New landlord asks if viable financially

[themitch]

Hi

Quick sanity check ... I am about to rent out 2 flats:

Flat 1: 2 bed flat, value £240k, mortgage £175k. Outgoings (mortgage, service charge, insurance) £900pm, Income (rent) £950pm.

Flat 2: 1 bed flat, value £140k, mortgage £120k. Outgoings (mortgage, service charge, insurance, agent fees) £700pm, Income (rent) £750pm.

For, pretty much, £50 per month "profit" on each property - is it worth renting them out? Am I doing something wrong or is this the right way to do things?

Thanks
M

[MrShed]

Depends on the mortgages really. Are they repayment or interest-only? On interest only it seems like a very tight margin.

[Energise]

With those figures I wouldnt even consider it, a 3 week void in each and you are almost wiped out, thats without the inevitable costs and no earnings on your 85K equity.

[P.Pilcher]

Everybody has to start somewhere. Yes, it is very tight but hopefully rents will rise faster than mortgage repayments and in a few years you will have capital appreciation of your investment as well. Don't forget that if you charge max rent you may get a higher turnover of tenants than if you kept you rent a tad below the maximum the market will bear. In the long run this could be to your advantage.

P.P.

[themitch]

Hi guys

Thanks for the replies. I thought there was a school of thought which said to keep your profit as low as possible so as to pay as little as possible income tax?

On the second property, the agent is proposing 8% let only or 10% let and manage. Although the 2% seems very competitive (i negotiated hard on that), it is eating into what little profit I am making - should I skip the full manage and take the extra £180 the 2% full management fee equates to?

The flat is furnished - I assume I would be silly not to take out contents insurance on my furniture in the flat?

Thanks
M

[MrShed]

Well, you could say the same for anything "lets not get a job over 20,000 pa to minimise my income tax".

I believe that with letting(especially if you use a letting agent, as it takes up very little of your own time) it is almost worth making a loss, as long as the loss is small, in order to get the long term capital gain on the property. However, this all depends on how you view the market I suppose - I personally see very little basis for the widely predicted house price crash/fall, in the long term house prices will always go up IMO.

For the 2% you might as well keep it managed, that 2% is easily worth the time you would otherwise put in.

Bear in mind that over the year you will be quite lucky to break even, as you will be making only £1200. It only takes one broken boiler, one damaged carpet and 2 weeks of void period to wipe that out. But as I say IMO it is still worth it in the long run. And yes it would be prudent to take out contents insurance.

[P.Pilcher]

I am seriously concerned about the 8% to find a tenant bit. Can't you find a reputable agent who will do this for you for a one off fee? In this case you will do better out of a tenant who stays long term. Swings and roundabouts I know, but it is the way I prefer to do business.

P.P.

[themitch]

Hi PP


I am seriously concerned about the 8% to find a tenant bit

I spoke to around 4 reputable letting agents in the area and they all quote between 8% and 10% of the annual income as a one-off fee to find a tenant. It sounds expensive (£720) but consistent. But I don't have to pay it yearly, I don't think.


Bear in mind that over the year you will be quite lucky to break even, as you will be making only £1200. It only takes one broken boiler, one damaged carpet and 2 weeks of void period to wipe that out. But as I say IMO it is still worth it in the long run. And yes it would be prudent to take out contents insurance.

Thanks for the sound advice, MrShed, any recommendations? I just rang Endsleigh and for standard (ie no accidental damage) Landlord's Contents only insurance, to cover upto £10k, they want to charge £100. Doesn't sound unreasonable to me?

Thanks
MM

[MrShed]

Sounds quite fair to me off hand - Endsleigh are certainly a highly recommended insurer.