Just getting started on a long term BTL strategy

Hi Sarah

Congratulations on raising the money to get started and thank you for reading the articles in the Advice section of Property118 >>> http://www.property118.com/learning-from-experience/61558/

Every landlord I ever speak to has encountered the dilemma of whether to go for yield or capital growth. This decision is as personal as which car we choose to drive, where we choose to go on holiday or where we prefer to live. There are no wrong or right answers.

My advice, therefore, would be to focus of stress testing the viability of your investments. It's no good going for high yields if a few missed rents would land you in jeopardy. Some BTL lenders will start possession proceedings if you miss more than one months mortgage payment. That's why having a backup fund is so important, just as important as stress testing your investments having taken all costs into consideration and then looking at what point interest rate rises will result in you breaking even or even having to subsidise losses. All of this can be done via this Landlords Calculator >>> http://www.property118.com/calculating-rental-yields-and-returns/

I wish you all the best and please pop back here whenever you need some more help 🙂
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My advice would be not to do it. It's really not easy to make money and you are putting your own home in jeopardy. I've been doing it for nearly 10 years and have made no money whatsoever. Two out of my three properties are worth less than I paid for them and one of those does not cover its costs in rental income. At best I have broken even because I have more or less paid off as much mortgage as I have lost in cash flow.

By all means use your savings to try to get a better return than with the bank, but please don't risk your home.

I never thought I'd see the day I was so jaded with property I want out, but it has arrived!

Reply to the comment left by "Florance Kennedy" at "20/05/2014 - 15:46":

Hi Florance

I've been in this business for 25 years and I too have had similar thoughts in the past. Thankfully I stuck with it and was able to retire 5 years ago having achieved financial independence from my property portfolio.

It may help you to read all of the articles in this series >>> http://www.property118.com/how-to-become-a-respected-profitable-landlord/60765/

The last 25 years have certainly been a roller-coaster ride!

Chin up 🙂
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Reply to the comment left by "Florance Kennedy" at "20/05/2014 - 15:46":

hi
while BTL are good at mo, i sympathise with what you say as it is really only because interest rates have been so low for so long. when rates were higher it was a completely different story. if we were not willing and able to be so proactive, our profit margins would be seriously eroded by repair costs, letting agents fees etc etc.

Hi Sarah

Excellent position to be in and a chance now to get stuck in and start investing. You will battle to and fro for hours agonising over the best strategy and quite rightly so as its a big decision - but there are no right or wrong answers. You decide on what your end goal is work backwards from there and the strategy will start to formulate and drop into place. Put all options down and gradually cross off some and narrow it down. Then buy your first sit back see how it performs and adjust accordingly if necessary.

Unfortunately Florance is on a bit of a downer because it sounds she has made some poor investment choices. 10 years down the line i was financially free . But it highlights its not always a bed of roses so do your in depth research and then check your figures and then check again Pick the first property to maybe be a mixture of capital growth potential and a nice bit of cash flow to cover all eventualities.

I released equity from my own home to get started then multiplied up from there by refurbing and releasing equity from the BTL`s. I`ve remortgaged my own house 3 times onto an interest only basis. It enabled me to grow quicker and the income from the BTL`s from the released equity easily covers the extra costs of the residential mortgage.

My house I see as an asset not a liability . It works for me day in day out earning me passive income rather than just laying around all day being plain lazy!.

Good Luck

Hello Sarah,

I have been following P118 as a guest and through my wife's P118 account but your comment has prompted me to become a member, so as to leave comments.

A bit of background, I have been a landlord for 25 years or so, but have only had multiple let properties for 20 years. My wife and I have properties in central London catering for students and professionals alike, neither of us have "day jobs".

Now to the subject in hand ... First, Property rental is NO easy way to make money, you cannot just lie back in your hammock and watch the money rolling in. It took many years before my wife and I were able to give up work and concentrate of the property business. That said it can turn out to be a profitable plan but you have to stick with it, there have been many times when my wife and I have seriously discussed getting of it.

As far as choosing yield or capital growth is concerned, yield is the bird in the hand (assuming rents do not drop dramatically, during my time as a landlord this has never happened but there has been prolonged periods of stagnation), capital growth is the two in the bush. In London, property prices are very high, possibly in bubble territory, although I do not know what they are like in the area you are looking at. But it is not always a given that property prices will rise, over the long term yes, but there will be ups and downs on the way. There are a lot of people who believe that property prices will and have to fall, I don't know if they are correct but such a large number of people need listening to. However it is my opinion that now that property letting has become a mainstream investment this has put a floor on property prices. Unless rents fall dramatically house price drops will be limited by the rental yield available, with lower prices the yield increases and investors will start to purchase. Mind you, as interest rates rise, yields in bonds, cash accounts etc. will also rise, so the yield in rental income will also have to rise for it to become an attractive business proposition, either rents will increase or property prices will fall.

The past 8 years or so have been VERY GOOD years for landlords, VERY low interest rates, huge problems for people to get mortgages therefore an increasing tenant pool with rising rents. I am not confident that these golden times will continue ... interest rates WILL rise, the economy WILL pick-up and mortgage lending will ease up. More and more legislation will be brought in, making a landlord's job more difficult. More and more local councils are introducing licensing and eventually all will insist upon it. All of this adds up to larger expenses for landlords. Future legislation could well be the elephant in the room.

Borrowing money to invest is a risky business, no doubt this money will incur interest and as I have just stated this WILL increase. Mark Carney says he will increase interest rate slowly, but when have we ever been able to take the Gov. of BOE's word on anything. "No, inflation is not a problem" they said while all the time they had 100% of their pensions invested in inflation-linked bonds. Only a few years ago mortgage lenders were saying "5% base rate, it's hasn't been this low for forty years or more, come on everybody money is so cheap to borrow". Mortgage terms tend to have a period of 25 years, what is your prediction of interest rates during that time? Let's say that base rates average 5% over that period (which historically is very cheap), a BTL mortgage will be in region of 2% above this, making the average interest rate payable 7% (and I think that I have been very conservative here), probably the best part of double the rate now available and this is the AVERAGE rate over the 25 years, which means that it will be much higher for some of the time.

If, after taking into account the above, you are still of a mind and in a position to start to build a property portfolio then for capital growth you must bear in mind the most important factor, location, location, location. As you have said you feel that the way forward for you is to keep extracting capital from the properties you have in order to fund new purchases, therefore increases in capital value are paramount to you. Saying that, if you do follow this strategy, it may take quite a few years for your business to start to produce decent profits. Something you have to take into account is your age and therefore the amount of risk you should be taking on. If your hair is going grey and you remember a time when politicians were honest, you may not have enough time to shoulder any shot-term loses, but if you are a 20 year old, just out of nappies, then time is on your side and you can fill your boots, then go for it.

I have probably painted a darker picture than you would like, but as I am closer to 60 than 20 years old, I do err on the side of caution.

I do wish you every success in whatever you decide to do.

Reply to the comment left by "Colin Newbury" at "20/05/2014 - 20:06":

What a superb opening post Colin, welcome to Property118 🙂
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I've increased my portfolio over last 6 months - a mixture of flats and multi lets,we have previously bought flats and very confident about managing them as they are easy to rent and maintenance is low and hands free. but lease management costs do cost a bit and need to be carefully checked as they knock the yields. We,ve now got 2 terraces for multi let this is a new area for us so we are treading cautiously. I've used the Landlord calculator and it is a good tool -together with various other tools available if you search the net - I have made sure that base rates will have to rise to about 5% on each new venture before I get out of profit and I've kept as much cash as I can to fall back on. I try to make sure a worst case scenario will still just break even.

I'm in Scotland, where most stock is Victorian tenements; common repairs, and internal problems with leaking baths etc take up a LOT of time, effort and money. If you go for it, Sarah, steer clear of old stuff in general and listed buildings in particular!

When people ask me about BTL I always tell them to look at this website and go through the downsides of letting before laying money out on a property. I would be very cautious with any investment financed by a mortgage on my home, (as an IFA, the FCA would want my head on a plate if I suggested this way of financing).

As for capital appreciation vs yield, I would go for yield every time! Outside London, capital appreciation is quite hard to find and making a real profit year on year is essential. If you personally run out of cash, you could find yourself bankrupt, loosing your home, your BTL and your good name for 6 years+. When it comes to costing, be very conservative. Creditors, especially HMRC, show no mercy when things go wrong.

There is money to be made with BTL, but if you don't have a generous margin, then you might be better off with ISAs or an investment bond! If you are determined and risk accepting, start small and use OPM, (Other People's Money) as far as possible.