Buy To Let

As part of my plan for passive income, I have become a landlord. I made this decision in 2013. Not sure how this will pan out. A few FI gurus talk about having a rental or more and I have seen others discuss rentals as a way of generating passive income but its not for the faint-hearted (which may be I am – its a step outside my comfort zone).

My brother was selling his house and I was working and had the money from my redundancy sitting in a savings account doing nothing useful. ie. earning 0.00000x% and inflation eating away any value in it.

I spoke to a few guys at work who have rental properties and also researched the area around where my brother was living and the property was a prime rental candidate. The neighbouring property is actually a rental and a reasonable rental income could be obtained.

The rental fee charged is £575.

I have a BTL mortgage of £268  £249 (lump sum payment made!) a month (interest only, fixed for 5yrs).

So that gives me a remainder of £326 (although the agent fee needs to come out of this so, it leaves me with £250 per month.

I have some annual costs to take out of this: house & landlord insurance & service fees (boiler servicing, safety certificates) so this doesn’t really leave me with much left but what is left will be taxable income.

Based on the money I have put in there as the deposit (my redundancy money) it is earning more that it would sitting in the bank account. That really says something about the state of the economy. Plus I may get some taxable profit out of the property when I come to sell it in a few years time.

Year 1 has made a small loss due to up-front expenses to get this BTL running.

Year 2 onwards should see a profit – approx 3% (after expenses) – which if I reach FI means the way the taxman treats this income will change and my tax rate should lower which would be good news too.

Year 3 – had lots of maintenance costs which has wiped out a considerable amount of my income for the year. That and the property being void for 2 months has made a dent in the income stream and I am likely to be lucky to break even this year.

In the meantime, it will be earning me more that I would get if the money had been sitting in a bank account. My only other choice would have been to buy income generating shares – which could have been a better, less hassle option.

UPDATE:

As most people seem to report their BTL as a gross yield, I am getting 6% yield which is much better than this invested money would have earned in a savings account.

The latest UK Budget changes will affect the mortgage relief I currently get. It would be more beneficial to have no mortgage on the property and then offset maintenance costs and use my tax allowances.

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