How do I buy to let when the rent won't cover the mortgage payments?

Question

It is looking increasingly like none of us will get a pension in years to come, so I have been toying with the idea of buying to let for some time. However, even the cheaper houses, reposessions and buying at auction cost so much now that any feasible rents wouldn't cover the mortgage payments. So, is it really wise to buy to let now, or have we missed the boat?

Answer 1

Let me start by saying that we (myself, my brother and my father) currently own 37 single family rental properties.

The best way to overcome the issue you are talking about is to buy rundown properties for below market value and fix them up yourself. This takes cash and usually a lot of it. It's not uncommon for us to spend 10-15K(and in some cases much more) refurbishing a property after we buy it (new siding, roof, carpeting, appliances, etc).

The second problem you will run into is actually finding the properties to buy. We spend hours just driving around and looking for investment properties. We have also developed relationships with local real estate agents and property managers so that we get a phone call when something interesting comes on the market.

The third problem is that it is extremely difficult to make any money owning just one or 2 properties.

If you only have one then if it goes empty for 3 or 4 months you have a cash flow problem. If you have 10 that is not so much of an issue as you can leverage the money from the other units.

Your fourth problem is going to be time. Remember that everytime a pipe breaks or a sewer overflows, you get a phone call from the renter. If you know how to fix it (and can afford to take the day off work) great. If you don't, thats your entire month's rent shot on the plumber.

If you are interested in this business for the long term and want to grow, it's a great business and it's still very viable to get into.

If all you are looking for is to own one or 2 and stay small, I would strongly suggest looking at a different investment.

Answer 2

There is a buy to let market out there, the key is to identify the people who are most likely to need rented accomodation and work out what type of housing they require.
At the moment there are huge numbers of immigrants in the UK from Lithuania and Poland. With the expansion of the EU to include Hungary and Romania next year we are likely to see immigration continue at at least the same level as it has for the last year or so.
The great things (from a landlord's point of view) about these people are:
1. They are all legal
2. They have come to work and therefore earn money to pay rent
3. They don't have anywhere to live
4. They don't mind sharing with each other

Now these people aren't typically going to be earning megabucks, so trying to rent them a city centre pad with views of the river might not be the best way to go about it. Pick a large house in an urban area and fill it with as many bedrooms as you can - think student accomodation.

Another thing to bear in mind is that property is cheaper Oop T'north. You can buy a reasonably large house in South Leeds for under £90k, for example. Over a 20 year mortgage at 5% your monthly payments would be approx £750.00
Get four people in there at a very resonable £200.00 a month each plus bills and you're £50.00 a month up and they're paying your mortgage for you at the same time.

Rental prices are dictated by property prices. There might be a bit of a lag before they catch up, but they will rise as housing prices do. The facts are that the UK population is rising faster than the number of houses being built. As a wise man once said 'Buy land - they've stopped making it'.

Answer 3

Whether you are buying for yourself or buying to rent, for 100% financing, of course that is the case. It is the way these things work, however, that once you have bought, your most important cost is fixed, versus rent which always increases over time (unless the area goes so far down as to basically be a war zone). Inflation.

If you're looking for positive or comparable cash flow right away, you're going to have to make a substantial down payment. That's just the way it is. On the other hand, in the US at least, the tax treatment for mortgages, whether on personal residence or on investment property, makes a substantial difference in the question of whether it is worthwhile.

The math is on the side of renting (or not buying) if you're not going to keep it for a few years. On the other hand, if you're planning to keep a property five years or more, the economics generally favor property ownership over any other investment.

Answer 4

It is a myth that renting is always worst off than buying.

Rent vs. Buy as Housing Market Continues to Slump

As housing market slump, it is easier to calculate "Rent vs. Buy" scenario. Because "appreciation" is no longer a factor.

Mortgage payment consists of two parts: interests and principal. Interests are like rent, which doesn't add to the equity to your house. It simply disappear as your pay it.

If interests portion of the mortgage payment is roughly equal to rent of equivalent property, then it is a decent buy.

For example, let's buy a $500,000 condo with 0% down and apply interests only loan (just like renting a place). Mortgage payment would be $3250/month. It is a bad buy, because you can enjoy same property for $2000/month.

Please note that I assume the tax benefits from home cancel out fees from home association and property tax. For more accurate calculation, consult with your CPA or accountant. But NOT your realtor, whom will say anything to get the deal to go through.

And again, if you like a particular property, then paying more may be reasonable. You are the only person who can decide how much more premium you are willing to pay.

http://money.cnn.com/2006/09/08/real_estate/caught_in_the_bubble/index.htm?postversion=2006090814
http://money.cnn.com/2006/09/05/real_estate/Ofheo_home_prices/index.htm?postversion=2006090514

Answer 5

Are they rent controlled. You are the owner, set the rent to cover the mortgage and reasonable repairs/taxes etc. If the local government says you can't, buy anyway and tear down the building. Pretty soon no one has a place to stay and moves to a new town, thus you get the happiness of totally destroying the tax base and any hope of them attracting new business.

Answer 6

Most buy to lets require 15% deposit so you should get a decent rate on this.

Perhaps target a student area where you can charge per person rather than monthly set rate, 3 students paying £350 per month is over 1k per month, most students will be offered inferior accomodation from their university at a similar rate.

Good luck and go for it ! If you are in the uk make sure you get listed on rightmove.co.uk for renting as all students check this.

Answer 7

You can try to get an insurance police over the span of the mortgage that will mature to the required amount. One of my neighbours once tried to sell his house. The neighbour was a bank manager and the buyer was a bit short of funds. The bank manager arranged the policy for him. Not sure what type of policy it was but you could check with your bank. Good luck!

Answer 8

You have just learned why this type of business really doesn't work for most people. I bet you haven't even factored expenses like dead beat tenants, building repairs, insurance, etc.

Answer 9

buying now is best at time if you don't plan to sell in awhile here in Detroit it's a buyer market every one is trying to sell and selling less than first posted go for it but do research on tentents and city codes we have some rentals in our family it works

Answer 10

as long as they can cover the interest portion it is fine,,, but if it is unable to cover even the interest.. then u better sell it off to minimize lost