Property rental as an investment

[JeanSeberg]

I have inherited a property worth £150K, no mortgage outstanding on it. With around £20K worth of work I could rent it out for £600 a month.

Is this a sensible way to use this inheritance? (I'm a 50% tax payer and assume rental income is taxed in the usual way?)

Or is there a better way to invest the money I'd make from the selling it?

Where could I go for advice on this?

An IFA might be able to help but it depends on the IFA.

It doesn't seem like a great return to me. I'd probably sell then depending on your area put down a couple of deposits on buy-to-lets (I could generate £600 p/m doing that) then divide the rest between other investments such as wine (not subject to GCT), a decent ISA (ie. one where you can't touch the money for 5 years) etc.

I'm not an IFA by the way!

Thanks very much.

Can you explain a bit more about the buy to let please?

You say you could generate £600 PCM doing that which is the same as the rental I would get on this property. Do you mean this is better because I wouldn't have to invest the £20k up front in renovation?

rough guideline on gross return on rental properties is 5%, before fixes, fees, tax etc. Plus of course any capital growth.

you can do better with small flats in rough areas but that is a specialist market. whatever you do you'll have to take vicious abuse on here for daring to consider being a landlord

savings rates are well below inflation. Stocks and shares investment may do better.

I am certainly not a financial expert. But if the flat is in a fairly good area and it's worth spending the £20,000 on then it might be a good idea to try renting it out. If after a year or so it doesn't work out you could always sell. I'd be reluctant to spend the money though if the flat wasn't in a reasonable area. Don't think I'd go for stocks and shares. Too risky though you could be lucky.

Thanks everyone.

It's a 3-bed semi in a good area and after checking with a few estate agents, there would be no problem to rent it out for a minimum of £600pcm. So I'm happy with that side of things.

I'm just not sure if it's worth the hassle of the renovation work, dealing with tenants etc when I might be lucky to make £3500 a year. So it would take nearly 6 years to even recover the cost of the renovation work.

Put like that it doesn't seem a great investment but I'm definitely not financially minded.

I have a buyer lined up so the question is sell or rent. And if I sell how do I invest the money to get a decent interest?

Agree with the others. Talk to letting agents about what sort of rental market there is locally, and what there expectations are in terms of decoration/furnishing etc. Also use these conversations as a way of interviewing Agents.

Decide if you can handle the sort of tenant you are likely to attract. I once knew someone who got high rents for poor properties from some pretty desperate tenants, eg people leaving prison, but she was married to a 6'7" bouncer. Again you probably need experience to let to students. (First time away from home, and not always house-trained!) I don't know if it still exists but Registered Social Landlords (Housing Associations) used to have a scheme whereby they took on the tenancy, paid you the rent, and restored the property to its original condition at the end. Who they housed, whether they paid, and what they got up to was then their problem.

If the property, in the right condition is likely to be attractive to young professionals or working families, you should not have too much of a problem. Worth though making sure it is in nice condition. People who will look after a property, normally want a property that has been looked after. Spending money on updating a property should then increase its sale value.

Work out the cost. Then decide if it is worth borrowing the money. Mortgage interest is tax deductible, so as long as the fee structure is OK, it can make sense. There are a huge variety of BTL mortgages, so it is probably worth going through a broker, indeed most are broker only. London and Country, to name but one, don't charge for the advice.

Then talk to your accountant. If you are married it might be worth transferring the property to joint names for CGT reasons, if furnished you can get a 10% wear and tear allowance, etc.

Thanks. I've spoken to several agents so am happy there are plenty of families available to rent and what is expected in terms of decor etc. I wouldn't need to borrow any money and I'm not married.

As I say, as a higher rate tax payer, my only concern is the income I'd make re. my figures above and if I should sell and do something else with the money.

Property income is taxed the normal way so if you're an additional rate taxpayer you'd be paying 45% tax on the profits. No NI though.

There is an option of mortgaging the property and using that money (for example - mortgaging the rental property and paying off their own mortgage) In this case the mortgage interest will be deductible against the profits and you'd pay less tax. This obviously only makes sense if you have a mortgage elsewhere - otherwise you'd just be taking on an interest payment you don't really need.

One of the advantages of selling this property now and buying a couple of buy to let properties that have mortgages on them is that the mortgage interest can be offset against your tax bill.

You will also be gradually increasing your level of capital by paying off the mortgages with the rent. Successful buy to let models are all about increasing capital not really about rental income. You buy flat for X with a mortgage of Y pay off mortgage till it is Z then remortgage back to Y to get the deposit for another property and so on. You will hear people talk about gearing this is about the optimum LTV.
BTL is about long term increase in value not short term income.

I've no idea what to do about the house now and I have a sale in progress so I need to make a decision fast if I'm going to pull out of the sale.

Rkisti I think you will find that you can only offset mortgage income against tax if you can prove funds were spent on the property. Ie if you need to spend money on the property it can be tax efficient to borrow rather than use your own savings or increase your own mortgage.

Making the right decisions can make a big decisions can make a big difference to the tax you pay, so really worth touching base with an accountant early. It is possible to make a good income from BTL but like any other business you need to ensure you keep a handle on costs and promote income. You often need Agents but don't forget they want to make as much money as they can from you.

The most important element is the tenant. Ask to meet them. Go for the ones who you feel you can trust and who appear stable with a reliable income above whoever someone who is offering more.

If you don't like the idea of dealing with tenants and a second set of domestic admin (broken boilers) sell now.

Sorry. Failed to proof read.

needmoresleep - no, it's not necessary to have spent the funds on the property as long as what you've taken out is not worth more than the property when you first started renting. See example two in this HMRC manual www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

I would also consider where else you have investments. If you have your own property, will you be rather over invested in property as an asset class? All asset classes perform in cycles, there is a lot of commentary about residential property being a bubble, will it burst at some point? I would suggest speaking to a financial adviser to assess your whole situation.

OK, so going off everyone's replies, it doesn't sound like I would be making a massive mistake by selling it and using the capital elsewhere.

(To answer a previous question - I don't have any other investments but with the money from the house sell will have a pot of £200k to invest.)

The house we're talking about is the one I grew up in and in the town I plan to retire in so it would be nice to keep it on for the future.

Your question to me has been answered (very eloquently) by others but given your last post I think it's worth taking emotion into account.

I have invested intelligently in but-to-lets but my own home is an utter car crash of an overly indulgent renovation project. They are two distinct things. The smart thing for you might be to sell and reinvest but if you'd like to live there, if there's a tie then forget practicalities. Do what is right for your happiest possible life.

Don't sell a house you may want to grow old in purely because of theoretical returns on investment. The best investment is the one you make for you. Sorry if I'm derailing and being soft but don't sell it if you love it and don't have to .