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  • Buy-to-Let

    Buy outright or with a mortgage?

    Hello I’m after some advice from some experienced BTL’ers

    Ive had a 2 bed terreaced BTL for 12 years on an interest only mortgage worth £78k with zero equity which I’m currently in the process of selling (bought at a bad time)

    I have a mortgage on my family home which I don’t want to take any money out of.

    Me and my work colleague are looking to start buying houses together, we can afford to save a combined total of £3000 a month so that’s £36kPA

    I’ve noticed that the standard 2 bed terraced houses don’t tend to go up in value as much as larger family homes as the market is saturated with them.

    My question is do we,

    1)Save up for 2 years and buy a house outright for around £70-£80K and rent it out for around £550pcm and repeat every 2 years

    2) Save up for 1 year and use our £36k deposit to put down on a slightly larger house returning approx £600-700PCM

    or finally 3) save up for 2 years to put down on a large family home returning £800-1200PCM

    Looking to set LTD company up as we are both on 40% tax

    I’m thinking owning a house out right we won’t be able to offset the mortgage payments against  our tax.

    obviously these figures are very rough, I’m just trying to explain my thought process.

    many thanks in advance.

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    Depends on your end goals, anyone looking to scale up as quickly as possible and who isn't afraid of a bit of debt should be using as much of the banks money as possible to invest, especially with interest rates looking set to be low for the medium term future. The best way to explain it is that anyone looking to make the highest returns is looking at ROI (return on investment) which is essentially cash in vs cash out. I'll do two examples below.

    Example 1

    House cost: £100,000
    Deposit: £100,000
    Income pcm: £600
    Income/profit annual:  £7,200

    Cash invested: £100,000
    ROI: 7.2%

    Example 2

    House cost: £100,000
    Deposit: £25,000
    Mortgage: £75,000
    Income pcm: £600
    Income annual: £7,200
    Mortgage cost (3.5% interest only): £2,625
    Annual profit: £4,575

    Cash invested: £25,000
    ROI: 18.3%

    There are a number of benefits to borrowing to expand versus buying cash outright, firstly you can buy more properties quicker so instead of having 1 property for 100K you can have 4 properties with 25k deposit and because you can always make more money than borrowing costs it means the more you can get your hands on the more money you can make. There is also the benefit of what is called leveraging which is that over time your borrowing will decrease naturally through inflation and if you buy the right property in the right place you would expect to keep 100% of the capital growth on that property which means over time your loan to value should decrease naturally.

    The above is over simplified and doesn't factor in anywhere near all of the costs of property investment but especially now where you can fix at a low interest rate for 5 years, it's a great time to borrow if you want to expand quick. That's not to say this is the right route for you and your friend, depends entirely on your goals.

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    Beautiful in its simplicity

    This has been my core strategy for the last 20 years

    And with CG taken into consideration you push ROI towards 40%

    It has made me financially free

    Leverage and compound interest can lead to perpetual motion

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    Jonathan Clarke. http://www.buytoletmk.com

    For what it's worth:

    Keep the zip of your purse firmly closed until this Brexit farce is resolved,

    In the meantime suss out potential purchases that you would consider to be suitable investments so that you have  the right opportunities lined up and due diligenced for when the time is right next year. Or not as the case may be.

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    Full time Landlord in WestYorkshire, mentor and property education to new and inexperienced PRS investors. 25+ years of working knowledge. RLA member http://www.landlordgeoff.co.uk [color=#800080]