Amy asks: “I’m a graduate who has been working for one year. I’ve secured a transfer outside of London but I keep my London wage. I will be moving to Birmingham where housing is much more affordable. Should I buy a house a rent a room to a friend?”

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Q&A 37 – Buying A House To Rent Out – Shownotes

Today’s question comes from Amy:

Hi all, I am a graduate who has been working for one year. I have managed to secure a transfer in my company outside of London but I keep my London wage. I will be moving to Birmingham where housing is much more affordable.

I have a friend there currently who is waiting for me to move so we can rent a place together. However, the more I look into it, the more I am considering buying a place and Subletting a room to him. His rent would cover my mortgage payment and I could pay all bills, giving us both cheaper rent and allowing me to save every month. I have currently saved about 5k for a deposit and hope to have 10k by next summer.

Even if I don’t stay in Birmingham long term, there is a decent market on spare room and I could then sublet my room too.

I would love to get your thoughts on this. I am being too naive?

Congratulations on your new job Amy. A London wage will definitely go much further in Birmingham!

 

 

It’s Not A Terrible Plan…

Your plan isn’t terrible in principle, and getting a lodger is often a very good way of funding a house purchase in the early years. It’s much easier to build up your wealth when someone else is effectively paying your mortgage for you.

You can earn £4,250 per year tax free from renting out a room. This will be increasing to £7,500 in the next fiscal year. After that, you need to start paying tax.

Also, you’ll need to be able to get a mortgage which on your “London salary” should presumably be fine. The mortgage provider will not take into account your income from your housemate’s rent though – so you’ll need to be able to cover your mortgage payments at a stress test level interest rate yourself.

 

…But I Wouldn’t Recommend It.

Whilst there are some positives to this plan, I’m going to have to advise against you doing it Amy. And I do so for one very key reason. The line in your question: “I have currently saved about 5k for a deposit and hope to have 10k by next summer.”

Go back and have a listen to episode 28 when a listener asked if a £20k deposit was enough for them. It wasn’t. And I don’t think a £10k deposit will be enough for you.

Theoretically, it is possible for you to buy a flat with a £10k deposit. However, this would mean that even at a 90% LTV you would be looking at a flat at £100k. IN Birmingham, £100k isn’t going to buy you a two bedroom flat in a very nice area.

Then, even if you did find somewhere that was acceptable for you at that price, you will also need savings for the costs that come with buying a house (surveys, solicitors fees, searches, etc) and you will need some money for moving costs (furniture, decorating, etc) as well as your emergency fund.

Also, what happens if your housemate leaves? What happens if you don’t like Birmingham? What happens if your job location changes again?

Add to this how hugely under diversified you would be if you bought a house at this time and all signals point away from buying at this time.

 

 

Buying A House To Rent Out – Conclusion

So, the bad news is that I wouldn’t recommend this as a good idea…yet!

The good news is that it won’t be too long until it is a good idea. If you are earning a London wage, you can spend a year or two renting cheaply in Birmingham, really getting to know the city and understanding the areas that you may want to buy in.

Then, if after 12-24 months you still want to buy, you should then have sufficient savings to get yourself a property that you like, in an area that you want to live without overstretching yourself financially.

I hope that answers your question Amy.

If anyone else has any questions related to personal finance, I’d love to hear them…

 

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