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  • Buy-to-Let

    100% finance. Am I being really daft?

    Your advice would be much appreciated.

    I have had an offer accepted  and if I had the money to put in, I would be putting in £100k and getting a 14% ROI running it as a 5 bed HMO.

    The trouble is I don't have the money but a family member has offered to loan me the required 100k at 4% fixed for five years.  What that means is that I will be 100% leveraged.

    Embarrassed to say I have never really understood what infinite ROI means.  Suffice is to say that if I go ahead I won't have put ANY money in and I will be netting £9800 a year.

     This property is in a good location but  in a purpose built block and is a bit grim on the outside so it is hard to imagine it going gangbusters in capital appreciation.  So my question is am I being daft getting 100% leveraged on a property that yields very well but has a big question mark over capital appreciation?  After all in five years time I am going to have to come up with 100k from somewhere and I am not exactly sure where?  Furthermore, I don't think I am getting a particularly great bargain in terms of its market value.  Somewhere between 0% and 5 % bmv perhaps.

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    Gangbusters isn't a term I can understand....your whole post seems a tad naiive to me...but hell I've only been doing this since just after Ghostbusters...that's 1993 in my case..not the remake(s). Will your family be happy to lose capital? They will surely request a first charge on the property...if not they may find I am their forgotten other Son......07775600621 if they have a query or another £100k similair.

    Robert

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    I am not an experienced investor by any means hence my posting seeking advice.

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    Why not reduce the risk for the family member and just borrow  the deposit amount rather than the whole price?

    Obtain a mortgage for the remaining amount.

    Have the lender assess the viability of your proposed investment

    Obtaining a lender's take on the whole proposition can sometimes be a wake up call to the LL.

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    Hi Alex,

    HMOs are "hands on" and generally the province of experienced landlords.

    If you do not have any money, how are you going to pay the acquisition costs, the running costs, maintenance and repair costs, licensing costs etc?

    I see this as high risk to you and even higher risk to the person who lends you the money.

    I would suggest that you re-think this whole idea.

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    Hi Vanessa

    The 100k loan from the family member would basically cover 25% deposit,stamp, fees and refurb.


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    It would definitely have worked in the past.  OPM was always the dream.

    My father had the opportunity of  early retirement with a large lump sum in 1999 but wasn't sure about taking it because he didn't know what to do with the money.  The whole family were desperate for him to retire because he had a very stressful job, where the life expectancy of people retiring at 60, was 62! I saw an opportunity and offered to borrow the whole lot from him and pay him an indefinite 10%pa on it, and when he agreed, prompty went and leveraged it up for 3 houses.  I already had a little BTL experience. 

    We didn't do it formally in any way as we are a family that trust each other completely.  Only you and your relative know how you feel about that.   Exit was never really discussed but in the end I got my parents into BTL and £100k washed out on a joint project we did.  Nearly 20 years later and they have a good property portfolio too.

    One thing I knew was that even if everything went wrong, I would always repay my father, whatever it took.  If you can honestly say the same about your family member and would ultimately have the income to know you could do this, you should be fine.  They obviously view you as a reasonably safe bet.

    What is more concerning though is that you don't sound particularly excited about the deal you have found, perhaps look around more.


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    Thanks for all your generous replies, it is nice to be on the receiving end of such support as I did not really know where else to turn.

    Let me try and answer the various points you have made.  First of all, the family member does trust me implicitly hence no need for a charge, and I feel strangely confident about being able to repay it. Somehow. The 100k is 25% LTV plus stamp, refurb etc.  I have a mortgage agreement in principle for £215k at 3.5% for 5 years.

    I have very little BTL experience but two years R2R experience.   This particular property I have been managing on a R2R basis for 18 months so I am not under any illusion about it being a totally passive easy income. Also, all the costs are factored in to my ROI calculation.

    However I am desperate to start managing a property 'of my own' to try and build some future wealth  hence I am quite wedded to this deal.  It ticks alot of few boxes for me.  Its 45 minutes from home, its price is under 300k and its net yield is above 10%.  I guess I hold the belief that finding a deal with those three boxes ticked in the South East is nigh on impossible.  Am I wrong?  The truth of the matter is that I have not looked at anything else....

    And should I consider the possibility of little or no capital growth especially on a purpose built block over the next 5 years?

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    CH - if your really serious and really determined then good luck to you. But as Vanessa warns anything other than 100% is doomed to fail.

    5 bed HMOs IMHO are not profitable - you need 6 beds. All the profit is in the 6th bedroom. you can make a profit on 5 beds but its very tight and anything that goes wrong could wipe out that years returns like a boiler or problem tenant or voids etc...

    However we all need to start somewhere and bags of determination can overcome  anything. Congratulations on negotiating 4% for 100grand, thats a blinding deal and shows you have a talent for negotiating and raising money. That one skill alone could eventually help you build a successful property empire. Yes your inexperienced but the best school you can ever attend is the school of life. So by doing this deal you will learn a massive amount and then be experienced. Good luck, you can call me anytime for a chat if you want. JK

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    You're right John about events conspiring to wipe out a years profit. But, as I am sure you know, they tend to work like busses such as a boiler breakdown which results in a problem tenant who then leaves and you end up with a rent void.

    Often landlords plan for an eventuality but rarely plan for them all. This is, in my experience, what kills most uninitiated LLs.

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    Landlord with 25 years’ experience in the property market and a specialist in tenant referencing, ID and credit screening. Creator of identity, credit and anti-money laundering system ValidID.co.uk

    Often landlords plan for an eventuality but rarely plan for them all. This is, in my experience, what kills most uninitiated LLs.

    Awesome comment Chris. Smile

    I think this is worthy of a thread in its own right. I will start one and would appreciate you adding to it.

    Landlord planning - list of eventualities

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