if you want your money out quick or you decide it isn't right for you.

The only flats I'd consider is part freehold in small numbers, say a house converted to 3 flats and you buy up all the part freeholds over the years and end up with the entire freehold.
 
The most important thing to remember is can you afford it if its not rented out. Tennant's can be a real pain in the backside so its also buggeting in letting agent and management agent fees which are about 10% of the rent. I'm in a not to desimilar position of having s btl property but thankfully my Dad takes on the responsibility of looking after it such as when the boiler packs up or theres a leak etc as he's only around the corner. If I didn't have him helping me I don't think I'd bother with it.
 
I wouldn't look at btl as a good form on income, its a pain to be honest. The only people I know that do well out of it manage the properties themselves and have more than one. I know an old couple have have 7 and do it all themselves, from decorating to handling the tenants and they enjoy it / make a good retirement income out of it.

I have a property let but I brought it for my own and then when I moved in with my lady I kept it on as a fall back. Three years later I've had enough of it, its never made any money but on the plus side its returned in value to a point where I can sell it and get my deposit back so this will me my last year of being an "evil landlord" type.

Keep your equity in the current house is my advice.
 
I'm looking to do exactly this. Bought my house two years ago at 90% ltv. Today it's sitting at around 75%ltv because the property has gone up in value.

Looking to release equity back up to 90%ltv enough to buy two 80k houses at 75% ltv.

With Income of 500 per house with interest only mortgages of 190 I expect to get around 5-6k a year after costs between the two. This will sit as an emergency repairs fund until it builds up with other savings to buy more houses. It's defiantly a numbers game. remortgage to get more houses and in 10 years I will start paying the capital down on the rentals.

This is for retirement planning not trying to make a quick return.

That's the blue sky approach see if comes off.
 
Pointless repaying the capital. Take as much out of each as you can up to your capital gains tax threshold year on year and re invest. If there's you and your partner you can squirrel away 22k a year into tax free isa's

I wouldn't want to be building a nice pot of money for the government to take in tax when you do finally sell.
 
spm_uk said:
I'm looking to do exactly this. Bought my house two years ago at 90% ltv. Today it's sitting at around 75%ltv because the property has gone up in value.

Looking to release equity back up to 90%ltv enough to buy two 80k houses at 75% ltv.

With Income of 500 per house with interest only mortgages of 190 I expect to get around 5-6k a year after costs between the two. This will sit as an emergency repairs fund until it builds up with other savings to buy more houses. It's defiantly a numbers game. remortgage to get more houses and in 10 years I will start paying the capital down on the rentals.

This is for retirement planning not trying to make a quick return.

That's the blue sky approach see if comes off.
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Bear in mind you are assuming you have tennants throughout this period and also rental demand stays as it is. It's always a risk though.
 
SamuearlJackson said:
Don't forget to take into account the new taxes announced in the budget which makes BTL with borrowed money significantly less attractive in the future.
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So whats the deal with this then? I've not had time to look into it properly.


I've got a property that I let. I'm just about to go through my first tenant change as the current ones are moving out and I've got a few potentials lined up. I've decided to give it one more go and if I have issue I'll just sell and take the equity out - it's on about 50% with an interest only mortgage - .99% above base so is very cheap. It offsets my home mortgage by half so it's worked well for me.

However, I've considered taking out equity and buying more but then it becomes more of a punt on the property going up in value rather than additional income. Prices in the area are low anyway (West Wales) and with the closure of the refinery it's taken the last two years of growth out of the market.

I would also look into the BTL mortgage market - it's not like it was years ago where you just took the 10% the house value increased and chucked it on another house. I have a mate who did this and he has 11 all told, makes a decent penny out of it but he bought small easy rent properties. I have another mate who kept going bigger and bigger and has a property worth £800K but mortgage debt of £1.4m - he only just manages as the property is in Tenby and rents for quite shocking amounts per week in the summer. One property he bought for £400K he can't even afford the upkeep and half of it is no longer suitable for habitation.

You get so much house for your money round here though. £300K gets some fine houses. My old man lives just outside Oxford and £300K gets a little 3 bed semi on a warren of a housing estate.
 
maccapacca said:
Pointless repaying the capital. Take as much out of each as you can up to your capital gains tax threshold year on year and re invest. If there's you and your partner you can squirrel away 22k a year into tax free isa's

I wouldn't want to be building a nice pot of money for the government to take in tax when you do finally sell.
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What do you mean by "take as much out each year"?

You mean re-mortgage?
 
EddScott said:
So whats the deal with this then? I've not had time to look into it properly.
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The tax changes will be phased in over the next four years but by 2020 the following will be fully in place, as far as I understand it:
1) Rental income gets added to normal taxable income (this could easily push one into the 40% tax bracket if one is not already in it and could also have consequences if one claims child benefit and/or tax credits).
2) Upto 10% of rent can be deducted from taxable income for allowable expenses but must be backed up by receipts.
3) Mortgage interest only gets tax relief at the 20% rate.

A back of the envelope calculation for a £200k house with 4% £180k interest only mortgage renting for £1000pcm (6% yield), assuming no upkeep costs and a 40% tax payer:
Now - £12000 rent minus £7200 mortgage interest gives £4800 profit that you will be taxed on. At 40% rate that would leave a profit of £2880.
Future - £12000 rent taxed at 40% (£4800) but you get back 20% of the mortgage interest on the tax bill (£1440) so overall tax of £3360 on effectively a profit of the same £4800 (about 70% tax in this case!) leaving £1440.

If interest rates go up, as Mark Carney intimated might start to happen at the turn of the year yesterday, then the calculation gets worse. The more leverage you have the worse the calculation gets, especially for those with lots of properties but not much equity.

Hope this helps.
 
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Here's a case where the landlord gets stuffed by the new tax.

Assume £1million in rent with £900k mortgage interest:
Now - £100k profit gets taxed (at 40 or 45%) leaving £60k or £55k.
Future - £1million taxed at 45% (£450k tax) with 20% of £900k taken off tax (£180k) leaving a tax bill of £270k when there was only a £100k pre-tax profit meaning a £170k loss!

This person needs to sell before other leveraged buy to letters flood the market over the next 4 years, potentially causing a supply glut and reducing prices. 40% cap gains tax would need to be paid if the properties had increased in value too.

This is an extreme case, of course, but it shows how a highly leveraged investor with a big portfolio is going to get smashed by the tax changes.
 
I've been thinking of doing this with my current house. It's currently valued at £179k and I have about £45k left on my mortgage. With the missus moving in we have been thinking of selling this and buying a new house. However someone mentioned it might be worth looking in to renting this out instead as I have a decent equity in it and also some extra savings.

With a BTL mortgage on 25% equity the repayments would be around £300 per month and looking around, properties in my area seem to rent for £700-750 pcm. I'm going to see an advisor in the week to work out if it is viable to do or if I should just stick all my equity into the new place.
 
SamuearlJackson said:
Here's a case where the landlord gets stuffed by the new tax.

Assume £1million in rent with £900k mortgage interest:
Now - £100k profit gets taxed (at 40 or 45%) leaving £60k or £55k.
Future - £1million taxed at 45% (£450k tax) with 20% of £900k taken off tax (£180k) leaving a tax bill of £270k when there was only a £100k pre-tax profit meaning a £170k loss!

This person needs to sell before other leveraged buy to letters flood the market over the next 4 years, potentially causing a supply glut and reducing prices. 40% cap gains tax would need to be paid if the properties had increased in value too.

This is an extreme case, of course, but it shows how a highly leveraged investor with a big portfolio is going to get smashed by the tax changes.
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Bear in mind there is a workaround for this which is having a limited company
 
Don't want to put you off but as others have said it's not as easy as it first appears. There are lots of costs involved and potential tenant void periods to cover. If you can manage the property yourself that will be good and you should save yourself the 7-10% most charge for management fees but if a tenant falls into arrears you have the hassles and stress of trying to extract the money from them. It's better to have a 3rd party involved. I had this once and remember I'm glad I wasn't handling it. I'm not sure what I would have said if I was told "sorry, I can't pay my rent this month as I'm saving to get married".

It's much easier when interest rates are low and house prices are rising and rent is too but rarely happens altogether. As interest rates rise I wouldnt be surprised if house prices hold steady but the interest rate rises will quickly eat into any money made on the rental income. Lenders currently are reverting to around 5% APR on BTL mortgages after the initial 2 year period which is a lot when rates are only 0.5%.If interest rates rise to 5% will lenders rates be 10% on BTL?
Also relief on mortgage interest is changing over the coming years. That could affect house prices too - BTL will be less appealing when this happens and interest rates rises will make it less appealing as most use borrowed money. I won't be surprised to start seeing properties flooding onto the market as rates go above even just 1%. Supply/demand will then change.

Like all investments, buy for the long term with a good understanding of the good and bad sides. If only in your 20's buying a property for 20-30 years will pay off well I'm sure.
A thought I like is if you can buy the property and be know that you may not make anything as income per month(if you have a 75-80% mortgage) but can wait on the long term growth that you will one day realise then you're ready :)
 
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