My Property Strategy – Opinions Please

Hi Matt

If you buy a property for £120,000 and rent it for £550 pcm that's a 5.5% gross yield.

If you manage to get a 75% mortgage that would equate to £90,000.

Let's assume an interest rate for now of 4%. That would equate to interest only mortgage payments of £300 pcm. If interest rates go up to say 6% the interest alone would be £450 pcm.

To get accurate figures see our mortgage sourcing tool which is free to use >>> http://www.property118.com/buy-to-let-mortgage-calculator-2/

You have explained your acquisition and mortgage strategy but you have not mentioned insurance, costs of finding tenants, maintenance, management and void periods etc. Based on the figures you have quoted I would suggest this is too tight unless you have a very good surplus income to offset the negative cashflow you would undoubtedly have based on the figures you have suggested?

Is your strategy based on producing income or holding for capital growth?

Can you afford to fund negative cashflow?

I'm asking these questions as some people are happy to subsidise their investments as an alternative to contributing to a pension scheme. If that's not the case for you I seriously think you should reconsider your strategy, either by borrowing a lot less in terms of LTV or looking at other types of properties in other areas. I would also question the basis of your decision to hold £30,000 of capital in reserve, what was the formula you used to arrive at that figure?

I strongly recommend that you do a LOT more reading before you jump into this. The spin off articles from the page I created to share my "Top 20 Tips for Landlords" should keep you going for at least a couple of days. As you work though it, please feel free to post questions on each page as you go and I will be pleased to answer them, as will others in the Property118 community no doubt. The link you need to get you started is >>> http://www.property118.com/my-top-20-tips-for-landlords/

I have been a landlord for 24 years now, if only I knew then what I knew now! If only I knew what I know now just 10 years ago.

When I got into property investment there was no internet and there were a lot less landlords. Getting to talk to them about their strategies was very difficult as it felt like prying into other peoples business. Since the internet all that has changed and we freely exchange information. Despite all the challenges I had to overcome I've done very well out of property and I now live off my property investment portfolio. I stopped buying and started living a few years ago. My passion now is to share my experiences with anybody who will listed. It's far cheaper to learn from other peoples experiences than it is to make your own mistakes. Like many other landlords who have done well for themselves I share without charging. All I ask in return is that you sponsor The GOOD Landlords Campaign. I set up this forum using my own funds but my goal is for it to be self financing based on donations. Please see >>> http://www.property118.com/sponsor-the-good-landlords-campaign/

Hi Mark,

Thanks for your quick response.

I would like to build a portfolio with a mix of properties some giving cash-flow and others giving me capital growth.

I take on board your point that 5.5% gross yield is too tight and whilst I do have very good surplus income I still wish to create a more balanced portfolio which gives me positive cash flow.

I think I will have to re asses the areas I am looking at for 8% gross yield. Are there any articles that offer advice on how to approach achieving this? I'm finding it a challenge so far to identify these types of property.

My thinking around my cash reserve is to have a buffer that will cover voids and maintenance costs. I fully intend to increase this as I increase the number of properties I purchase. I think I read on this site that 20% of the portfolio value would be an optimum cash reserve.

By the way this site is a fantastic resource for newbies like me, along with property tribes which I also visit regularly.

Thanks
Matt

Hi Matt

I need to ask you a question in order to look into this for you, where are you based?

I'm in the North West near to, Blackburn/Whalley area.

Appreciate your help.

Hi Matt

I've had a quick look on Zoopla and there appears to be a discict lack of shared accommodation to let within a 3 mile radius of Whalley Range - see http://goo.gl/3ZJtW

Have you considered buying three bed houses and letting them by the room?

The going rate appears to be around £300 pcm so you could rent a three bed property for £900 a month.

Another search of Google in the same area revealed that 3 bed properties are selling for as little as £65,000 - see >>> http://goo.gl/FnD86

I don't know the area but this is the kind of initial research you can do from your PC without leaving the house. Obviously the next step would be to talk to letting agents and other landlords in the area and then go and take a look at the area and the properties yourself.

To test the rental market before you buy you could always advertise the the rooms to let in a local newspaper or on with Sparerooms.co.uk or an online letting agent. Obviously you would need to get the owners permission to do this first.

If you rented out by the room this would make your property a HMO. In Manchester, you need a licence from the council to do this (See Manchester MBC website) and they are not giving any. Literally not one ! The only way around this in Manchester is to buy an existing HMO which already has a licence. The penalty for running an unlicenced HMO is £20,000.

Very good answer, stopped buying a few years ago & started living. That's where I am now, when u have bought so many, u do get sick of the buying & the intensity etc. But for the new people, if they have the passion & the energy, then go for it. But as Mark says, yes, please listen on here, your margins are far too tight. I'm at the completely other end of the Spectrum, when buying, buy for 50k, normal rent £525, but a few times, get £900pcm on a 50k house, that's what I try to aim for & get disappointed when I get a 'normal' rent.

Have you thought of changing your strategy and doing a mix of renovation/development and renting? With £140K of capital you could look at acting like a small builder: buy a house on a BTL mortgage with a low LTV, use your spare capital to renovate, sell at a profit, and move on. You could keep repeating this strategy, or occasionally hang on to a house and rent it out in the normal way to slowly build up a rental portfolio that gives you a steady long-term income to back up your development work (and ultimately top up your pension).

By this means you don't reply on long-term capital growth in the general housing market, with all your capital tied up in a low-yielding rental property, but make your money work harder for you. It partly lubricates access to extra capital from third parties (the mortgage) and partly pays for the value you are adding through the renovation.

Of course this strategy relies on you being able to identify suitable candidates for renovation and there being an active local market to sell the property on quickly afterwards.

You might find it worthwhile looking at going into business with a builder partner: you provide him (or maybe her) with extra working capital, to reduce his dependence on bank loans and dodgy private clients who may underpay him and drive him into bankruptcy (a serious occupation hazard for small builders), he provides his expertise as a builder, and you could specialise in the rental side of the business. Of course this means finding a good builder you can get on with and there's mutual advantage in going into business together.

hi matt,

having read through your question i feel that you are being a little under ambitious!

If you are interested i could help you find some properties in an area which attract good working families that you could buy for around £100,000 and easily achieve £600 a month in an up and coming area near Leeds.

It is an area we are experts in and their is no charge for the advice if you use us to look after the properties once we have let them.

Just let me know if you are interested.

James

Hi James

Please email me about this service as it would make an interesting article in our buy to let property hotspots section. My email address is mark@property118.com