Sell or let - dilemma

[mistywillow17]

If anyone could help me get some clarity on this, I would really appreciate it, as I am going round in circles at the moment. And the numbers are starting to seem meaningless.

A bit of background - our current property is valued at £200k. We pay around £500 a month mortgage on the £85k we still owe on this property.
We need to move to bigger house – which will probably be around the £250k mark

Our current income is around £1400 after all bills, but not including the mortgage. We have two options, one low risk, one higher risk.

Option 1
If we simply sell up and move on, the mortgage on the new house would be around £750-£800 a month

Option 2
We could rent out the current property for £800 a month. It is in a desirable area, and the letting agents think it would be easy to let, and would attract good tenants.

To do this AND buy a new property, our mortgage repayments would total £1500 a month.

If the house is let out, this is offset by the rent – we assume £600-700 after fees and all other costs (no idea whether this is realistic or not at the moment)

So in an ideal world, with tenants who pay their rent on time and in full each month, we could be paying around £800-900 a month for TWO properties, which would provide us with a long-term investment for our retirement.

But during periods when the house is empty or tenants don’t pay, we would be liable for the full £1500. (We do have savings that could be used as a safety net in this situation). And of course, there are other risks to consider – the future of the housing market, interest rates etc.

Which option do you think should we go for? Are there any further risks we need to think about? For info, mortgages in both scenarios are fixed term for 4-5 years.

Any advice/thoughts appreciated - sorry for the long post!

I very much doubt your sums are realistic.

you need to allow for:

agents fees (10% plus VAT)
remortgage fee
landlords insurance: Buildings, contents, legal, malicious damage, emergency cover, rent guarantee (if tenant stops paying)
gas cert and boiler service (not much but it adds up)
tenancy fees
inventory
maintenance and fixes

costs during void periods: council tax, bills (lower with no-one in there)

as a guide I pay 25% of the gross rental income in fees. Bit skewed as it is a lower rent than yours and various other factors.

get some quotes and do real sums. It may work but be informed!

I'd sell if you are able to and buy a bigger house. I am an accidental landlord who cannot sell (negative equity in a not rising part of uk). Although we have been lucky that in 5.5 years it has been let for all but 2 weeks- it is a constant worry, and it's managed by an agent.

And you haven't taken account of the fact that you'll be liable for tax on the income (on a v simple basis: diff between the mortgage INTEREST payment plus any expenses and the rent). We've just paid our tax bill for the year around £800 between us.

Plus any increase in value of the house will be liable for capital gains tax, if you don't sell within 2 years of having lived there.

Sell. Move on. Instead of thinking of it as saving for retirement- put some money aside in another sort of investment.

How would those figures stack up if you assume big increases in interest rates, for example? What of one of you lost your job, took maternity leave etc?

Letting agents always say they will get good tenants and a good price. They lie. A lot.

800/month sounds a lot for a 200k house. Where are you? I would have a look in newsagent windows and see what local rentals go for. Work it out on a per bedroom basis.

If you choose to rent then you - obviously - keep the equity in the rental house. You will need a full 250k mortgage on the new place. You will to find ~80k deposit to get the LTV down so the mortgage is cheap(er).

I do not think either the deposit (80k) or mortgage (150k) is possible on the income you have stated above.

sorry.

oh yes, these other points are also very valid.

I don't pay tax on our rental income - it is of course declared but it doesn't bring in enough when totted up with our other incomes. CGT also unlikely to be an issue as we aren't in London. Not planning to sell for years but if there is tax on it then, so be it.

Would you be able to get a 2nd mortgage on those figures? The affordability rules are much more stringent than they used to be.

Although it's been mentioned, you really need to have a large reserve for maintenance issues - we have a number of buy-to-lets and this month one of them is going to cost more than the monthly rental in repairs - damaged LX cable which keeps tripping the heating and has blown the (new) timer on the immersion, and a new fridge-freezer to replace the door which has fallen off the current one and is not repairable apparently. You also need to be prepared for the tenant (or agent) to be calling you at every opportunity to tell you that there is a leak, a doorhandle has fallen off, the bath needs sealing etc. We try to do much of the repairs ourselves but if we need to send a contractor around it ends up costing £60 to replace the door handle, for instance.

Thank you for the advice everyone, much appreciated.

We were given the basic figures by a friend who is a financial adviser.

He is confident we can get the mortgage required (although we still don't quite understand how he has worked it all out - he has made it look quite a complex procedure) but he hasn't really gone into detail on the other costs involved, tax etc, which is clearly where we need to do some more thinking and research.

(we obviously knew there WOULD be other costs, but perhaps have underestimated these)

Similar houses in the area are renting for the same amount at the moment - but I am nervous of the potential impact of changes to the housing market, having been stung once before with a flat that went into negative equity when the market dropped.

I'd let it but then I'm a private landlord and investor. Your numbers would add up for me but this isn't about numbers it's about your personality and attitude to risk.

That you describe it as high risk suggests to me that you may be better suited to just moving on. (I would however say that not making investments is a riskier life plan overall IMO).

I let out a flat once when I moved in with my husband. For me it wasn't worth the stress. Even fully managed there was always the worry that the boiler would break or it would burn down, and was a huge pain in the arse if they didn't pay rent on time. Selling it was the best thing I ever did.