Main breadwinner dilemma - should I sell second home?

[Sleeples]

Hi!
Forgive my incredibly first world problem.
I’m married with two DD. I own a flat in an increasingly trendy area of London - it has 140 years on the lease. It’s bought entirely with cash, no mortgage.
I used to live there with my family but we’ve moved out of town and I still own the flat. It’s currently empty.
On top of my mortgage for the house we now live in, I’m in 50k of loans. I can afford all the payments.
I’m working FT and am the main breadwinner. My husband’s work is reliable but while I earn £55k a year he’s on less and is self employed.
Now we’re sending DD1 to nursery which is about £70 a day and will be four days a week. A lot of this is because when his work does come, we have struggled with the juggling act. I can’t afford this alone but he has said his salary could help.
I never wanted to be a landlord but I wanted to keep the flat so my DD have somewhere to live in London one day if needed.
But should I just sell to get out of this slight money squeeze?
It’s a one bed flat - worth about £240k…

If the hassle and risks of renting aren't for you, I'd look into selling and put the money into Index trackers - they have historically been a safe bet over a long timescale. Have a look at Vanguard, they have low fees and historically very good performance.

I've also been a LL and our situation was very close to yours. I sold up for a number of reasons - needing to reduce our monthly mortgage costs in the property we currently live in, and wanting cash to pay for a loft conversion.

With being a LL, you have the risk of the tenants not paying and it taking months to get them out. They might decide the flat is ideal for a weed grow, wrecking your electrics... or they might do what mine did. Behave beautifully for nearly two years, then sublet to illegal immigrants and risk me getting a £20k fine. F**k that. I sold.

Now my spare cash is in solid investments that don't cause me even 10% of the worry. Plus I no longer have to pay 40% income tax - if I pull my gains out of the fund, I have the £12.3k capital gains tax allowance (separate to the income tax personal allowance) then only 20% on any sum above that figure.

@ittakes2 I thought 140 was a decent lease. Will be 120 if and when they need it, still decent no?

Why don't you raise a mortgage on the flat for the £50k (or better still for 'home improvements' on your current house) and pay your loans off. The next few years with predicted rising interest rates are not the time to be juggling loan repayments, especially not when your salary is only just over what you owe on loans, and the repayments must take a large chunk. A £50k mortgage for 10y fixed term will be a lot less pcm than your loan repayments.

And then get it rented out! Even if it is 'only' for £1200 a month, and management fees take 10% of that, a £50k mortgage on current fixed term rates is only going to be £300 / 400 pcm, which leaves you with £500+ pcm profit, yes you'll then have to pay tax on it, but if you want to keep the asset for the future, it's still better than not having that income and that asset.

Yes that is a very good lease term - doesn’t become a problem until 80 years or less

The thing is that if you sell that flat you will never ever be able to afford a London flat again.

50k of unsecured debt, no savings, rising interest rates and fairly average income is a recipe for financial disaster.

I speak from a position of experience. Sell the flat, pay off all your debts and keep the rest in a high interest savings account.

If you suddenly need money, the flat may take 6 months to sell, in which time you could loose your current home because you can't make mortgage payments.

The flat is giving you a false sense of security of financial stability.

@outdooryone

Do you mind me asking how much you're making monthly on how much invested?

I have a property I rent out and if I could make as much monthly as I get in rent (it would need to be a fairly low risk investment though) I'd consider selling it.

Although I'd need to take into consideration the potential loss of profit from any potential property price rises. My property has trebled in value in the 20 years I've owned it.

If i recall correctly capital gains tax doesn't kick in until you have had your 'spare' property 6 months so you could sell that now and keep all the equity. Wait longer and if you find you aren't coping with your debt or the decision gets nudged towards sale for whatever reason you might find the money in your flat goes towards the taxman a lot more than it would now.

Check that out though obviously as I'm not sure.
You certainly need to know your position here with capital gains tax as it could influence this decision.

I'd sell the flat, pay off the unsecured loans (as interest rates are only going to go up), fund any renovation works required in my current home, and invest the rest of the capital for long-term growth.

OP why don’t you try renting the flat out for 6 months and see whether you can handle being an LL?

Keep it, rent it and work on an income of 7months rent per annum-the rest will go on fees and maintenance- but it still pays a chunk off the debt /towards nursery fees.

In your position I would sell it. £50,000 debt is a lot on a £55,000 salary, and it will be one less headache.

I have rented out a (3 bed) flat for the last 20 years. No mortgage, was paid off before we moved and I was able to keep it. At one point, I was going to sell it (to clear the mortgage on the house I was living in, etc) but I am extremely glad I didn't. It's a flat in zone 2, and the rental income has more than doubled since I began letting it. The extra income has given me a lot of freedom around work, and a valuable asset that my son can use in his turn.

There isn't another capital asset that could generate this amount of income, month in, month out, for me. I suspect the same is true for you.

Yes, it can be work and pressure and money, and if you have annual churn of tenants then the agents' fees become tiresome. But if you do it properly, look after the property, don't skimp on things like proper boiler servicing and cover, and warranties on white goods and you buy decent insurance that gives you legal cover and rental income guarantee, then you have a nice, income-generating asset humming along.

Bear in mind that agents want their slice up front (I pay 8% plus VAT, but that is just for marketing the property and finding the tenants. I pay them to draw up the contract, which is pretty standard AST, about £50, I pay for an inventory, about £120, and for credit/right to rent checks on each tenant and their guarantors if they have one. You will need an EPC rating, a gas safety check certificate and an electrical compliance report. Agents should ask for this upfront before marketing your property.

If you are feeling the pinch now, perhaps a good sit-down with your husband and a debt-repayment plan is the way to proceed?

90% in the don’t sell camp. The 10% depends on your debt interest rate.

I wouldn’t sell it nothing rises in value like property in the uk. For gods sake don’t put in premium bonds. I have quite a lot and I get £25 a month house prices where I am are rising by 5% a year!
I would let it as a holiday let or a student let on a fixed contract. You may not make as much but you know the tenants won’t be there forever.
Look into getting or adding the £50k to a mortgage. It would cost you less than £200 a month at current rates. The rental property will give you income into retirement.
I do agree there are majors issued in the uk housing market but as individuals we can’t make much difference and you’ll need it later for your daughters

@TheEconomista

Premium bonds?!?!?! What?? Please explain how that’s a good idea.

She wants safe cash to be able to upgrade if she wanted to move again soon. That seemed more sensible than putting it all in shares that may crash or pension she can't access.

Would like to thank you all for replying! It’s been very very helpful. Have decided with my DH we will rent it out but let a recommended agent in the area we know deal with it all. His recent and coming earnings will cover the first year of childcare, then she’s almost three and we will have some relief with 30 hours. If I’m not able to move my balance when the credit card time limit is up (which is ages away by the way 0% for 24 months) then I’ll look into getting a mortgage on the flat.

I would sell it and invest some in your house & stick some aways for DCs. depending on where the flat is - maybe more growth over 20 years but life has to be lived.

My great friend has just sold her BTL flat as ( even with proper agents ) the hassle was getting too much )

Also need to talk to my boss - I’m due a promotion so it’s somehow motivating to hear how average my salary is. I work too hard and well for a mediocre income

Get flat done up. Rent it out. Use a management agency if not confident you can do it to a professional standard. Use money from rent to pay nursery fees.

You can't claim interest back on btl mortgage but you can claim back management fees, house insurance, and repairs, painting etc including labour.

Good decision @Sleeples

Rent it out then get a buy to let mortgage to release the equity. Rates are all time low, you can give for five or ten years and pay interest only. By the time you come to remortgage, the flat will be worth a lot more than it is now plus you will have benefitted from rental income. Get a managing agent so you don’t increase mental load.

Selling it now would be a mistake. Small London flats without a garden are exactly the worst kind of property to sell at the moment. Due to pandemic everybody wants to live in a house possibly with an acre of land and 17 bedrooms.
Rental market however is still strong, especially on cheap flats (by london standards).
It fully depends on where your flat is, but judging by the £240k price it can’t be anywhere fancy or anywhere near to central London. Hold on to it at least until the flat market picks up, 3-4 years.