Let second property go?

[DearMartha]

I’m an accidental landlord and rent out my old London home. I’ve just had my first tax bill since becoming a landlord and am wondering if the stress and expense is worth it. Would love your thoughts based on following:

• my property income has pushed me from a basic into higher rate tax bracket
• I’m on an interest only mortgage of around £230,000 for the rental. I was planning to overpay on this each year but high tax making that tricky. After tax, mortgage, expenses I’m ’making’ around £2k per year
• I have no pension pot and so my hope was the 2nd property would be an income and asset in my old age.
• if I sold it I would make around £200,000

My question is, do I keep it and try somehow to pay the mortgage down and play the long game. Or do I sell?

If I sell, what could I do with the £200k that would give me more security in the future (and maybe even benefit my family in the meantime). I was brought up with the idea that investing in bricks and mortar was the best thing you can do but everything seems stacked against that at the moment. Any thoughts/suggestions would be amazing. Thanks.

If you would get £200k of equity selling it, and you are clearing £2k a year from it, that's a return of 1%. You'd get better than that on a current account, never mind putting it in the post office.

Sell. Work out how much you can put in a SIPP each year given your current tax liability, and do that every year. Put £20k in a S&S ISA each year too, until it's all in one or the other.

What to invest in depends on other factors - time horizons, so on, but if you have time for the long game on property, you've got time to invest almost all of it in the stock market.

Would you get £200k after capital gains tax and fees?

As pp says - sell, put the maximum you can in a pension, £20 in an ISA and repeat until all the money is invested

£20k that should be!

Yes, I believe so.

Thank you. I suppose I’ve always thought property (generally) increases in value outside of the return I’m making from rental income and that has been the carrot for me.

We got rid our BTL a few years ago. TBH I kept wondering if we were missing a trick... lots of people invest in property but for us it just meant a large tax bill 🤷‍♀️🤷‍♀️

Not every property increases in value though and it can take many years for a house to increase in value. I agree with others that this is not looking like a good investment for you and you could make more profit with less stress by putting the money in a high interest account.

If you put the whole lot in F&C Investment Trust today, you'd get an annual dividend yield of 1.23% - more than you're making now. Its total return over five years is 9.37% and over ten it's 12.06%.

Investments like this are also much more liquid - if you had some in an ISA and something unexpected came up you could simply sell some shares. You can't sell 20% of a house.

Sorry, to clarify that's an annualised return of 9.37% and 12.06% for F&C.

Really good point. Thanks. Any thoughts on where I can learn more about investment funds etc so I can feel more informed and confident?

Sorry but I don't think you can compare the return on owning the property long-term to investing £200k in a SIPP. London house prices have gone up 72% in a decade! If you sell and put the money in a SIPP, you'll miss out completely on any capital gain. I've owned properties on interest only mortgages - as long as you're covering the mortgage and making a bit of a cushion for repairs, that's fine IMO. You won't make much more in an ISA and you could make a LOT less if property prices stay high. And let's face it, the UK is not building enough property, the population is increasing, everything points to property prices continuing to rise.

Sorry but I don't think you can compare the return on owning the property long-term to investing £200k in a SIPP.

Er, that's kind of the point of the thread. I'm happy to make the argument.

London house prices have gone up 72% in a decade! If you sell and put the money in a SIPP, you'll miss out completely on any capital gain.

How on earth did you reach this conclusion? Do you understand SIPPs? If OP puts the money in a SIPP she/he can choose the underlying investment (the 'self invested' bit of 'Self Invested Personal Pension'.) Some investment choices will be focused on capital growth, others on income, others will be a balance. I happened to pick F&C Investment Trust because it's mostly about growth with a small income, which mirrors what OP is currently enjoying on the property. Other investment choices are available. FCIT has risen by 63% in a decade, which in a SIPP or ISA would be free of CGT, while the income would be tax free too. London house prices may well have gone up by 73% on average, but by definition half of properties will have risen by less, that gain will be taxable for OP, and one property is considerably less liquid than an £11.30 asset traded on the London Stock Exchange.

I've owned properties on interest only mortgages - as long as you're covering the mortgage and making a bit of a cushion for repairs, that's fine IMO.

If OP wants to leverage her/his investment then there are plenty of ways of doing that. The risk is that it amplifies losses as well as gains. I'm old enough to remember negative equity from 30-35 years ago, which you seem to discount on account of your Panglossian optimism. I do not.

You won't make much more in an ISA and you could make a LOT less if property prices stay high.

Oh dear....

And let's face it, the UK is not building enough property, the population is increasing, everything points to property prices continuing to rise.

Apart from affordability, government policy, bank credit availability... Seriously, while property prices may hold in absolute terms anyone who thinks the property price inflation of the last twenty years will continue in a straight line is utterly deluded. Even rank amateur BTL landlords are having second thoughts.

I have a small
portfolio of rental properties and I’m making 3-4% return after tax, mortgage, expenses etc. I’m going to sell when each comes to the end of a tenancy. It’s too much hassle for a return I could probably better investing the capital elsewhere.

With £200k you could buy outright in some parts of the uk and rent out. However rents aren't that high in those areas and appreciation values will be lower. You'd still have all of the maintenance/management. I think I'd pull out and invest.

Just as an aside, I was also brought up with the idea that investing in bricks and mortar was the best thing you could do. But as an owner occupier, not as an investment vehicle. I do think that BTL mortgages have done woeful things to the property market. People who would not ordinarily have been able to afford to buy a second home have been able to do so for years now.

OP, you don't say how old you are or how far off your retirement is and what your income requirement would be in retirement. Whether you have children you need to get through university or help out in some other way financially. How your health is. Whether an inheritance is likely for you from an older relative. Why you haven't already saved into a pension - sometimes there are specific reasons for this. etc etc.

Depending on your circumstances you could get different advice.

Sorry, OP, I've just realised that I never replied to this.

I'm afraid I can't really answer this fully as I was brought up around it all and learned the detailed analytical stuff as part of a degree.

I know some of the other threads on the Investment board here have links to various Youtube channels which may help, but personally I've found the Motley Fool UK website to be very helpful at bringing investment ideas to my attention.

I do know that some of the well-known investment platforms (Hargreaves Lansdown, AJ Bell for example) have resources to help them sell you their services you learn so maybe that might be a good place to start. You could also just try googling "investing for beginners UK".

So sorry I've only just picked this up now! Thank you so much x

It doesn’t sound like a very good return on investment. If you sell and put it in VCT’s you could mitigate some tax and potentially have a great return.

Personally I wouldn’t be a landlord for all the tea in China.

I’ll also add that out of the various funds I’ve used in the last year, the lowest return was just over 8% and the highest was almost 30%. Yes there are risks as with anything, but one bad tennant could cost you more.

I'm a LL with 11 btl properties. My houses have all gone up in value so I've got capital gains. If this £2k has put you into a higher tax bracket just put the £2k into a SIPP then you'll stay in the lower tax bracket. You will quietly be adding to your pension and at the same time your property will likely go up in value. 1 property can't be that much work. Mine combined only take me about 4 hours on average each week and that includes my accounts.

Not to mention the hassle of renting, bad tenants, damage, rent gaps, the cost of maintenance, etc. I thought about property years ago, but having the cash in hand and investing as you want to get the best return you can is so much less stressful. You might lose out on absolutely most increase, but you sleep better at night.

How old are you? Are you a higher rate tax payer? Pension would be very beneficial from a tax perspective, then isas or Premium bonds (not high returns but safe plus chance to win each month).

Whilst that might be true in terms of the yield, if the house is appreciating in value it might still be a good investment. London properties are notoriously terrible for yield because they’ve historically done about 6% a year in growth I believe.

Gilts are a popular investment of larger sums outside of a pension or ISA at the moment.
Gilts are not subject to capital gains tax, though dividends are taxed as income.
Investing in very low dividend gilts, with a premium maturity value means you maximise capital appreciation but with minimal tax on the dividend.

You also know exactly what amount you will receive on the maturity of the bond (the gilt face value plus the final coupon payment). You can sell the bond before maturity if you need the cash, at its prevailing market value.

Building a bond ladder, maturing in sequencing years, can be a useful strategy.

https://www.ajbell.co.uk/our-services/investment-options/bonds/gilts

Look up also 'Why Government bonds are a great investment' by PensionCraft on YouTube (sorry link won't upload).