Buy To Let 'a mate'

Buying property to let should be considered a business not a pastime.

Buy To Let Case Study

Mr Friendly buys a house for letting. The property costs £150,000 and on an interest only mortgage has a monthly mortgage interest payment of £575.

Mr Friendly, aged 30, has a friend who wants to rent his property. Mr Friendly is very friendly and offers his mate a deal. The deal allows the mate to rent his flat for £600 per a month.

Our reply

Mr Friendly needs to look closely at the way he is starting out on his future empire. It is important to receive a minimum rental yield of 6% in order to make the figures stack up. On this property he would need a minimum of £750 per month. As we can see Mr Friendly is renting his property to a friend and this may be something of a concern. He is renting the house out at £600, which looks a lot like “mates rates”, but it is crucial to draw a line between friendship and business.

“By renting out to sharers he could potentially achieve a much higher rental income. He wants to buy many buy-to-let properties and he will need to be ruthless in his approach if he is to turn his plans into a viable business venture. If he is not charging a cheaper rent because of his friendship, Mr Friendly must look to see if this property is actually a good property in terms of investment.

“At 30, Mr Friendly certainly has time on his side and it is of course more than likely that he will experience capital gain on his property; however I cannot stress enough that you should not rely on this solely. In the event that the capital appreciation is not enough to make a significant profit, by having received substantial yields Mr Friendly will have built up an extra pot to help him continue his plans.

“Mr Friendly has talked about the area in which his property is located and cited the postcode as a cause for concern. Of course there will always be fashionable and unfashionable postcodes, but the trick is striking a balance between the purchase cost in a fashionable area and the potential of those in the less fashionable. Mr Friendly is convinced that his property is of a good standard, and if this is the case, potential tenants and indeed buyers will look past the postcode as the scramble for decent property continues unabated despite rising interest rates.

“Ultimately it is important to be disciplined and treat buy-to-let as a business rather than a hobby to top up your main income.”