Sell or Rent out WWYD?

[TheCokeMachine]

I'm currently debating on if I should sell or rent out my house (East London terrace in popular station location). At first I wanted to sell because I assumed that we'd be hit hard with tax if renting out - but I've now realised that may not be the case.

There are three possible scenarios available to us at the moment:

1. Sell the house, we'd make approx £150k profit and use that as our deposit for our next house.
   

1. Rent out the house, keep the repayment mortgage as it and apply for permission to let. We'd probably make £300 a month after expenses, but this would be liable for tax (at 40%). This would also mean we have to use our £60k savings as a deposit for the new home.
   

1. Remortgage the house on a buy to let to the point we we'd break even (thus avoiding tax?), use the equity as a deposit and keep our savings off-set against the new mortgage.
   

I'm really interested to see if option 3 would be possible - is there anyone who has done anything like this and can advise. I've heard the term 'Let to Buy' mortgage before but can't seem to find anything concrete about them and I'd like to be clued up before I chat to the bank.

Thanks!

[Springforward]

We briefly considered a let-to-buy mortgage a few years ago, though chose not to go with it and sold instead as we had no desire to be landlords. We were thinking of doing your option 3.

The IFA we were talking to was attached to a Your Move estate agency, so quite mainstream I would have thought?

[frenchfancy]

Have you included in your calculations the extra interest you would have to pat on tour new home as your deposit would be 90k less?

Don't forget that if you rent out for a period of time then sell you are liable for CGT.

If you were looking to become a landlord would you have chosen your current house to invest in? If not you would be better selling, buying your new house and then buying somewhere else suitable to rent out.

[TheCokeMachine]

Thanks Springforward, it's good to know that it's a normal thing to do.

frenchfancy thanks - the reason that I'm thinking of renting it out is because it would be a perfect investment property. I need to speak to the mortgage advisor to work out the interest charges on another mortgage before making any decisions.

I didn't want to be a landlord, but I reckon that I could manage it ok, I'd be on maternity leave at the outset so I'd have time on my hands. I'm looking a longterm investment, perhaps as a first home for my children or as a retirement fund...I'm not in it to make a quick profit.

[Heswall]

What about repairs and maintenance, potential voids, tenants doing a bunk owing rent, if you don't want to be a landlord I would sell and buy something else otherwise the money will be inflated away or worse still spent. Once you've moved out of a house it's in the past year focus becomes the future.

[TheCokeMachine]

Thanks Heswall - I am hoping the £60k we've offset should cover repairs/maintainance and other issues. The more I look at it the more I think we should do it - but with a full managed service from an agent - the local ones say for an extra 1% they guarantee the rent.

I think I'll give it a go for a year and see how things work out, if I don't like it I'll sell the property then.

Now we're in a great 'proceedable position' to buy as DH has has had our mortgages agreed in prinicipal today so we're ready to get house hunting properly now :)

[MaggieW]

If you're in a popular area in London then I'd be tempted to hang onto it. But remember that BTL mortgages are generally at a higher interest rate than other ones so make sure you have factored that in. Obviously there will be year 1 start up costs but you can minimise them. Perhaps let it unfurnished? Our neighbour's just done that and I thought it would put people off but she had several families wanting it within the first week! (I'm in SW London).

I'd think again about fully managed if you're going to be living locally. As long as you can build up a small team of reliable tradespeople then you could consider just a finders fee for the agent? Alterntaively you could always use an agent initially for the first tenancy and guage how involved it's going to be and then give the agency notice if you think it's something you'd be happy to take on.

Have you read the Diary of A Landlord section in the property part of each Wednesday's Evening Standard. It's quite interesting reading with some useful information. You can probably google back editions. Good luck!

[TheCokeMachine]

Thanks Maggie, I'm in a supposed 'up and coming' area of London - and there have been real positive changes here in the past couple of years :) I think I'll do managed for the first year and then take it from there.

I'll check out the Standard, I've been on maternity leave for ages and miss reading it on the tube on the way home!

[secretskillrelationships]

wrt option 3, taken from the HMRC website:

Similarly, the interest on a loan or overdraft may not be allowable, or only part may be allowable, where the taxpayer, for example, uses the borrowing:
?to buy non-rental business investments (which may be shown in the balance sheet as assets),
?to buy private assets or assets for their family,
?for the provision of private funds to be taken out from the rental business.

I know lots of people do it, but I looked into it in some detail when we moved 12 years ago. We didn't have a mortgage at all and needed one to buy the family home. Talked to the tax office and they were very clear that if the mortgage was to buy a family home, even if taken on the let one, the interest was not deductable as an expense on the rental. We took out a mortage on the new home. An offset mortgage from the start would have made more sense too as the tax on the rental income isn't due until the end of the financial year (in the first year at least). It seemed an enormous risk to take on a huge mortgage (over £150k) but the rent just about covered it. We didn't do it to make money, we were moving out of London and I was scared I'd hate it and not be able to afford to move back. Turned out to be one of the best financial decisions I've ever made!

[tricot39]

I looked into this 5 years ago. Despite having a good rating with the building society, they were not happy about shifting money from one mortgage to another (ie increasing the mortgage on my old flat and reducing it on our house). The underwriters felt it was an unacceptable risk - even though the branch had thought it was a no-brainer.

Letting out the house for 3 years or more will mean that you may be liable for capital gains tax when you sell it. It's worth downloading the current guidance from HMRC and understanding all the "wrinkles"

Lastly selling a tenanted flat, from my experience, is not easy. You have more wear and tear, plus the tenants can do their best to put off buyers if they don't want to be moved on. Proceed with caution would be my advice - but good luck!