Newbie landlord in Birmingham seeks guidance

Hi Rajen

I'm delighted that you are doing your research before jumping in with both feet. I became a landlord in 1989 and it was much harder to get good advice then.

Has anybody explained to you that you are more likely to require 20% to 30% deposits? This is because buy to let lenders will want you to have a larger deposit than when you are buying a property to live in.

Based on your income, a great way to get things going will be to increase your mortgage on your home to the max. It's likely to be on a cheaper interest rate to a buy to let mortgage and the interest you pay on the extra money you borrow to invest can be set off against your rental income to reduce your tax bill from any rental profits. This is a link to the member profile of mortgage adviser I recommend >>> http://www.property118.com/member/?id=314

I also recommend that you use a good letting agent so that you can remain focussed on your day job without having to worry too much about the management of your property and all the rules and regulations which are so easy to fall foul of. This is a link to the member profile of letting agent I recommend >>> http://www.property118.com/member/?id=346

Reading about my own property investment journey may also be useful to you for ideas and motivation. It's quite a lot of reading as it is in 10 parts but I really do think you will find it worthwhile. As you read the various pages please feel free to post comments or questions in the section below the main article and I will be delighted to answer them for you. Please see >>> http://www.property118.com/my-first-intentional-property-investment-part-1-2/29019/

Wishing you well and you know where to find me if you have any more questions.

Hi Rajen,

As Mark points out you will need a minimum of a 25% deposit for a BTL mortgage.

Also, I don't see any point in renting out individual rooms in a 2 - 3 bed house. If you do this, you will have to include all bills, mainly council tax and utilities.

When you take these away, then your profit would be minimal.

The only way to benefit from room lets is to go for a property with, say, two reception rooms, and create an extra bedroom. Then the numbers might stack.

Be careful not to stray into licenceable HMO territory either.

When just starting out and "learning the ropes" a single occupancy property is far less risk in my opinion.

Here are some low risk strategies for risk averse people or those just starting out:

http://www.propertytribes.com/low-risk-property-investment-for-risk-averse-people-t-8286.html

Just remember your whole business model is based on whether you can service the mortgages of the BTL properties!
Usually this is facilitated by rental income.
What if you have a tenant who does not pay rent and who you have to evict!?
Could you afford to cover the mortgage payments and all the costs that you will inevitably incur in the eviction process!?
That is the MOST important question; bar NONE.
How you determine you may manage this most important scenario will inform you as to how you conduct your business.
You could take a massive risk and rent to HB claimants and if you cannot service your mortgage payments you will lose everything.
As a small LL you probably cannot afford such risks.
therefore you should invest in properties where tenant may pass RGI checks.
As you build up more cash resources you may consider venturing into more risky HB territory.
IGNORE any additional positive cashflow by taking on HB tenants.Even if you could earn £150 more pcm by taking on HB tenants.
It only takes one eviction to wipe out all that supposed extra cashflow.
Stick with RGI qualifiable tenants and when you are well financially resourced then you may consider risking a HB tenant.
Remember if you CANNOT afford to cover mortgage payment if ONE tenant fails to pay and needs to be evicted your domestic financial situation will be destroyed and YOU will be homeless.
Banks love to put 2nd charges on resi properties of LL who have NOT been able to make the mortgage payments on their BTL properties which they have repossessed and inevitably sold at a loss..
If I was you I would borrow the max on your resi property and then apply a 2nd charge of about £200000 to a trusted party like a parent, then you are covered so you won't be homeless if it all goes wrong.
It is better to be in supposed debt on your resi property as then you can't be touched.
why would you risk all on a HB tenant for an extra £150 pcm.
Stick to RGI type tenants and accept less cashflow.
You'll sleep a lot easier at night!!!!

@Paulbarrett "Just remember your whole business model is based on whether you can service the mortgages of the BTL properties!
Usually this is facilitated by rental income.
What if you have a tenant who does not pay rent and who you have to evict!?
Could you afford to cover the mortgage payments and all the costs that you will inevitably incur in the eviction process!?
That is the MOST important question; bar NONE."

I agree that these are indeed important factors and for any BTL investor ('newbie' or otherwise') professional advice at every stage, and in regular review intervals too, is essential.

...... which you won't get from furryanimalsupermarketnonadvice-nonfacetoface.com 'sales' outlets.

So, fundamentally, for BTL mortgage PLANNING, take advice from a professional, qualified and experienced (and REGULATED, I would add - especially, Paul, as you ventured into regulated advice by mentioning raising money from a residential property too) Adviser (not 'salesman') who can help implement the most appropriate initial and future-proof strategy (ie without a crystal ball, but based on sound financial planning).

RGI, guarantors and even specific tenant-bespoke income protection plans (covering unemployment issues too) are all sound financial security measures which many of our letting agent Introducers recommend. In addition, we work directly with many landlords and tenants who value comprehensive BTL mortgage, and rental protection, 'advice'.

Product info is one thing - financial advice is something entirely different and so, my message to Rajen (and to endorse Mark's comment) is to carry on properly researching your strategies and to surround yourself with professional advisers including all relevant aspects legal, taxation and finance.

Howard

Firstly thank you all for your comments. I am touched for the time you have all taken to advise me.

I am pretty risk-averse and I guess it showed (thanks Vanessa). I don't think that's a bad thing though, everything has it's pro's and con's right?! It limits my potential profit but also reduces my potential losses.

I look forward to reading your own story Mark but I don't think changing the mortgage term for our home/flat is something I feel comfortable with. I guess it's more of a mindset. I feel comfortable and secure with the monthly mortgage outgoings (knowing that if the interest rate were to change or if my wife were to be without a job, I would still be okay) and I feel content knowing the mortgage will be paid off by the age of 55 (hopefully earlier). I also understand that it makes more financial sense to keep the deposit minimal and use the money to fund other properties (esp. BTL). This is the theory (Mark and Paul’s theory) I plan on using from here on. I may decide to re-mortgage our home/flat in the near future if need be. It's probably likely that I will sell this property outright to fund our future family house.

After reading all of your threads I think I will keep it simple for my first investment and learn the ropes (work on one property at a time - initially anyway). I will use RGI tenants only. I would also make sure I have 12 months of rent on standby for 'worst case scenario' but I am not sure how quickly I will be able to do this. I will also use an agent to free up my time (and take away some of my stress) for my day job, and also to utilise there specific skills and advice.

I have made some exciting progress. I have found a 3 bed (1 of these rooms is more of a study I think) mid-terrace house, behind a school. Every room is dated and needs complete re-decorating. The kitchen needs a complete rebuild from scratch and so I assume will the bathroom. The garden is an OVERGROWN jungle and needs a complete overhaul. Overall it doesn't look like it needs anything that can't be done without a good builder and some strong hands. The property is on sale for £75k and similar properties (end terrace's - not mid-terrace's mind you) are on sale for £130k+. The kitchen is about 3m x 2.5m and the bathroom is 3m x 1.3m - I don’t know if that means it shouldn't cost much to build? Similar properties are on rent for £575 pcm unfurnished. Assuming the end cost to the property is no more than £75k, that’s a 9% yield (excluding all fees and insurance etc). The mortgage could be paid off in 10-15 years and I could use the future rent for kids’ education or savings for further investment.
I am considering doing a viewing with a builder to see how much work it needs (the garden and decorating I can do myself). I am also considering acting as a buyer for one of the £130k properties to find out how much in demand they are for those prices. One thing I do not know how to research on is the rental demand for the property - do I put some 'practise' adverts onto the internet as Vanessa's site states?

I need to put together a spreadsheet to do the sums to make sure I can afford this entire etc.

Thanks again everyone for reading and advising! You are all experts in your field and I really appreciate your time and advice.

Kind regards,

Rajen

Howard I absolutely agree with your consensus.
How many LL though enter this market as rank amateurs with no real concept of PLANNING which you so correctly identify as fundamental to being in this business.I think a lot of this stems form them being experienced homeowners and they think that being a L is not much different!
I think I would even accuse myself of such an attitude 6 years ago when I entered the market!!
The vast majority of the lettings industry is so amateurish due to the nature of the majority of its participants..............the amateur LL.
I appreciate this must be a frustrating situation for the professionals; who are like it or not are in the minority!
How to ensure the amateurs attain some level of professionalism...............that is the question!?
Your contributions and this site and others are valuable resources for the amateur and professional alike.
How does one persuade the rank amateur to engage with sites like this before they venture into the bear pit!!
We amateurs do our best and professionals posting is not a waste of time.
I speak as a rank amateur and can assure you and others that I take note of such contributions which have been of great assistance to me.
I hope I am learning every day to assist me in my day to day management of my affairs.
I just hope there are lots of other rank amateurs that are availing themselves of the extremely valuable and helpful info that is discussed on this and other sites.
Somehow amateur LL need to be upskilled; it is a problem which needs to be addressed as it seems BTL will be the default investment strategy of people who cannot tolerate anymore the diminished returns from savings.
IR will be low for decades; a suitable resolution needs to be found.
BTL is being seen as that solution.
Not sure if that is what should happen to investment capital as property investment doesn't really grow much business compared to investing in say an engineering company.
But people invest in what they know after all the investing scandals with pensions etc.
They choose that, oh so simple investment as investment in property; as NOTHING is as safe as houses, isn't it!!??