UK Buy to Let - Is it worth it?

I have modified this post to be more specific, this is a new departure for me so I'd appreciate any help.

Looking at a high standard 1 bed apartment near Liverpool. Cost £120k. I will deposit 20% and raise 80%. IIB Homeloans are offering 96k at £488 pm 'interest only' for 5 years, annuity is £693 pm. Projected rent is £580 pm and there will be management costs and letting agent fees of £100 pm in total. I would expect rent inflation to cover the annuity payment in 5 years time.

Is this opportunity worth the investment or should I expect a better return in the UK?

Also, not sure if I can claim mortgage interest relief against tax liability in the UK for investment property, I think so but but would like to confirm? Any advice would be much appreciated.

Killian

Maybe the answer to my question is obvious but I am a novice investor in the UK market, are there any opinions on the current climate in the BTL market in the UK - NW.?

Hi Killian,

The FT ran an article several week ago about BTL in the UK saying that yields had increased a little in the past 6 months as house prices had stabilised and a number of speculative BTL investors had left the market and rents had gone up. I cannot remember the average yield figure but I think it was somewhere between 5.5% and 6.5%, So, at first glance, your investment proposal does not look particularly attractive. You rent will only just cover your interest-only mortgage payments and this assumes full-occupancy (include the annuity payment and you are subsidising your tennant).

The Bank of England does not want to let house price growth to revert to the go-go days so I would not expect an hughe amount of capital appreciation in the near term, otherwise interest rates may probably increase.

I did not fully understand your point about the rental increases covering the annuity payment - is the annuity payment quoted correct per month , or should it have been per year?

Basically, you have a yield of at best 0% in a country where you can earn up to 5% on an internet bank account (Egg; Ing Direct; the Post Office). Unless I mis-read your post this is a bet on capital appreciation with no income. Relative to much safer alternatives your investment is quite risky.

As for the rental market in the NW, I live in the SE so I am not familiar with that part of the country. Check out prices for a 1-bed in Liverpool on www.primelocation.com & www.rightmove.com for some price comparisons.

Good luck.

Worth a read.


http://property.timesonline.co.uk/article/0,,14050-2215931,00.html

Killian - why do you think that domestic property is the most suitable investment for your specific needs in preference to the many possible alternatives? What is the make up of your existing savings/investment portfolio? How much of your net worth is already tied up in property? These and other more general questions must be addressed before asking yourself if property in a particular area is "worth it". If in doubt get independent, professional advice.

Killian

Looking at those repayments, they appear to be based on an interest rate of 6.1%. Is this correct. This seems a high rate of interest. Are you borrowing in euro or sterling. The rental level you quote seems about right at a 5.8% yield.

I am also considering purchasing a buy to let in the Northwest of the UK within the next year.

How did you find getting mortgage approval with IIB. Did you approach any other lenders.

Paul

All, many thanks for the input, it really helps me.

ClubMan,

I have a regular €650 pm Managed Fund in the IOM maturing in 9 years and two pensions, one 15 year term with a previous employer and one with existing, 4 years. I want something that will generate an income and help me with my lifestyle rather than everything into a pension or long term savings and I saw BTL as providing both.

My idea is the popular formula to build a portfolio of BTL's to generate income and retain assets that will grow in value. I already have 2 apartments in Budapest and I'm looking for the next location to spread the risk. Duplex's good article points to making sure you choose the right location.

With shares it's all your money up front, with the BTL's it's 80% borrowed and the tenant covers the repayments. A 20% deposit in Ireland might fund 1 apartment whereas this could stretch to 2 or 3 apartments in the UK.

Is it possible to beat this approach with shares? I have no experience of this but simply can you build a portfolio of shares that will generate an income and capital growth to match property investment over the past 10 years? It is dawning on me that property is not necessarily the way to go at this time.

Johnboy, you're right, the numbers look like this is a risky investment. The gross yield is 5.8% but this is totally eaten up by management and letting fees. (The annuity cost per month is repayment mortgage cost, £693. My point was that the rent would increase from £580 now to £693 or more in 5 years time, the 'interest only' option is only available for 5 years to Irish buyers.)

My experience with independent financial advice is the guy who sold me the Managed Fund at a 7% bid/sell spread, and the property advice is from estate agents selling their property. I discovered AAM last year and I promise to learn fast from now on!

Killian

Don't forget to factor in stuff like tax, vacancy periods, other costs etc. when crunching the numbers to assess the viability of such a venture.

Killian said:

My experience with independent financial advice is the guy who sold me the Managed Fund at a 7% bid/sell spread

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What sort of intermediary was he? On what basis did he justify the charges?

ClubMan,

He was an international 'Independent' Financial Adviser trawling around multinationals selling this product to ex-pats. I was living abroad for 3 years and wanted to cover the fact that my defined benefit pension was frozen in Ireland and there would be a gap in my pension contributions.

This was a specialised Royal Skandia product to invest in a choice of worldwide funds, with flexibility to change funds at any time. There was also a one off bonus of 50% of year 1 contributions added to the fund after 12 months, this looked attractive but in the context of ongoing management charges this was a gimmick! He also presented the idea of active management producing higher returns but at a higher management cost. I have read enough since to know that this is way over the top in terms of charges but there are hefty penalties to get out. I considered this a couple of years ago when I returned to Ireland but I have continued to contribute (6 years to date).

Killian

Hi Killian, you may be spreading your geographic risk by looking to buy in the UK but you are still increasing your exposure to the same asset class. You do mention that the tennant will cover the repayments but in this case no repayments are being made so at the end of the 5-year interest only period you will still owe all the capital and your investment will not have generated any income.

You need to ask yourself why would you enter into an investment that generates a negative cash flow when local investors can earn between 4%-5% from a bank account with considerably lower risk? Are you sure that you are being offered the property at a realistic price?

Admittedly you could borrow in euros but then you will run FX risk - the Hungarian forint has fallen 4% against the euro since May by the way.

You can still access the property market via the equity market by purchasing a listed property trust, a housebuilder or even a company that produces construction materials.

Bear in mind what Clubman has said - why have you decided that property is the the most suitable investment alternative at present?

Johnboy

Paul, IIB were good to deal with on the phone, rate is high though and interest only for 5 years, didnt try anyone else. I am losing interest in UK for reasons below.!

JohnBoy, on analysis there are a combination of factors going against the investment, the property would need to cost me £100k instead of £120k to be viable. Smilar sized properties in the same area are priced around £100k but this is a high standard flat with at the associated security, lanscaping etc. It would generate more rent but not enough and there are also monthly property management costs in addition to monthly letting fees. The interest rate for Irish investors is also high at 6.11%, much higher than in Ireland, making the repayments very high. There is probably no substitute for your local market with local funding and self managing the apartments, this is where the profit can be made but Ireland is an expensive place to start at this stage.

I will consider atlernatives and do some research on the savings and investments forum, will probably come up with a plan and propose it there as a sounding board. How should I go about contacting a really 'independent' financial advisor?

Killian

Hi Killian , you ought to appreciate that I am a conservative investor at heart. I am not necessairly a property bear but it is an illiquid investment with considerable entry, financing & maintenance costs. As a consequence, the investor ought to be compensated for these factors with at least a reasonable net income.

As for the financing rate - 6.1% is higher than my UK mortgage (base rates are 4.5%) but probably about right for BTL given the increased risk for the lender.

Have you tried to negotiate on price? The UK property market is moving ahead at a relatively modest pace so it lacks the frenzied approach to buying that is commonplace in Ireland at the moment; though the next move in UK rates is as likely to be up as than down.

Johnboy

JohnBoy, the lender is adding a margain of 1.45% to the quoted 'London' base rate of 4.66%. With the prospect of near term rate rise this would
make the investment even more questionable.

I will get another quote and talk to the seller but I have no confidence that this will end up being a good deal.

Killian.

Hi Killian, don't give up hope yet. You probably have a similar financing rate to any number of rival BTL investors looking at this flat, so from an investment perspective this is not really a great deal for anyone. This could suggest that the seller may have an unrealistic expectation of what the place is worth.

If you are still stuck on property investment in the UK you should register with [broken link removed] - this website (at a small cost) allows you access to the Land Registry database in the UK and see for yourself what the actual sale prices were for properties on any road/street in the country. This will help you sort out estate agent fiction from fact and give you a clearer picture of the market for 1-bed flats in your chosen area.

Johnboy

Killian said:

I have modified this post to be more specific, this is a new departure for me so I'd appreciate any help.

Looking at a high standard 1 bed apartment near Liverpool. Cost £120k. I will deposit 20% and raise 80%. IIB Homeloans are offering 96k at £488 pm 'interest only' for 5 years, annuity is £693 pm. Projected rent is £580 pm and there will be management costs and letting agent fees of £100 pm in total. I would expect rent inflation to cover the annuity payment in 5 years time.

Is this opportunity worth the investment or should I expect a better return in the UK?

Also, not sure if I can claim mortgage interest relief against tax liability in the UK for investment property, I think so but but would like to confirm? Any advice would be much appreciated.

Killian

Click to expand...

Killian in a word in answer to your title "NO"

Thanks for all the input so far. I wanted to get a feel for the market and entry costs in Ireland before giving up on the UK altogether. Let's compare the two!.

The prospect in the UK is as follows:
1 Bed Apt £120k stg
Deposit £24k
No Stamp Duty
£750 Legal Fees
£5K Furnishing

Location near expanding Hospital - good rental demand
Rental Income £600 pm
Building Management Cost £50 pm
Rental Management Cost £60pm
Mortgage cost (80% Int Only) £488

This is a breakeven cashflow deal on interest only. Gross Yield 6%, Net 5%. entry costs are £30k Stg - €43k for 20% deposit.

Look at the following example with Irish prices :

House €276,000 ave house price (2bed appt Galway, Daft.ie)
Stamp Duty €11,040 4%
Legal €1200 approx?
Deposit €27600 10%
Furnish €8000 approx

Rental Income €800 (2Bed appt Galway - Daft.ie) - 3.5%
Rental Management €80 10%
Mortgage €817 4% int only

This is a negative cashflow of -€97 pm with an entry cost of €48k for 10% deposit

On this basis the UK gives a potential capital gain with breakeven cashflow, am I missing something or are there much better deals out there in Ireland?

Killian

Hi Killian,


What you are missing is income!

The UK property looks to be marginally better in relative terms (though you assume FX risk) but neither investment option looks attractive. Why are you content with zero or even negative income from these investments?

Are you so determined to buy an investment property that the financial aspects of the investment are a secondary consideration.

Since you are only holding out for capital gains I would reckon that Ireland is the best bet because the property market there seems to be in overdrive. Remember that the UK has already had its property boom so are you sure that the capital gains from that market will be enough to offset the lack of income?

Johnboy

Johnboy, I take your point. My comparison was to show that Ireland is not a good option either. Capital gain in Ireland is also risky at this stage. I would like to see someone disagree or maintain there is still value in the Irish buy to let market?

Killian.

perhaps there is not much value left in either market?

I think that you ought to weigh up the returns from some alternative investments.

People have made a lot of money from property in the past few years so it is difficult to rule it out as an investment because it inspires such a strong emotional response from everyone (just look at the Great Debates section on AAM).

Why not the stock market if you have excess cash? The yield on the FTSE Eurotop is 3.4% and it also has the potential for capital appreciation. The equity market will provide you with diversification and the entry costs are cheaper - moreover, after the recent sell-off I would argue that stock markets are already pricing in (to a degree at least) higher interest rates, whereas property is not.

From your last post you appear to have decided that you want to purchase an investment property and are seeking advice from this board - I think that you will only get positive feedback from property bulls as relative to investment alternatives, neither looks particularly attractive.

Johnboy