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  • Buy-to-Let

    Pick apart my property plan ...

    Hi everyone,

    first off I wanted to say thanks for all the helpful advice and guidance on my previous two posts. This community has been fantastic so far. I'm writing out my investment plan and reasoning in the hopes that, if there are any glaring flaws they will be pointed out to me here. 

    So I have come up with a buy to let investment plan based on my situation.

    The Situation

    Myself and my three brothers, all aged under 25, have inherited a property worth £650,000. By the time it is sold and the inheritance tax, solicitor fees and letting agency fees are paid we will each be walking away with a little over £120,000. We expect the property to be sold within 6 months.

    The four of us have sat down and agreed that we are currently self sufficient and don't have any NEED for this amount of money at this time and are happy to invest for the long term. We would like to invest in property because it seems relatively low risk if done correctly. We have also decided that it is advantageous for us to band our assets together and look to build a joint portfolio rather than investing separately. So we have a capital of £400,000 to invest. We have also decided that we are not comfortable with the idea of investing outside of London and have agreed that is where we will be putting our money.

    The plan

    We pool our resources together and invest in 2 London 3 bedroom terraced houses in West London/middlesex for £400,000 with a 50% mortgage on each.

    Pros

    • a 3 bedroom terraced house is easy to source in London
    • If rented to a family. Things are generally safe and likely longer term lettings
    • Option to be a 'live in Landlord' and save tax on rental income
    • Seems like capital gains on houses may be higher. Although this is far from clear with lots of contradicting evidence
    • Opportunity to add value to the house with extensions/loft conversions etc. (our father is a carpenter with a network of tradesmen)
    • Mortgage repayments are lower and much more affordable (£500 per month)
    • LTV is fairly low. Meaning we can cash in on capital gains sooner and re-invest sooner
    • We can 'stagger' the investments, buying one house and focusing on getting it up and running before buying the second. If one house is vacant the rental yield from the other can cover it.

    Cons

    • May be tougher to find a family to rent it. We run the risk of the house lying empty for a stretch
    • I don't really understand the process or risks involved with renting out multiple rooms in a shared accommodation. Is it easier to find one family/group to move in?
    • All investors stuck with the property. Need to have a chat about worst case scenarios and sticking to a strategy
    • All investors need to agree what to do with letting profits. They should be set aside and re-invested in the property

    So based on my calculations if we were to rent out a 3 bed terraced house in Greenford/Hayes/Southall for £1500 a month. After the mortgage and tax is paid we would get:

    around £10,000 for two rented houses (with a property manager)

    around £20,000 for two rented houses (without a property manager)

    By saving the rental profits, every 3-5 years my father could do a loft conversion for us. Costing roughly £50,000 and taking roughly 6 months. The cost of a vacant house could be covered by the rental profits from the other house. The loft conversions will add value and rental potential to the houses.

    Where we would like to invest

    We have been looking exclusively at areas in west London/middlesex that will hopefully have a high capital growth. We have decided on the following areas.

    1. Hayes and Harlington

    2. West Drayton

    3. Southall

    4. Greenford

    This is because of their proximity to the Crossrail. Their proximity to where we are currently living. Their proximity to heathrow airport where I assume there are plenty of working folks in need of accommodation. Their relatively high rental yields when compared to the rest of London

    Again, this is a plan we have come up with and hopefully it makes financial sense but if there are any flaws or things I am overlooking please let me know

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    You each have 325k inheritance tax allowance so no inheritance tax to pay ?

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    The deceased estate pays IHT not the beneficiary.There would be IHT to pay on any amount the total estate exceeds £325000 however if the deceased person had a spouse who pre deceased them and had not used their £325000 exemption  on their death then this is doubled to £650000

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    We had a similar situation a few years ago. And we rented out the house we inherited and then remortgaged it it to buy other properties. If you did that then at least one house would then be free of stamp duty, solicitors fees etc?

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    Thanks Micheal,

    We have roughly £120,000 to pay in tax and very little savings between us. Do you think we could get a mortgage on the property with no deposit?

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    You will own 100% of the property you inherit so if you re-mortgage at a LTv of 50% you will effectively have a deposit of 50% if you use a LTV 0f 75% you will effectively have a deposit of 25% etc. minus taxes and fees

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    Hi Conor,

    What a fantastic conundrum to have!

    A few thoughts from me.

    I wouldn't sell the property you inherited.  I would take a look at it with fresh eyes.  Does it require refurbishment, does it have development potential, can you add any value?

    Once established how best to maximise this asset, I would rent it out as a BTL, taking out a BTL mortgage for around 60%.

    That would leave you with a pot of circa £390K at the current value and rental income.  You could agree with your brothers that you use the net rental profit to split it four ways, giving each a bit of extra monthly income.

    Then the money redeemed by the BTL mortgage could be split four ways for you each to have a pot of money to play with.

    I would caution against going into business with your brothers for two reasons. First of all, money can ruin even the best relationships and has done on many occasions that I personally know of.

    Secondly, you are becoming financial associates.  If one of you becomes financially corrupted, it could affect the rest of you.

    Work together for the greater good but keep your business affairs entirely separate.

    I would go to a developer with 2/3 bed new build houses around the £300K mark with a 30 mile radius of your chosen locations and negotiate to buy four, one each.  You should get a deep discount for a bulk purchase.

    You then have economies of scale to go to lettings agents etc with four properties.

    My plan means you end up with 5 properties not four and you keep the main asset of your inherited house to "seed" additional wealth.

    The first thing you all need to do as individuals is meet with a mortgage broker and ascertain if you qualify for BTL finance.  You may have different financial profiles that impact how much you can borrow, so without this knowledge it is all a bit of a moot point imho.  (Forgive me if you have already done this).  Property Tribes Financial Services on 01206 654444 would be pleased to advise you and help you access BTL finance.

    Hope that gives a different possibility of how you might make the most of your circumstances?

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    Hi Vanessa,

    Thanks for the detailed response. I didn't think keeping the inherited property was an option. As far as I know and according to our solicitor. We have a lump sum of £130,000 in tax to pay along with some funeral costs and other expenses. I didn't think was possible to remortgage an inherited property? If it is then it's certainly worth looking into.

    As far as adding value to the inherited property I don't think there's much scope to improve it value with renovations. It's valued highly because it's located in a nice part of Ealing with good local school. This property already has an extension and it is not possible to get planning permission for a loft conversion. Due to conservation laws. It's also only a 3 bed terraced house.

    Personally I believe that there is more potential growth in a property with the scope to renovate and add value.

    But thanks for the financial services number. I could use the advice!

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    Great to have cash to buy. Best value is at Auction.

    Renovate and then rent.

    As you are near Heathrow I would definitely look at doing an HMO.

    This is what my son and I do near airport and all our rooms went within 3 weeks. We use an agent to find them and do all the checks.

    We only accept professionals. We are getting 3000 a month instead of 1800 for just a house. Someone leaves we always get replacement quickly. 

    You need to look carefully at HMO as 5 beds are better than 6 or more because fewer requirements. Also only 3 lenders will lend on 6 beds or more.

    Don't go to 3 storeys as it becomes a compulsory HMO to be registered and lots more requirements ie fire doors.

    Good luck

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    What if any are the licensing requirements of the council if it has introduced selective licensing?

    Everyone knows the issues of 3 storey properties.

    A normal house which has more than two households is now a HMO.

    Are such properties required to comply with the same regulations as a 3 storey property which has say 5 rooms and 5 households?

    If they are then it makes such properties unviable.

    There is the threat of ICTB plus major ugly improvements to the property to make it HMO compliant.

    So before one ventures down the road of multiple households in a normal two floor property one has to know what the council is doing or will do

    Renting out rooms may not be allowed except after enormous costs to make the property HMO compliant.

    There is also the mortgage issue.

    If a council determines that due to the occupancy status of a property that it is a HMO what will the lenders do?

    Even if the tenants are all in one AST the council will consider the property as a HMO.

    As this is a material fact that the lender MUST be advised of and then  what reaction will the lender have!?

    I suggest they would require a HMO mortgage product and for the appropriate HMO requirements installed.

    What if that isn't viable?

    That could cause many problems.

    It isn't as easy as you suggest no matter how well rooms may rent out in a normal 5 bed semi.

     Not many normal family homes have 5 bedrooms.

    Invariably a loft extension has been built and that makes a normal 5 bed house with 5 households a licensable HMO even if the tenants are on one AST unless they can prove they are family!

    Requiring all manner of very expensive ugly HMO improvements.

    I suggest you are in breach of lender conditions!

     Plus possibly HMO conditions.

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    You are completely wrong,I'll start by stating our HMO is fully legal and exceeds all requirements. In fact we made it future proof by installing interlinked alarms in all rooms and fire doors, also paid for a fire inspection, none of which were required.. We have our mortgage with a lender who knows it is an HMO. Legally our HMO doesn't have to be registered as it is only 2 stories, but the council does know it is an HMO and was converted under permitted development. HOWEVER councils can make their own rules. An example being in Nottingham, some areas require ALL HMO's to be registered and other areas, under the same council, only require HMO's under the national registration requirement to be registered.

    Yes HMO's are more work but the rewards are high. You just need to make sure you comply with everything required under the rules. It is not rocket science and as 'Newbies' it has all gone very smoothly. we are looking for more.

    Lastly as for 'Ugly conversions'. Make sure they are not. If you buy a run down property that requires a lot of work then all the 'Requirements' can be hidden. Our renovation was high spec as we only wanted professionals and wanted it easy to be sold as a house, if needed.

    Only hitch was Mortgage company wanted us to run it for 6 months before they would lend to us.

    Derek

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