Should we take out a mortgage to fund our buy-to-let venture?

26 May 2015

Q

We've recently received some capital from the sale of my mother-in-law's house and would like to use it to fund our first buy-to-let property. We have enough cash to buy a flat in our neighbourhood. However, the letting agents we've spoken to recommend buying two properties with a 50% deposit and 50% mortgage. My husband and I are cautious by nature but don't want to miss the boat if there is money to be made by having two properties. We are both in our early 50s and have paid off the mortgage on our own home. We would appreciate some impartial advice.
From
SJ/West Midlands

A

Using buy-to-let mortgage finance is a necessity for most aspiring landlords but even some who do have the funds to buy a property outright will still use a mortgage to help build their portfolio.

If you are able to buy two similar properties with the same capital outlay, you could double the amount of rent coming in each month.That should result in an increased rate of return on your capital.

Of course, you do have the additional cost of the mortgage to contend with and you need to factor that into your budgeting, along with the other costs of running a buy to let such as letting agent fees and the doubling of purchase costs such as stamp duty.

You can, however, offset mortgage interest against the rental income for tax purposes.

The benefits still need to be weighed up against the fact that any void period without tenants in the properties will see your rental income dry up.The mortgage will still need to be paid, which will reduce your overall return and you will need to have a buffer to cover costs during that period.

In contrast, a single, unencumbered property would not carry any mortgage cost that would need to be met from income during any void in tenancy.

On the other hand, having more than one property should reduce the chances of having no rental income coming in at all.

It also gives the chance to put some diversity into your properties, so rather than buy two properties that are exactly the same you could choose a different property type and area.This could reduce the chances of both properties being empty at any time and reduce the exposure to one particular property.

The bottom line is that you really need to weigh up the benefits of being able to buy two properties against the fact that you will be taking on a debt that you didn't originally plan to have.

If you are happy that you can make provision for the additional costs of mortgage interest plus the usual upkeep and managing of another property, then it could be worth considering.

If, on the other hand, taking on a mortgage makes you nervous, perhaps it's not for you – especially as this is your first foray into buy to let.