Keeping our house and renting it out

[ZenNudist]

Would you do this if it were financially feasible if a bit of a stretch? I live in a good area and prices are likely to go beyond what our dc could ever afford so we want to invest for the future.

It seems to me that it would be essier to just buy a slightly more modest house (5 bed detached, not huge but still bigger) and then keep and rent out our 4 bed semi.

I appreciate we will pay higher stamp duty, high rate tax on the rent, have maintenance costs on both, void periods on the property we rent out as well as hassle finding tenants (but central to a city so not too worried). Not relying on the rent but looks like holidays, saving for university and other luxuries would be harder. I'd have to actually budget rather than being a bit silly with money.

My salary is set to increase and anyway I could go full time in 3 years when both kids are in university but the extra earnings get taxed at such a high rate I'd probably just put it in pension.

Would be interested to know if others started to prioritise investing over lifestyle. I'm 43 so got a 25 year mortgage in me just.

Forgot to say we need to move because our house is a but small given we both WFH and dc are getting older and need study space and generally more room.

Don't you need the equity ?

The real kicker with this would be the capital gains tax you’d need to pay on it when you eventually sold. Make sure you factor this into your calculations.

don't forget capital gains

It doesn’t sound very financially savvy tbh. Capital gains would be a killer and buy to let isn’t the sound investment it once was, you’d be making a loss on your existing property each month I would bet. At your age, do you really want a 25yr mortgage?! If you’re just doing this for investment, there are much better ways to invest your money. I know it’s a bit of an emotional thing with your current house (I’d be sad to sell ours), but I think you need to start thinking with your head and not your heart!!

Friends of mine sold their house found their dream house and then lost their buyer. To keep their purchase they've gone down this road. They said that the rent from the first property is such that they're effectively living mortgage free. So it can work. For me it's too much of a hassle being a landlord. I'd want to do it right for any tenants and that's potentially a lot of work and cost.

We did this, to stop our chain breaking as we had a school application deadline. Do your sums very carefully, ours is break-even so I’d not want to risk it if money was tight. I don’t factor in a capital gain as that’s not certain particularly in an uncertain economy (plus the stamp duty when we bought our new house plus capital gains tax obviously reduce this).

Emotionally it’s not so easy letting the house compared to one you’re not attached to. Also our old neighbours complain to me if our tenants park badly etc.

Costs to factor in:

• 3% stamp duty on new house
• higher conveyancing costs
• extra mortgage arrangement fee
• higher interest in your new home as you’ve left equity behind (and no tax offset there). And interest rates go up.
• managing agent fees (and our agents take their annual fee upfront, I dispute that that’s in their terms, so with our moving costs that was a bit annoying)
• compliance costs (electric checks etc)
• initial costs to get house up to scratch, then ongoing maintenance and servicing of boiler etc
• interest (only going up, plus if you are 40% tax payer you only offset the interest at 20%)
• tax. 40% of ‘profit’ (assuming you’re 40% rate), but because of not getting full offset from the interest you can pay tax even if you’ve made an actual loss. The tax man has made more from our rental than we have so far (I think that’s the real reason the government likes landlords).
• risk if voids and risk/cost if damage
• increasing interest rates
• increasing compliance requirements

On the plus side we’ve had no issue getting tenants, it’s a good sized family home and there aren’t many to rent in our area. But because it’s someone’s home you can’t just decide the local market is looking good right now and evict them to sell. So it’s not the same as a financial investment.

I’m glad we did it as we couldn’t have moved otherwise, but I wouldn’t do it again and I wouldn’t do it with an expectation of making money. Lots of small landlords are leaving the sector for a reason.

That's really helpful thank you. No I don't need the equity. Wd dont currently have a mortgage a so can afford the bigger house with savings and a chunky mortgage and get either a 10 year or whole term fix. I think DH is leaning towards saying that the modest sized 5 bed is not special or spacious enough so then starts to be unaffordable if doing the same on a pricier home.

Many of my friends have more than one property. I don't think I'd do so well from just investing in say a REIT. I'm no good at investment. Really need to start doing something.

Not looking to make money short term. More a hedge that our dc aren't priced out of the area. Would consider the CGT.
I'm an accountant so I do understand the financial implications.

I think I was thinking we may as well keep that house as buy an investment property in the area (smaller, interest only mortgage, probably get two). I like the idea of financial freedom to choose what house we like without having to sell.

You’d be better off investing in crypto than buying an investment property! I have properties with interest only mortgages and thanks to taxation changes, you now pay tax on your mortgage interest payments. Only the government wins. I am now in the position of having to subsidise my properties. I can’t sell them as they are flats with cladding/fire safety issues that need sorting out which is taking years.

It is a lot of hassle and work, and even more fun when HMRC decide to go over your accounts and question every single jolly thing. You have to keep really good detailed records so you can explain everything to the eejits at HMRC.

I have done this with my first house. I'm not sure I would want to compromise greatly on a new house though, just in order to keep on your old house and rent it out.

We build our new house rather than bought so had no stamp duty to consider. Also, I work part time and am not a higher rate tax payer.

Do your sums and see if you think it's worth it. I make around 4k a year after tax and it all goes into a stocks and shares ISA and we don't touch it. Obviously there will be unknown expenses for repairs etc. The plan is that the money will go towards university costs/house deposit for our children. There's around 60k equity in the house so we may sell it in the future and release that money for the children too. There will obviously be capital gains tax to pay too.

I pay the agent to manage it, I wouldn't want the hassle of managing it myself.

For us, I think it's worth it, it's not making us loads of money, but it will hopefully build up a nice savings pot over a number of years.

That's definitely a viewpoint to take on board. Thank you.

DH does invest in crypto but I just leave him to it as gambling. I'm ultra cautious but need to do something with my money because inflation is eating away at it. Property seems like the safest bet for the longer term. I've considered a holiday let because I could enjoy that as well as be buying an asset.

I don't think this place will sell so fast because the market is slowing but the big nice houses still on for £££ so I lose out on selling my house at a lower price but just widening the gap to the next rung on the ladder.

Put it in trust for the kids?

We're about to do this, although it's because we couldn't get a buyer for our current home and don't want to lose out on our new home as houses of the type rarely come on the market here.

We're still hoping to sell it within 3 years so we can get the stamp duty back. I've done all the calculations are it won't be particularly profitable! 40% tax (and you can't offset mortgage), landlord insurance etc means it more or less breaks even if we can rent it out at the higher valuation given by our agent.

Why anyone actively chooses to do this is beyond me.

How are they living mortgage free? Are they not paying taxes on the rental income? The recent changes make it impossible to live mortgage free based on rental income from a single property.

We have done this but with a view to selling before we lose the recent stamp duty break and suffer too much capital gains loss.

You must really think it through and HMRC are brilliant in talking you through some of the tax requirements.

I did this OP. It only really works if you don’t have a mortgage as the tax now on BTL has changed. You used to get mortgage relief, you don’t anymore, so you pay tax on all the rent now just the portion that’s actually profit. For me, it meant I was loosing money and together with repairs and maintenance it wasn’t worth my time. But if you don’t have a mortgage it’s not a bad idea.

You don’t pay CGT on the period you lived there so get a decent relief.

Surely that depends how n how much income it generates? If you are renting it out for 6000 a month then even after tax that is a decent sum to live on.

But there is a mortgage to pay? Unless they were mortgage free already on that property? There is mortgage plus tax and no claim on interest anymore.

We are doing this now. We have a 1 bed house ideal for a young professional couple but in a town where rental stock is next to nothing due to it being a tourist area full of AirBnBs. We hope to provide a rental option for someone local, which also means our property will be in demand.

We’ve worked out that it should still be profitable; we are paying additional stamp duty on our new home, the rental income will cover both the repayment mortgage, management fees plus a little extra for maintainance each year. We are not expecting a month on month profit, only to break even- we intend to maintain high standards for our tenants. Our salaries can cover both mortgages if required.

We are currently still young enough to take our 30 + year mortgages and intend to keep this property until our retirement so there is plenty of time for the tax system to change/ property value to increase- it’s very much a long term plan.

Worst case scenario, we hate being landlords… we will sell before the 3 year deadline for stamp duty refund and get our extra stamp duty back!

Lots of people are mortgage free or have very small mortgages. It’s not unusual let wine impossible

Let alone impossible

No I wouldn’t.
I have owned rental properties in the past and it was a bit of hassle but I did make money. Now the laws etc have changed and it’s so much harder to to turn a profit PLUS if you have bad tenants getting them out is very very hard and can cost a lot of money. I know a few people who got burnt
Most people I know with buy to let properties are getting out now

That’s not the worst case scenario.
You could end up with tenants who don’t pay rent and cause damage who it takes you quite some time to legally evict.