Thrilmere Deacon Q and A #002
Our latest instalment of our Q and A sessions featured Oliver Mohsen-Taheri who heads up our Dubai operations. Enjoy. 🙂
A 24 year old looking to invest for the first time in order to rent. I was looking for knowledge, tips, and experienced property developers and agents as I am inexperienced, 24 year old currently saving to buy a property in order to let. However, after reading on this topic, I believe that renting out my first property could be quite difficult.
Oliver Mohsen Taheri:
Yeah. I mean, first of all, 24 years old looking for your first buy-to-let. Brilliant, I think it’s great. If you think about the amount of time you’re going to hold a property for, if you’re buying it now, by the time you’re 50, 60 years old, the value of that property would have multiplied many times over. And it’ll give you a nice retirement pot. I guess it really sort of stems back to why do you want to invest in property? What’s your goal? Is it that you want to have something for retirement? Is it that you want to supplement your income? And that then determines where you should be looking to invest. Also things to look at. Who’s going to manage your property as well? Are you going to manage it yourself? If so, do you need to learn a bit about the property market about regulations or are you going to use the management company? If you’re going to use a management company, who are they? What’s their experience?
And obviously, most importantly the area that you’re buying the property in, you need to make sure that there is a tenant demand. I mean, there’s no point buying a nice property if there’s nobody in the area who’s going to live there.
keep it Metro, keep it in the center of any town or city where you are and you’ll do quite well.
Also, would my deposit be higher due to me renting the property out?
So I guess compared to if you’re buying as a first time buy, you might be able to put down 5%, but if you’re buying a buy-to-let property, really you’re looking at about a 25% down payment. Sometimes you could get to 20 but realistically would say probably 25% so you do need a little bit more, but your rental income should cover the mortgage and long term it would certainly be worth it. It would be a good investment.
I have a one-bedroom flat currently in South Oxfordshire which has given me around 5% net return and I’m thinking about buying a similar one for buy-to-let. Some of my friends are going into holiday lets and they’re earning a lot more. From a tax purpose, holiday lets seem to be quite attractive. What are your thoughts, and what is involved, and is it hassle-free? I’m not sure which way to go.”
Yeah it is a good question. I mean holiday lets can generate you a higher return because obviously you’re charging a nightly rate rather than monthly rate. But like Vinny mentioned, there is a lot more work involved. You might have people coming in and out staying for one night, two nights, a week, or whatever. And then you need to arrange somebody to let them in. Somebody to let them out. Cleaners, all of these things. So it’s just weighing up the sort of… What again, why do you want another property? What’s the goal? What’s your long term goal as well? Is it that you’re buying a property to generate a certain level of income? If so, will the holiday rental model help you achieve that? If so, great. And then you just need the right team around you in order to manage the property, run the property, and obviously like you said, yes you can benefit from the tax incentives as well. So I mean, there’s pros and cons for it.
Releasing equity in the current home to use as a deposit for a second home.” Great idea, love it. So read it out. “Hi all. We currently live in a property which based on recent sales, is valued around £160,000 to £170,000 and we currently have £72,000 left on the mortgage. How do we go about releasing some of the equity in this property to put towards a deposit on a second home? Our intention is to rent our current property and use the money to buy a second home because we’ve outgrown it. A possible rental income, £850 to £900 pounds a month.
Oliver Mohsen Taheri:
I’d use £160,000. And then refinance it on a 75% loan to value. So this is 75% of your property value that you can borrow as a new mortgage. You pay off your old mortgage. So you pay off your £72,000.
So that gives you a £120,000 new mortgage. You pay off your £72,000 and you’re left with £48,000. So you can use that £48,000 as a down payment.
As a down payment on another property. £48,000 is definitely going to get you a really nice one or two bedroom apartment in any of these areas that we’ve mentioned to you before. So it’s a really good start to instantly double your portfolio from one unit that you can’t really live in to two units and something that’s going to generate some income for you.
Yeah. And even if a second home was used, you weren’t going to use that for you to live in. You’ve essentially got £50,000 as a down payment. Great. Opens you up to a lot of good areas. And obviously the rental income you’re going to generate from your first property after the mortgage is paid. You’re going to have a good few hundred pounds in your pocket every month as well. Which you can either use to pay towards your mortgage on your next home that you’re living in. So essentially potentially living for free depending on your mortgage.
I have a flat that’s worth £120,000, which I have inherited. It’s almost fully paid off.” Congratulations. That’s pretty super. “What would be the next best step for using that flat to build my portfolio? How can I release equity in the flat and reinvest it in apartments? And what is an interest-only loan?”
A lot of people want to know, how can you release equity? How can you pull out funds from your current property and put it into a second home? You’ve got here £120,000 on the value of the property. The mortgage is almost fully paid off, exactly the same equation as what Oliver just went through in getting a 75% remortgaging at 75%. Pull out then the difference, pay off what’s left and then you use that to buy the next property. And in this case, if you’re pulling out anywhere… If you’ve got very little, let’s say off, yeah.
Let’s say you pulled out 75% of £120,000 so about £90,000. You could use that for what, two, three properties in the right areas.
To put it into… if you’ve got £120,000 rather than £90,000 put that into three or four properties in the right areas. So I’d say do a bit of research on that first. Speak to a few local letting agents, find out what the demand is, what sort of rental returns you can expect, and then you can decide which way to go with that place. And then yeah, like Stuart said, you can refinance. The best thing to do for that is to speak to a mortgage broker. They’ve got access to some lenders… Some brokers have got to access hundreds of different lenders to ensure you get the best rates rather than just going to HSBC or NatWest and just being offered one or two rates. Go speak to these guys, get the best rate, get the best loan to value. And obviously it will ensure you can maximize your return on investment as well.
You only pay the interest on the loan. A lot of people say, “Why would you do that? What happens at the end? You’ve got this big loan to pay off.” I guess that the reality is with a buy-to-let property, the aim is to generate income.
Cashflow. So by putting more of your cash into the property, it doesn’t give you a better return on your investment. Yes, you’ll generate more in your pocket, but you’re putting more back in. So actually when the value of the property goes from there to there. Whether you’ve put in that, or whether you put in that, you’re better off putting in less because more of the growth is yours.
You just get to see more of it in your pocket, basically. It’s all about cashflow this game, I think. And if you’ve got a mortgage that is full repayment, you’re paying off the interest as well as chipping away at the capital, which you don’t necessarily need to do. It’s not a practice that absolutely everybody takes. Most investors do look at this as an interest-only strategy. But having spoken to one or two of my mortgage brokers this last week, even the guys over at MFS were suggesting actually, our main concept there, was suggesting that he actually has a lot of his buy-to-lets on full repayments. He’s got a couple that are on interest only and a couple that are on full repayments. Just based on where they are, on how he wants to manage them within his portfolio.
Do you feel there is any big difference between a 999-year leasehold and a 250 leasehold versus freehold if buying as an investment?
I would say in my experience, in my understanding, absolutely not. If you’ve got a 250 year leasehold, you don’t really need anything more than that. Unless my friends I don’t know which one of our clients it is. Unless you’re working on a cure that’s going to let us live a lot longer than we think. I mean it’s not really something we need to worry about. The only difference with freehold and leasehold is when you’re working with a leasehold that’s under around 85 years.
Yeah. That’s when mortgage brokers and mortgage lenders decide to actually we’re not going to lend on it. Or you might find it harder to get a mortgage. So if you’ve got a mortgage… If you’ve got a property that has a 99 year lease for example, as it ticks away, years down, a decade goes by and you’re at 89 years, you might then find it difficult to find a new buyer who’s going to be able to finance it. Yeah. Because, a lot of lenders will say, “Actually we don’t like the look of that.” However, a lot of new build property, a lot of the options that we work on have a much, much higher lease.
Obviously I think one of the points was about freehold as well. I think a lot of people, especially in the region that our office is in Dubai. A lot of people only want to buy freehold and I think part of that is because of maybe not fully understanding the benefits of buying a leasehold property. Obviously if you’re buying a freehold property, if anything happens to it, any maintenance that needs to take place, you’re responsible. You’ve got to sort it out. The roof leaks, that’s your job. Leasehold was introduced a number of years ago in the UK and a number of other countries, to essentially protect all the owners in the building. You have a central management company, they’re responsible to take care of everything. The freeholder is also responsible to look after everything as well. And for you as a landlord or you as an owner in a building that’s leasehold, you can relax a bit more in the knowledge that there’s somebody else taking care of the lifts, the cleaning of the communal areas, the lights in the stairwell, the roof. Somebody falls over as they walk in the main entrance, they’re not going to sue you. So it should give you that peace of mind that somebody else is there to help.