BTL vs short term let strategy

[jimmye]

Evening All,

I own a property outright (with no mortgage) in London, which I bought in August 2015 for £332.5k. I reckon it’s worth around £370k now. I lived in it from August ’15 to September ’18, after which I let it out to a single tenant under an AST and I’m earning £1395 per month in rental income. My tenant still lives in the property.

My main goal is to generate enough cashflow to replace my day job and I'll see any capital growth as a bonus. My long term strategy is to hold all of the assets I acquire without selling any of them. I'll remortgage my current property, releasing 65% of equity - I wanted 75% but the brokers said 65% is the most I could get with the rental income - and use this to purchase 'vanilla BTLs' in certain cities up North which are predicted to have high capital growth over the next 10 years or so. I would invest with the lowest LTV my funds would allow and then remortgage to 75% LTV after acquiring the asset, invest again, and repeat etc. I've set up a Ltd company to use for this strategy.

However as my main goal is to replace my salary with rental income, I’m now considering investing for short term lets (Airbnb). I'm aware of the added costs, risks etc. of doing this but I feel if it's managed well it could work. I would hire a managing agent to handle all repairs, maintenance etc. - they seem to charge around 13% on average.

My questions are as follows:

If you were in my shoes, would you choose to keep the property in London and remortgage or would you sell it so you have more cash to invest in cities which could offer much higher yields and likely more capital growth? My accountant advised me not to sell my London property but to remortgage to release equity instead. A serious benefit imho of selling the property however, is that it would enable me to buy more properties elsewhere with cash and I therefore wouldn’t need to take out any mortgages.

But would this strategy essentially mean that my money would be tied up in these properties if I wanted to stick to Airbnb rentals? I.e. I wouldn't be able to remortgage as I would then be in breach of my mortgage if I wanted to continue to use Airbnb? But if I wanted to remortgage to release equity it could then just become a standard BTL which is a good backup option.

Do any of you have experience with short term lets / Airbnb businesses? Are there any cities in the UK you'd recommend for this which aren't too saturated?

 

[totallyproperty]

Hi Jimmy,

welcome to the forum!

I know your rental property is in London, but are you also living in London yourself too? I only ask, as it would affect my reply if you ultimately wanted to retain a property in London (with a view of living in London again at some stage),as it could be a case of, once you came out of the London property market, it might be harder to buy back into it?

If you don't plan on living in London (and have no need to retain a property there) I personally think you would be better coming out of the capital. Rental yields are much higher outside of London (for buy-to-lets) and if you are investing for rental income (which is always the recommended strategy),then it would make sense to buy in cheaper areas (that are 'up and coming') with stronger yields.

With Airbnb properties, I think careful research is needed on property sizes and potential returns. I personally think with Airbnb it's about creating something a little bit different with your property. Yes you would need to compete on price, but having a designer edge, or establishing some discounts with local independent restaurants, or a welcome basket etc., are all things that can give 'perceived value' and tip a property booking in your favour.

Do you have any idea what type of Airbnb customer you would want to attract? Couples, families, etc? That could help dictate location.

I've invited a couple of our other members to comment on your mortgage questions as that isn't my area of expertise. Incidentally, we do work with a leading UK specialist property finance broker, who I would be happy to introduce you to if that would be of interest?

Kelly

 

[FWL]

Historically London has been more focused on capital growth as opposed to high rental yields although there has been something of a blip during this Brexit negotiating period. However, in the longer term it is highly likely that London will return to its previous trend with higher rental yields available outside of the capital.

The recent blip in London property prices was partially as a consequence of a trend which you mention in your initial comment. This has seen many people selling London assets to acquire “relatively cheaper” assets in other parts of the country such as the Midlands and the North of England. Rental yields are certainly higher in many towns and cities outside of London but there is a balance between capital growth and rental yields.

In a perfect world you would be able to acquire properties without the need for debt therefore avoiding interest charges. However, while there is a need to respect debt there is no doubt that secured mortgage debt (within your financial constraints) can be extremely lucrative in the longer term.

I am not really an expert on Airbnb but it is safe to say that comments and feedback do vary quite significantly. However, there is potential to create a relatively steady income stream in the longer term but as you say this would impact your ability to remortgage for equity release.

Historically cities in the UK with a relatively high student population and blooming economy have created buoyant property markets. We are seeing huge inner-city redevelopments in the likes of Manchester, Liverpool, Leeds and Birmingham. As the inner cities become more developed this has created demand for properties on the outskirts thereby effectively expanding city centres. There are some interesting opportunities out there but you will need to do your research.

 

[Longterminvestor]

A quick look at the Airbnb website will give you an idea of the rental rates on offer in different cities across the UK. One word of warning, you need to balance the income from high rental yield areas with periods where the are no occupants. Sometimes better to aim for a lower rental yield with a greater occupancy rate IF the figures add up.

 

[realdeals]

Hi @jimmye

Over the last couple of years the so-called “London premium” has diminished somewhat but there is still a difference between the value of a London property and a similar property elsewhere in the UK. Many people have taken the same route as you, selling their London property to acquire “better value for money” elsewhere.

When it comes to buy to let investments, on a long-term basis, it does make sense to look at cash flow in the short, medium and long-term and look to secure high buy to let rental yields. This may limit capital growth in the longer term but the potential to pay off a mortgage much quicker could open up new investment avenues and create additional funding. If you’re not looking to move back into the London property market, which many expect to recover once Brexit is done and dusted, then there may be better value elsewhere.

Cash flow is obviously King and your long-term target, something which is more regular and more predictable than capital growth.