Please help me with my BTL dilemma

Hi Prakash and welcome to Property118

You have asked "Can I go ahead".

My response to that is maybe you can but that doesn't mean you should.

When you talk about pressing a few buttons with the bank and getting £15,000 transferred to your account I am assuming that you are talking about a loan? How much are the repayments on that loan?

You have also mentioned pressing a few more buttons with the bank for your wife, the same question applies.

Will the rent from the property cover thiose two loans plus the mortgage, insurance and your ongoing liabilities to insure and maintain the property? I suspect not. Therefore, you may have to subsidise the deal from your surplus income, can you afford to do that? Even if you can, that means you will be losing money every month, presumably you have thought about that and you are relying on the property increasing in value? That's not guaranteed though, what if it doesn't go up in value?

You have also assumed that your rent is guaranteed for the next three years. What makes you think your brother will want to rent from you for that long? What if he decides to move on for any reason, he might find something which suits his circumstances better or his personal circumstances might change. It is rarely a good idea to do business with family as there is a relationship to consider as well as pure business.

Very few mortgage lenders will provide a BTL mortgage if you plan to let to a family member. This would make the mortgage regulated too and there are far less mortgage lenders in the regulated BTL mortgage market.

I'm not going to tell you whether you should do this deal or not, that's for you to decide. However, I do think you should think long and hard about this.

Sorry if that's not what you wanted to hear.
.

``Thoughts and worries:-

1. we live in Bristol (2.5 hours drive for the property visits.)
2. I am scared of losing our current home in case all goes pear shape, I dont want sleepless nights
3. my wife but she thinks the money is safe when it is in the savings``
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These are natural worries and fears of course but your plan will work if you buy with due diligence heeding Marks good advice . Overcome your fears to grow as individuals. We all feared our first day at school, our first exam, our first date. our first driving lesson, our first job interview. But we get through these and survive learn and grow . I invest in MK myself and projected growth over the next 5 years is about 25% so you will be fine . Your 160K property will then be worth about 200K.

So to answer specifically your thoughts and worries.....

1) Why do you need to visit except socially - You are renting to family
2) It wont go pear shaped - Have faith in your idea
3) Savings earn 2% if that - Property can earn you 20 times that . Property is safe

Bite the bullet take a deep breath and go for it. Good Luck
.

Reply to the comment left by "Mark Alexander" at "15/11/2013 - 08:28":

If you don't want sleepless nights I wouldn't get into BTL, just this week I've had to sort out a shower that was flooding a bathroom and had seeped into the flat below. Then another tenant abandon his flat owing a months rent and having given the keys to his pot smoking friends. I arrived at the flat to be confronted by five youths who whilst very mellow weren't happy about being thrown out of a flat. One of his mates stayed to look after his two cats, not allowed on the tenancy, I had a sleepless night worrying that the flat was being trashed. Both these flats are a couple of minutes away from where I live, I can't imagine the problems of renting somewhere a couple of hours away!

I would also agree that letting to family is potentially difficult, e.g. if he loses his job he may not get Housing Benefit due to renting from family, if he fails to pay the rent your relationship with him will suffer, could you bring yourself to evict him and sue him for the rent arrears?, what if he has an accident or illness (or dies) and then finds he cannot pay the rent? what about damage to the property? I know it sounds like I'm being very pessimistic, but these things can and do happen so you need to consider as many "what ifs" as possible.

I would also add that if you are in Bristol, then when the property becomes vacant, or needs work doing on it, you are going to find it much more difficult to manage the property, so you may also need to factor in time and expense of visiting the property and/or the fees and commissions that a letting/management agent would charge (+ VAT).

Costs are always higher than you anticipate, so make sure you have large margin of profit to cushion yourself against this, and remember that the mortgage interest rates are likely to go up over the coming years so factor this in as well.

Prakash

As Mark has already said, before committing to a BTL property you need to do your sums or it could cost you a lot and as you say go pear shaped.

You need to ensure that your rental income will cover your borrowing (including your loans for the deposit), insurances, fees, maintenance etc... Or that you can comfortably cover all of the above from your existing income. If your brother-in-law had a change of circumstance can you cover the costs of a void period before new tenants are found?

If you do your calculations and work out your yield % using the handy yield calculator on this site, it should give you a good idea of if your investment is viable. Only you can make the decision but the above should help. Good luck.

I agree letting to family is not a good idea. I heeded my accountants advice, when I started in business, his advice was never employ or go into business with friends or family. I have seen the problems people have had with this. Sometimes if you have a vacant property it is difficult to say no but I don't think I would buy a property for a relative unless I could afford not to receive any rent if they found themselves in trouble financially. Also I think your outgoings are going to be high with your deposit if mortgage rates go up but I think Mark can direct you to a calculator for this purpose.

Hi Prakesh,

Mark's feedback is very relevant to the questions you have asked and I would certainly suggest taking note of this. As a new investor it is very natural to have lots of questions going around in your head, however from my experience it is important to ask yourself the right questions.

It sounds like you haven't necessarily set out to do this just because your brother wants a place to live. If that is the case I would wind back a bit, taking your brother out of the equation for a minute, and ask yourself why you are doing this? Is it to provide; extra cashflow? a pension in the future? a legacy for your children? Once you have the answers to this you can set a goal and invest with your head, not your heart.

As you can probably already see from the other posts there is not necessarily a right or wrong answer, however it is important that you understand what your goal for investing is, otherwise you could make some very costly mistakes. I would definitely recommend before you do start investing that you get some education, a coach/mentor to help you invest with knowledge and skill to achieve your goal in a more cost and time efficient way.

With nearly all of my clients being property investors, I understand the need for some empathy as well as jargon free financial advice in these matters.

Which is why I shall firstly say that renting to family is perfectly acceptable and many families I work with have chosen this option (Blood is thicker than water), but you will need to have a REGULATED BUY TO LET MORTGAGE and not an unregulated mortgage as you may have first thought. This in itself presents a challenge as there are only a handful of lenders who offer this type of product.

Getting back to the idea of renting to family, we always advise the client to ensure that the member of family they rent to has some form of Insurance in place that pays out should that person be off work ill or more importantly lose their job. These are normally the reasons why tenants cant or don't pay their rent.

You too can then also ensure you are covered by taking out Landlords Insurance to protect not only the property itself but you, for loss of rent ect. Again we would advise the client on this at a very early stage as it is yet again, another expense you need to consider.

So the question, should you go for it? Well as my other colleagues rightly said, to have your money tied up in some savings plan in this day and age is just simply MADNESS, when property can clearly provide you with a far greater return. But like any investment there are risks.

*Risk, that the property price does not increase as you first hoped
*Risk, that your family member does not keep up with their payments

Its now up to you to decide if those risks out way the benefits, given that we could mitigate half that risk with insurance.

The benefits are that you have helped a family member and you have invested in your future.

If you want to understand more about the set up costs and the likely return on investment, please don't hesitate to contact me, I'm on the end of a phone, details on my member profile, linked next to my picture 🙂

All the best
Simone Gilks

I would also suggest if you see a comment here that you like that you look up that persons profile. Some comments are not always unbiased. Hope I am allowed to say that. L.

I think this post raises the very delicate and potentially hazardous issue of "going into business with family / friends". This is what you are doing as essentially you are purchasing a property purely on the basis of renting to a family member.

We all, by & large, want to help (if we are in the fortunate position to do so) a family member or friend. It is a nice thing to do and shouldn't be discouraged. However it is A LOT more potentially hazardous than conducting business without this issue.

It probably works most of the time but I bet there are many many horror stories of where business between family & friends has had disastrous consequences. My advice would be to keep things as professional as possible, however clearly that would be impossible to do, in my opinion, should either party run into difficulty.

Of course the loan issue as Mark mentioned and the fact that you will be conducting mortgage fraud if you rent to a family member with most lenders, are both major issues. However the fact you live far away shouldn't be a major obstacle for you.

Overall, if you have the funds to purchase property, it seems a good thing to do.