Should we go into buy-to-let?

[justaphase]

OK, so we are buying a lovely new house and I have just about got over the extortionaye price that we are paying and now dh has come up with this.

We were originally going to sell our small flat. Now he has decided that it is a much better idea to remortgage the flat to raise cash for the new house (plus additional mortgage) and rent the flat out.

First of all I don't think the maths works very well:

1. interest only mortgage will cost us £1000 per month
2. gross rent is likely to be £1100, we need to pay £140 service charge of this plus estate agent's commission. And this does not include maintainance cost and assumes we find a tenant straight away.

His argument goes:

1. We need to pay 6K to the estate agent to sell the flat, we can afford to have it empty for 6 months for that
2. property prices will keep rising, it is stupid to sell now.

Aaaargh! How do I convince him? Or am I really being stupid?

We are in Greenwich btw (Deptford side), so near Canary Wharf and the area is being developed very aggressively. I am not sure if this is good or bad.

IMHO you would be mad to sell if you can afford to keep the flat on. It may not go up much (if at all) in the short term but it will increase in value over the long term, especially given your location - Canary Wharf, the Olympics etc. Imagine paying off the mortgage on it, selling it and having a big lump sum for your retirement. Property is all about the long term.

I did this when we bought with dh, but two things:

Firstly, my flat has trebled in value since I bought it so the mortgage is more than covered by the rental income. Having looked at the btl market recently, there is no way I would do it now because the rental income generally won't or will only just cover the mortgage.

Secondly, if you ever want to sell the flat at some point in the future, you will be liable to pay capital gains tax on any increase in value. This is assessed on the basis of your income tax band, I believe, and a friend did tell me that the increase in value whilst it was my primary residence is excluded from calculation of CGT. Nevertheless, you could find yourself losing a lot of any increased value - 40% if you are a higher rate tax payer - whereas you would not pay CGT on the house as your primary residence.

We have lived in the flat for 6 years though, surely this makes us exempt from CGT even if we rent it out now?

No - what it means according to my friend (and I still have to check this) is that any increase in value during that 6 years is exempt. He mentioned that if you sell within 3 years of it stopping being your primary residence, you don't pay CGT, but if you keep it for longer, you will get taxed on any increase during the period for which you rent it out. Call the IR - I find they tend to be quite helpful about this sort of thing...

We have just sold our btl after having it for 5 yrs.

If you are looking long, long term, then go for it. That location is fab for btl. Hwr, you need to make sure you have enough money to be able to pay maintnance, live with any dips between tenants and deal with interest rates going up and the rent not covering it.
If you are in a position to handle these things and have a slush fund for for it, then long term you are a winner. If you will struggle, then I would think again. It is no good having no money now because you are supporting your flat as a long term thing, but can't go on holiday and money is tight day to day...

It would have been good to hang on to our btl as a pension, but realistically, we needed to realise some of the capital for living now.

As a compromise, how about doing it for 3 yrs, see how it fits with your budget, and that way if you sell it before 3 yrs, you won't have to pay ctg on the profit?

If it works well in that 3 yrs, keep it forever, if not get shot!

Does that make any sense!!!

Also you pay income tax of any nett income(although it doesn't sound as if there woudl be much !) plus vat on fees.

Keep the flat! I am currently kicking myself that we didn't do this when we sold up 5 years ago. We bought our flat for £32,000, five years later sold it for £61,000 and five years on it is currently on the market for offers over £110,000 (the new owners have done nothing other than a lick of paint ).

If you can keep it for the long term yes but the days of making a quick buck from property seem to be coming to an end.Also I think buy to lets are going to fall prey to Gordon Brown with taxes soon.If there weren't so many buy to lets 1st time buyers would have aq chance

I don't think property prices will be doubling again for a while but I would keep the flat personally, if only as a safe guard if anything went wrong in the future between you and DH.
Just emotionally detach yourself from it the day you move out and be prepared for tenants to wreck it, I believe you can buy insurance though.

Did you see the article in the Evening Standard yesterday about slowdown in property prices? It focused on Greenwich and Deptford and said that prices are sticking a bit so it might be worth holding on if you can. As Katepol said, you've got three years of letting before you are liable for CGT because you've lived in it previously.

I probably would keep the flat - there is demand in London and even if there is a dip in prices in the next year or two, it is a good long term bet.

However, I would do my homework and double check that you can actually get the rent your dh thinks you can get. Also, how long can you fix the mortgage for and most importantly can you be arsed with dealing with tenants.

I have a couple of buy to lets, which I manage myself as agents charge a fortune for this service.

The tenants are forever on my case - it's a right pain, esp if you have a busy job, kids etc.

But they have made money and I think if you choose the right property, they are a good investment.

Personally I am steering well clear of buying anything at the moment as the market in London is definitely due for a correction.

Since you already own the flat, the situation is totally different and I think you would regret selling it.