Continue being a landlord or sell? Advice welcome!

by reluctant_landlord 15 March 2010 |

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Just over a year ago I moved out of a property I had owned for 9 years to move into a rented house 50 miles further south with my partner, the idea being to see how we got on before making major property commitments.
Houses just weren't selling then, so I refurbished the owned (no mortgage) property and successfully let it out after a few months. It brings me in about £700 a month, minus about £100 managing agent fees. I'm a 40% tax payer, so I need to take tax and costs off that too.
Once we had been here for a year we agreed it was all working for us and we should look for a home to buy. About the same time my company decimated my pension plan and is still mooting redundancies (I've worked there over 20 years).
By the time we were looking around, property prices around here have become unbelievable (well, to me, anyway). If I sold my 3 bed detached I might expect to get somewhere between £180k and £200k for it right now - prices haven't moved much where I came from. To buy a similar sized property around here would be at least £300k, and I have seen relatively small houses up for much more, even in areas not thought of as 'posh' in any way.
I have about 15 years left to work, assuming I can remain employed for that period. My partner is 12 years younger but having changed career, earning substantially less than me. We have enough capital between us we could just get a large mortgage to buy one of these 300k houses, but I am trying to figure out the best option for the two of us, especially given the upheaval and uncertainty at my job.
Option 1 is sell the owned house, realise all the capital, put it with the capital we have, and that would give us some protection against the roughest market conditions.
Advantages - owe no mortgage, save income, little risk of being repossessed even if complete disaster strikes (ie both unemployed etc). No more worry and hassle of being a landlord.
Disadvantages - opportunity for capital growth limited to single property, no opportunity to try to offset damage to pension through capital growth of second property. If partner wants to move job (likely within a few years given building new career) we could stand to lose the costs of buying as we sell to buy again (2 lots stamp duty and legal fees, etc)
Option 2 - take BTL mortgage for 70% of owned property, top up with small mortage on property we like, have a finger in 2 properties simultaneously
Advantages - leverage mortgages to increase potential capital gains. Can claim tax relief on BTL interest and costs.
Disadvantages - worst case scenario doesn't bear thinking about - drop in property prices, huge mortgage commitments, lost jobs, tenant from hell demolishes property etc.
Option 3 - either sell or rent out the owned property, but remain in rented ourselves for the foreseeable future.
Without a crystal ball, every single option feels like a gamble on the housing market right now. I read as much as I can on what is supposed to be happening, and I was once burned very very badly in the last recession, which makes me cautious about ending up with so much in property.
But what do others think? Do you see a clear path through this?
One last twist in the tale, a friend told me that even if I have one BTL mortgage and 1 mortgage on a property we live in, if the real reason I am taking the mortgages is essentially to fund my 'business' (the BTL) I can claim the interest from both mortgages against the rental income from a tax point of view. Could anyone confirm or deny this? It might matter because securing the mortgage against the lived-in property would probably be cheaper (1% or so less) than a BTL mortgage against the rented property.

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Comments (12)

410

manzanilla posted
It would folly to take on larger mortgage commitments until your redundancy situation is resolved. Especially as you know your partner is likely to move in the next few years. This says to me that you should be renting where you are now.
So your choices areto keep the old house or sell it.
Personally I would go for keeping it. Whilst I am not a bull on property prices - indeed on balance I expect them to fall over th next year - I regard the default situation for someone of your age and means as owning one house, so to sell it and rent would mean that you were taking a very decided view on the property market. By retaining it you have a considerable hedge against property prices moving up - it's not a perfect hedge, as you may want to buy somehere where the prices have moved up more, but it is a very real presence in the market.
manzanilla
Posted on 15 March 2010 | Love 1 love Report
804

MikeGG1 posted
If only we had a crystal ball!
Price movements are likely to depend on the area you live in. I can see small reductions likely in some areas as interest rates start to rise but once they have peaked, prices should start to move up again.
By retaining your property your are hedging your bets to some extent.
I would let things ride at least until your employment situations become clearer.
A property that you have lived in is exempt from Capital Gains Tax for 3 years after you have moved out, so that is another point in time to watch out for, but you have 2 years before that happens.
Remember that the house that you live in and own is your home to use as you like. A rented property isn't.
Mike
Posted on 15 March 2010 | Love 1 love Report
272

Swarbs posted
To my mind, there are to key things to consider when making investments in property:
1. Can you afford to pay any mortgages in the worst scenario feasible.
2. What is your long term plan.
So in your case, you need to consider what would happen if you were made redundant, and if your tenant trashed the place / ran off without paying rent etc. Could you afford to cover both mortgages in this case? You should only take the option where you are sure you will be able to cover your outgoings, especially given how close you are to retirement. Bear in mind that in the worst scenario that is feasible you are unlikely to lose more than three or four months gross rent whilst sorting out a terrible tenant, so you would need about £3k in the bank plus at least six months payments for your residential mortgage in case of redundancy. And add another 20% contingency just in case.
If you can comfortably keep that cash in the bank and cover the costs of both properties whilst the rented property is tenanted, then you can keep the rented property and buy another. Although you do of course need to factor in the potential stresses that come with a rented property. Indeed, that is probably the biggest factor in your decision. Personally, I would take the first option, because I am willing to put up with the stress and hassle and risks of being a landlord (and actually enjoy it quite a bit), and so am able to get the rewards. Someone who doesn't welcome the hassle and accept the risk should steer clear of getting too involved - they tend to be the type of people who happily ride the market up, but as soon as it gets tough they cut corners and make the wrong decisions and end up going bankrupt.
As for the long term plan, if you do keep the rented property what will you do with it when you retire? Or when your partner retires? The longer you can hold on to it, the more you stand to gain when you eventually sell it. Remember that you only gamble on the housing market in the short term - in the long term you will always win out. Even people who bought at the last 'peak' in 1990 will have made around a 100-150% gain if they sold in January 2009 at the bottom of the last 'crash'.
But make sure you are willing to hold on to it for at least 10 - 15 years - the housing market may be slow for the next few years so you could have to wait a while to realise much additional profit. The good news on this front is that, having lived in the property before renting it out, you not only get the last three years capital gains tax free, but also get a £40,000 private lettings relief - http://www.property-tax-portal.co.uk/taxquestion49.shtml. Indeed, if the property is in joint names you get double this - £80,000 tax free, which would make a nice bonus for a more comfortable retirement!
Of course you have to consider what happens if you sell the rented property now as well - will you be able to pay off the mortgage you take by the time you retire. Or if you stay in rented property, how will you cope during retirement if you can't afford to buy a place? Prices where you are now will rise relatively similarly to where your rented place is, so you won't get any closer to affording to buy where you are over time.
Oh, and for the final question, no you cannot claim tax relief on the mortgage on your private residence. The only way you could do that is if it the mortgage is solely connected to your BTL business, which yours won't be. It won't secured be on a BTL property and it won't be used to buy one - it has been used purely to buy a house for your to live in, so it isn't a business expense and can't be claimed against rental income. Your friend is probably thinking of the other way round - if you own a house that you live in and you take out a mortgage or secured on it to fund the deposit for a BTL property then you can claim the interest on that loan. But you can only claim interest on loans up to the total value of the BTL property when it came on the lettings market, so claiming interest from your residential mortgage would reduce the amount you could claim from any subsequent BTL remortgages. Does that make sense?
Posted on 15 March 2010 | Love 1 love Report
134

liesarenocomfort posted
Keep the house rented out, rent for yourself + partner + pile any spare cash into stocks.
Gives you asset diversification, security (you can always kick tenant out + move back) + reduces risk (no mortgage).
And ?i?f? ?t?h?i?n?g?s? ?a?r?e? ?g?e?t?t?i?n?g? ?s?e?r?i?o?u?s?,? dar???e I say,? ?t???h???????ink about a ?pr?e-?n?u?p?.?? ???????(???n?o?t? ?w?a?t?e?r?t?i?g?h?t? ?b?u?t? b?e?t?t?e?r? ?t?h?a?n? ?n?o?t?h?i?n?g???????)????????????
?

Posted on 20 March 2010 | Love 0 loves Report
1

freespirit posted
I've only one thing to add to your questions. No one, absolutely no one, can advise you on what to do for the best. People's own experiences and situations are not yours. The world we live in changes day to day, hour on hour so live your life as you think is best and stop looking for others to direct you on all your "what ifs".
However, if you do want to try and think worst case scenarios here is another one to add to your list.
You lose your job and don't find another. Your partner leaves you because it's just not the same without money. You need to sell your property to raise money to live on because benefits are not what people say they are especially when you've got assets like a house to sell that you don't live in. I'm not being nasty but trying to emphasise that "what if" will never cover everything and you need to remember that when you seek answers like today. Take care and I truly hope all your "what ifs" are not too bad.
Posted on 22 March 2010 | Love 0 loves Report
25

Mick James posted
Imagine that you owned no property and were handed the value of your BTL in cash. What would you do? Would you go straight to the estate agent and use it all to buy a rental property? If your current rental was in the window, would you buy that one?
I imagine most people in that situation would maybe put a bit aside then take a bit of time to look around and buy the nicest house they could afford to live in themselves. There's no rush in the current market and possibly bargains to be had. Whether you take on a mortgage or not depends on your view of your future employment prospects, but you'd get a good deal with that level of deposit and you could insure against redundancy.
BTW if you do keep the rental why not get some landlord's insurance?

Posted on 22 March 2010 | Love 1 love Report
28

matchmade posted
Buy-to-let is a mug's game for the vast majority of people. As soon as interest rates go up there will be no money in it in income terms, and possibly a loss. Also in my view it will be years before you see any capital gains: all the risks are on the downside - dodgy tenants or none at all, ever-increasing regulation of BTL, possible second crash in house prices. You need to think about your future with your partner as the priority, and if you are serious about buying a new house for both of you, it would be far better to have the BTL one sold already. What if you see a property you like and you can't sell anything? We're in the aftermath of a very serious recession, which is likely to last at least another 6 years, as it did in the 1990s. In this environment, cash remains king.
The only sense I can see in owning a BTL is if you already have a very low loan-to-value, and you're prepared to put up with the never-ending hassles of looking after tenants and maintaining the property. But in my view at your age you should focus on simply enjoying your new relationship: life's too short to be worried about a tenant who doesn't know how to change the bag in the vacuum cleaner, or to be faced by cleaning up all the damage and general wear and tear that tenants will inevitably inflict on your property.
Posted on 22 March 2010 | Love 1 love Report
2

Gilbert posted
The key to any investment wether it be cash, stocks or property is yield, ie How hard your money is working for you.
In your case you are receiving £700 less £100 agency fees pcm or £7200 per year. Your mean property value is £190,000. This gives you a yield of 3.8% before tax, Insurance, and maintenance. Considering the bank is paying you up to 3.3% Gross for doing absolutley nothing, I would argue your house is a poor investment and advice you to sell.
As a rule of thumb a a sound property yield should be in excess of 6.5%
Owning your own home is a different matter rather than a business one.
Posted on 22 March 2010 | Love 1 love Report
1

vega posted
Your buy to let.
Keep it and still rent for yourselves. OR sell your BTL and live in it.
Do not buy another property, especially on a mortgage.
Any cash you have. Keep it, do not worry about interest on your savings. You must have a buffer for serious times to come.
Propertry will take another dive by the end of this year. There will be a great deal more unemployment by the end of 2010. Remember the asset of any country is not the banks or property but the working population and when that fails, everything goes.
Forget interest figures and capital gains. Think survival for a long while yet.
Good luck!
Posted on 22 March 2010 | Love 1 love Report
1

vega posted
Apologies for error.
I meant to say,'keep your BTL and live in it'.
Sorry about that.
Posted on 22 March 2010 | Love 0 loves Report
4

cyril the squirrel posted
You are right to pose these questions at this stage. However, there are so many 'ifs' that you are in danger of developing stretch marks on your skull while you attempt to deliver the right answer!
Remember to act within 3 years to avoid capital gains which can sneak up on you unexpectedly. The £40k private lettings relief will also work in your favour, and give you more time to carry on renting.
If I was in your shoes, I would sell now and bank the cash and pay rent for something in your new location; the have patience and let the forthcoming downturn take its toll and exploit the 'cash is king' principle to get a property which gives you value for money. Then you can consider the BTL potential in your new location.
Posted on 23 March 2010 | Love 0 loves Report
0

reluctant_landlord posted
I want to thank everyone who posted a response to this question. It has certainly helped me to think more clearly about the situation, which is all I was hoping for.
Several of you - MikeGG1, Swarbs, Gilbert and Cyril - gave me some good solid practical points to add to my research. Mick James, your different perspective on the question was nothing short of inspired. Matchmade, I really appreciated the wisdom of your comments on focusing on enjoying life.
I think I still have some work to do on figuring out the best course of action, it will involve late nights and spreadsheets, but this really has been helpful. Oh, and just to clarify, I'm not in line for redundancies myself yet - it's just there have been a lot at my company and I'm looking a few years into the future and wondering how much longer I'll survive there.
Good luck to all of us!
Posted on 31 March 2010 | Love 0 loves Report

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