Lucia France: Paul, onto your next question then. “I’m due to receive some money from my father’s will. This will allow me to pay off my mortgage for my property, a two-bedroom flat. After my mortgage is paid I will have an additional amount of money that would be enough to buy a 75,000 pound one-bedroom flat outright. I even have a potential tenant in mind. I think I would get 400 pounds per calendar month, 450 per calendar month in rental. I was wondering if you would think this is a good idea and if there is anything I need to watch out for.” Doesn’t say where it is, but I’m guessing it’s in London.
Paul Mahoney: The price does kind of give some sort of indication of where it is. It must be in the North of England because there’s not really much to buy around that price in the Southeast. Things to consider, so they’ve said that they’re looking at buying that property outright.
Lucia France: That’s correct, yes.
Paul Mahoney: In a way it’s somewhat similar to the previous question in that I’d usually discourage people against buying buy-to-let property outright simply because, as I say, it is an under-utilization of the money. You’re looking at getting on a net basis they’re probably only … Because they said 400 to 450 rent per month for an 80,000 pound property so that’s about a five percent yield. That’s not great for a property of that value.
Lucia France: Right. Okay.
Paul Mahoney: On a net basis they’re probably not going to be getting that much when they consider things like management, maintenance, whatever. If it’s an apartment they’ll have service charges, ground rent. There’s a whole lot of things that will go into the cost of that property.
Lucia France: For sure, yeah.
Paul Mahoney: By taking leverage you can actually boost that yield because borrowings are cheap at the moment, and boost the ability for growth. I’d consider whether a mortgage is suitable. Again, similar to the previous question, I’d consider whether this property they’re looking at is actually a good investment. It seems like this is the first investment they’d be making.
Lucia France: It seems so, yeah.
Paul Mahoney: Seek professional advice on that as to whether it stacks up. Not just what it might rent for on a monthly basis because quite often, especially with cheaper properties in less desirable areas, often the rent can seem quite high but also the vacancy periods could be quite high and the types of tenants can be less attractive than you might want.
Lucia France: Right. Okay.
Paul Mahoney: Quite often I’ll see opportunities that people show me that the yields are 15 percent, but if your property is empty half the year [crosstalk 00:22:11]
Lucia France: It doesn’t really matter. Yeah.
Paul Mahoney: Or if your tenant doesn’t pay, there’s a whole load of things to consider so far as whether something stacks up as an investment or not, not just what you think it might rent for on a monthly basis.