My family is struggling on £20,000 a year. Should I downsize my home and invest in buy-to-let?
06-01-2015
Money Makeover: The arrival of a second child means £17,000 a year less for this couple – is a buy-to-let rental property the answer to their problems?
Baby steps: Sam and Melissa could find that venturing into buy-to-let helps when raising Violet and Freddie, although they must be mindful of the risks involved
By Katie Morley
Sam Pugh and Melissa Clarke, both in their 30s, are still adjusting to life as parents of two children. Their son, Freddie, was born earlier this month, a brother for their daughter, Violet, who is 14 months.
Like millions of other young families in Britain, the two of them are feeling the financial strain of parenthood. Melissa is now on maternity leave and is reluctant to return to work any time soon.
Sam earns £20,000 as an electrical engineer, but the couple are now having to manage without the £17,000 a year Melissa earned from her job in the local prison.
Although they can just about afford to live in their current home, with two children it is a struggle to survive on just Sam’s wage. He said: “I’m very meticulous with the bills but we are basically bringing in not much more than is going out.”
As a result, he is considering selling their family home, a three-bedroom house in the suburbs of Rugby in Warwickshire, and buying a more modest family home in the town centre as well as a buy-to-let property to supplement their income.
• Money Makeover: 'At age 87, how should I invest?'
• Divorcee with £300,000 savings wants to downsize – but her adult children have nowhere else to live
Sam is a dab hand at DIY and has put these skills to use renovating property since 2009, when he bought his first house. He said: “I was a single 25-year-old bloke and I bought a three-bedroom terrace for £94,000 which was a bit of a mess.
“However, it was the best and biggest place I could afford at the time. I gutted the entire house and gradually did it up. I sold it for £116,950 in 2011.”
The couple’s current home, which Sam bought for £161,500 in 2014, should fetch £225,000 after renovations are completed. He currently has £80,000 of his Nationwide repayment mortgage outstanding.
If the house does sell for this price, Sam will have about £135,000 of equity. He’d like some advice about how he should use some of this money to buy an investment property whose rooms he would rent out individually. This type of buy-to-let property is known as a “house in multiple occupation” or HMO.
Also on Sam’s mind is £10,000 worth of credit-card debt that he’s managed to rack up. It’s interest-free at the moment but this will expire in 2017.
Ying Tan, managing director of the Buy to Let Business, says: The financial position Sam finds himself in is not uncommon. Every parent knows how costly it is to raise children.
But with the right investments he should be able to derive an income and add value to his property through his DIY expertise.
One of the most common routes into buy-to-let for investors is to purchase a somewhat run-down property and renovate it in order to increase its rental potential. Some investors come unstuck when doing this because they underestimate the cost of the renovation. However, as Sam will be doing most of the work himself, he should find that the cost of the renovation is lower.
If Sam sells his current house, with the £135,000 of equity he will have, I would suggest he uses half to fund the deposit on his own residential property and the remaining half to purchase a buy-to-let with HMO possibilities.
A HMO property can generate a greater rental income than a regular buy-to-let because the landlord can charge a rent per room. But some investors, particularly those new to the market, are fearful of getting involved in HMOs because they think there are reams of regulation involved.
That’s not necessarily the case, however.
Firstly, not all HMO properties need a licence from the local authority. The general rule is that a licence is needed if the property is let to five or more people who are not from the same household (although it’s worth checking with your local council, as rules can differ). Even if the property does need a licence, applying for one is fairly straightforward.
However, the cost of maintenance is higher for HMO properties. Along with the licence, there are more renovation costs involved, such as those needed to meet fire safety regulations. Of course, these costs will be reduced somewhat if Sam is doing the work himself.
With, say, £65,000 of the money from the sale of his house, he could easily buy a HMO property for £200,000 with a £50,000 deposit.
However, he will not have access to the very best rates for his buy-to-let mortgage as he is a first-time landlord and has a salary of less than £25,000.
I suggest he looks for an older-style property with three bedrooms and two reception rooms (newer properties rarely offer this as they are designed to be more open plan). The three bedrooms and one of the reception rooms could be rented out for around £100 a week, giving him about £2,000 a month.
If he rented the whole property to a family he would be looking at around £1,100 a month, so the HMO option almost doubles his income. Even when we take off money for additional costs he should still be left with around £1,500 a month, which would go a long way to replacing his wife’s £17,000 salary.
With the remaining £67,500 left over from the sale of the existing property, Sam could buy a £150,000 property with a deposit of 40pc or £60,000, keeping £7,500 aside to cover costs. With mortgage rates at historic lows this would be the perfect time to get a loan with lower monthly repayments.
Patrick Connolly, chartered financial planner at Chase de Vere, says: So far, Sam has benefited from improving properties that he has been living in. But this might not be a practical solution now that he has a young family.
He has about £135,000 of equity in his current property. This is helpful in keeping his mortgage costs down and gives him some possible options if he wants to move elsewhere.
Selling his home and buying a lower-value property in which to live would seem sensible. It means they could reinvest their equity back into the new house and end up with a smaller mortgage, or even none at all, which would reduce their monthly expenses.
• I'm 28 with £50,000 savings. How long before I can afford to quit work and travel the world?
• Do I have enough to retire in my 50s on £50,000 a year – plus luxury holidays?
Sam could then buy another property to renovate. But there is, of course, no guarantee that residential property prices will continue to rise, and that such a venture would be successful in the future. Buy-to-let properties have been very popular and many people have done very well by investing in them, but this has been during a period of rising property prices and low interest rates. These conditions won’t last forever.
In my view a buy-to-let property is a high risk and potentially impractical option.
Considering Sam’s salary, low level of disposable income, lack of savings and debts, he is likely to need a reasonably high deposit in order to secure a mortgage to buy another home in which to live – even a smaller one. This could mean there is a limited amount of equity left to purchase a buy-to-let property, so he might struggle to get a mortgage.
Even if he did manage to get a mortgage for two properties, his monthly expenses would rise significantly and he would need the buy-to-let property to be successful to meet his daily living costs. This would be a dangerous strategy.
It is positive that Sam is making repayments on his debts. He should continue with this and avoid taking on any new ones.
I also notice that Sam and Melissa have no cash savings. Ideally this should be addressed as everyone needs some cash savings to cater for any short-term emergencies.
It is particularly important to have cash savings when you have a young family, when finances should be kept as flexible as possible. If they do decide to downsize, perhaps some of the money could be set aside as “rainy day” savings in a cash Isa.
Would you like a Money Makeover?
You also must be willing to appear online and in the paper. And if you don’t mind being filmed for a short video, that’d be a bonus. If we pick you, we'll have our trusted financial experts give you practical help and tips on how to reach your financial goals.
If you'd like to be considered, please send your responses to all the following questions with the header ‘Give me a Money Makeover’ to money@telegraph.co.uk.
Your name
Your age
Your telephone number (we will not share this with anyone)
Your main financial goals (As much detail as possible please)
Any debts (including mortgages)
How you would describe your attitude to investment risk (As much detail as possible please)
Your current investments (Please provide as much detail as possible about your holdings and their value as a percentage of your overall portfolio. Please also tell us about cash and property you own).