Want to buy a house - do we sell the flat or keep as a BTL?

[tashka]

We have a 1-bedroom flat in north-east London, which we bought in 2007 for £187K. Now the mortgage outstanding is £140K and we should probably be able to sell the flat for £185-190K.

We now want to buy a house in SW London. In the area I like the houses start at £400K (the ones needing renovation which I am generally OK with). We have about £100K for a deposit and our total income is about £85K a year before tax.

The dilemma is: do we sell the flat (which shall give us another £40-45K, so we would have around £140K for the deposit) or do we keep the flat as a buy-lo-let for our retirement as we do not have any other savings.

We should be able to cover the BTL mortgage payments using the rental income from the flat, so keeping it should not be a burden (theoretically), but then (i) we will have less money for deposit; (ii) the flat is in a Victorian converted house and it likely to require some proper renovation works at some point in the future (it already had some mould on the bedroom wall); (iii) there may be problems with the tenants etc

But if we sell it now, we won’t even return all our money (we spend another £15K on top of the purchase flat on it buying the freehold and doing some renovations) so may be we should keep it for some time until the prices rise?

To be honest, we don't really need to buy the house right now, but I am concerned that the prices in the area I like are rising quicker that we are saving the deposit (whereas in the area our flat is the prices are not rising at all) and in a couple of years time when we would need the house we may not be able to buy it…

Would really appreciate any views on what shall we do!

Thank you all so much in advance!

[DumSpiroSpero]

My gut always leans towards keeping it as a BTL, having not done that with my own first flat.

I bought for 28,750 and sold after 2 years for 40,000. At the peak of the property boom they were on the market at around £145,000 - epic fail on my part.

That said you are right to be thinking about the possible renovations it may require and the benefit of putting down a bigger deposit. I suppose the main thing to consider is whether putting down a larger deposit if you sell the flat will enable you to start saving or a pension scheme.

If not then I think the case for keeping the flat as an investment is even stronger.

Perhaps you could speak to some letting agencies re fees, the market in your area, tenant vetting procedures, landlords insurance etc, and may even be worth having a survey done on the flat to see what you may be letting yourself in for if it does need structural work at some point.

Don't forget to consider the income tax aspect too and the implications rental income will have if you have student loans.

[HaveToWearHeels]

Remember the rental income on a BTL must be 125% of the monthly interest (ie the mortgage payment) on top of that you will need to pay agents fee's etc.

I would personally keep as a BTL (as I have done in the past).

[elfycat]

I kept my house as a BTL when I moved in with (now) DH. So if it didn't work out we could part easily. I split the capital in it and now have 2 BTLs.

There is a level of stress involved, and cost, and the odd idiot tenant who thinks her lifestyle should be paid for by you as you have money to waste buying houses. But we've never considered selling them and paying off our own mortgage.

If I had sold my house and put the money into our main house we'd probably be £60k down on our assets now (over 11 years), through rent income, capital gain and the fact that we had to do up our home out of pocket, stretching our finances that bit. We're crap at savings but good at budgeting and paying back - so 3 mortgages works. I've even managed overpayments on our home and one rental since the interest rates have lowered.

[tashka]

Thank you so much for all your opinions and advice!

[SunnyUpNorth]

Definitely look at the rental value you would get. We kept our first flat as fortunately we could afford to buy a house in the area we were moving to.

We were lucky in that just before we left our flat (SE London) the new tube line was installed so rents shot up. Our rent on the flat now covers the mortgage on the flat and on our new house. So we have significant more disposable income than we otherwise would have.

We didn't really plan it that way, but it has worked out so well that we are now exploring other buy to let investments as our future income/pensions.