Renting out primary home so you can live in a rental?

[PancakeCloud]

Is this a terrible idea?

Current home unsuitable (small flat with with two small DC) and has been on the market for over six months. We had a buyer early on who then pulled out due to their financial situation. We have dropped price twice already. Gearing up to drop price further but getting less money for our current home will make finding our next home more challenging, and so we’re considering alternatives.

We have done the maths and while not very efficient, we could afford a rental that would be suitable for now based on our current income and potential rental income for our current flat. Rental income approximated based on local market, understanding 10-15% will go to a management company, and net of tax. We would get landlords insurance, which I haven’t factored in yet.

Is this a terrible idea?

Why do you think you can’t sell your flat at the price you want? Because half of all landlords are also selling, as the new renters rights make it much less attractive to be a landlord, especially harder to evict & impossible to have a long term contract as they can quit with 2 months notice.

It’d be a bizarre decision to get into the game right now, especially as amateurs who won’t have carefully optimised everything ( the right mortgage, flat location, shell company to reduce tax) to make it at all profitable.

Having a main home rented out whilst yourself renting can cause difficulties with school admissions.

You are exposing yourself to a lot of financial risk. The renter may be a nightmare, damage things, refuse to pay rent and/or move out.
Plus you would have a tenancy commitment elsewhere.

Don’t forget, if you do rent it out, there will be Capital Gains Tax to pay when you do come to sell.

Seems a risky idea to me - will you be able to cope with mortgage payments plus your own rental payments in the case you have a non-paying tenant? It takes ages to evict so if you are unlucky with a bad tenant you could be stuck with double payments for 6-12 months.

I have a flat I rent out which has barely broken even for the last three years.

On paper it should give me an income of about £700 a month (after mortgage, service charge, agent fees and landlord insurance).

In practice that profit has been entirely eaten up by repairs (tenants haven’t reported problems as soon as they saw them, so they became much bigger problems), and by the tenant who just vanished overnight and didn’t even tell us he was leaving so we had a void period, and by the cost of sending out people to service the boiler three times before the tenant (who had agreed and confirmed all appointments) actually deigned to let them in, etc etc.

We’re now selling it at a small loss as honestly not worth the hassle anymore - our current tenant gave notice so we’re cutting our losses rather than risk taking on a new one and being unable to get rid of them.

If you’re actually relying on the rental income to cover your cost to live somewhere else that’s a really risky strategy.

Cant this be mitigated with references etc?

Posters on Mumsnet complain about tenants constantly but I was a tenant for a decade and would never have dreamed of trashing somewhere or refusing to pay rent. Is this really that common?

Wow that’s quite shocking. Did the tenant have any red flags?

No red flags at all - professional job, good reference from previous landlord. Sadly there are just as many bad tenants as bad landlords, and the law has now swung really far to protect the tenants and make life as a landlord very difficult.

We have to credit check within an inch of your life no falling for sob stories, you need a guarantor. Ideally, you want somebody with something to lose by getting into Debt so a police officer or an accountant or somebody in the army.
I believe teachers and nurses are the worst Tenants for some strange reason

We’re on our 4th set of tenants in 6 years, they’re vetted, credit checked, come with references etc.

we’ve had to spend between 3 and 4K between each set fixing stuff they’ve damaged. not just normal wear and tear and one vanished owing us 3 months rent.

Insurance isn’t hugely expensive, there a load of other small costs that add up as well though, safety tests and so on.

Tax can be a lot as it’s calculated after your income tax, also if it’ll have a mortgage that’s not a tax expense, you get a 20% tax relief on the interest but that’s it.

Land Lord does have a certain ring to it. Like one is joining the gentry.

I will balance out previous posts by saying I let my house for 4 years when working overseas. I had one sent of tenants who stayed the whole time, paid on time (even when covid hit), left when given notice, and left the place in reasonable shape. However, I’ve come to realise I was very lucky!

The likelihood is that you will have no trouble with tenants - as you say, most people are good people. However, you need to make sure you have the financial reserves to manage in the case you end up with bad tenants. This is your home/livelihood here - if you can’t pay the mortgage and your new rent, but also can’t move back into your house (because the tenants won’t leave and there is a court backlog) then there is a risk - no matter how small - that your house could get repossessed.

As a landlord with over 20 years experience - it can be done but you’ve got to consider everything.
Landlords are selling up now because there are so many more legislations / renters act that come into force a few weeks ago.

I don’t plan to sell my portfolio as this would mean that my current tenants who have been fantastic would have to find alternative homes when the market is challenging as it is….
and it’s my retirement fund etc. That said though, I won’t be recommending people who are new to becoming a landlord to do it.

I would just wait out and sell. A buyer will come along - even if you have to move to another property that isn’t your desired - you could move again or over the years develop the property…

I'm a landlord and agree with your sentiments, like you, its my pension and I am fortunate to have long term, excellent tenants.

With that in mind I have no plans to change, but if a tenant left I would seriously consider whether to re-let as a tenancy or offer it as a holiday let.

I've been fortunate to have very nice tenants, others not so much, its a risk, and one I'd not take in the OPs position, it could end up costing more than she ever makes.

I did this for a while when moving cities as I wanted to test out the move before I sold up. You will end up out of pocket for sure given the comparatively high costs of renting yourself versus what you will end up from your rental income after tax, mortgage, expenses etc. You also have to consider capital gains when you do then sell your home and it might well be difficult to sell if the tenants don't want to leave (or you do what I did and wait till they"re out before putting it on the market, but then I ended up paying mortgage and rent for a year while selling and it was horrific).

Another thing to remember is your income tax will include rental income so there is potential to be pushed into a higher bracket and lose childcare/child benefit entitlements, your costs of renting elsewhere won't be taken into account.

Personally, having done it, I wouldn't again, way too much stress and expense - but if course it is doable if you are willing to take on all those things.

having a management company does not remove all the admin from you

for example, you will have rental income and will therefore be required to submit your tax return though HMRC's MTD (making tax digital) process.
How IT literate are you? Yes there is free MTD software but it is somewhat clunky and not as "user friendly" as paid for MTD software

How unsuitable is the flat? Is it a 2 bed? If so I would declutter, maybe get some space saving furniture etc and stay put for 6 months and try to save some money. Take it off the market and try again later in the year.

It’s a very uncertain time at the moment, both economically and politically. Things could look very different next year. If things are better then the likelihood is that you’ll sell, if things are worse at least you’ll have a secure roof over your head and not need to evict someone to get back into your home. There are some really inspiring blogs etc of people doing small home living with kids if you look online.

Wouldn't you have to pay tax on the rental income?

Yes she would but she has accounted for that as she says “net of tax”.

I would cut the price of the flat and get it sold. I wouldn’t like to be a landlord - too much risk.

Too risky I’ve a friend with a few rentals she’s a good and fair LL barely breaks even
tbh she has below market rent to retain good tenants as had so VERY bad experiences that cost her £1000’s

there all your safety certificates ,house insurance, and mortgage ( a lot of normal mortgages won’t let you rent it out )

being a flat I presume it’s leasehold gave you checked that to see if there’s any problems there

the only benefit for your plan is you can evict tenants if you need your home back to live in
BUT they can refuse to go and you have to go to court and pay for bailiffs to get them out

If you can afford to buy without using some of the equity in your flat it’s not a terrible idea.

If you can’t however, then yes it is a terrible idea. You will have to pay:

• Almost all the new tenancy fees including inventory and inspections, PAT testing and preparations for it to be ready to rent, background checks on tenants etc. this is at the beginning and the end of the tenancy, and bear in mind you could have a new tenant every year or two.
• Management fees (don’t go for fully managed it’s a rip off especially if you know the flat well yourself and have a couple of good tradespeople to hand when you need them
• Buildings / landlords insurance
• Any ongoing maintenance charges etc for the building
• Income tax on the rent, at your highest tax rate, so it could push you into the higher rate tax bracket for example
• Repairs and maintenance, which some years may cost you nothing and some years may cost you half your income in a small home. And from experience it’s very difficult to take it out of the deposit as they always claim it’s wear and tear or your fault.
• Capital gains when you sell it, I think the threshold is not having in it for 18 months but that may have changed
• Rent on another home
• Plus for love nor money you cannot get a tenant out anymore if you find your “perfect home” and want to sell

You won’t have to pay:

• Council Tax
• Contents insurance

Can you tell us:

1. Why do you think it’s not selling?
2. What is your long term plan?

It's a terrible idea. As a landlord of over 30 years I'm now looking to get out. The risks are high and the costs are huge. No one in their right mind would consider getting into it these days.

Yes 2 bed, although really one bed plus box room. Considering this approach, although I had high hopes for a sale in spring

we won’t be able to buy our next home without using equity in our flat. The consensus seems to be renting is too high risk and would likely be unprofitable.

1. It’s a leasehold flat with a tiny balcony and no garden - really not a lot we can do about either of those things, but appreciate those factors will put buyers off. With two children in a two bed the place gets messy quickly and probably looks a bit crowded, although we tidy up within an inch of our lives prior to any viewings. Obviously anything should sell at the right price but if we drop further we’re looking at a loss (and, more to the point, will limit us in terms of what we can buy next). We bought in 2019 so probably around the peak of the market pre Covid- it was in good condition and nicely decorated when we bought but we haven’t spruced it up since we moved in, other than to convert the second bed into a nursery room (youngest still in main bedroom).
2. Long term plan is an unknown. Plan A is to sell up and move into a three bedroom with more room for us all to breathe. If we did rent out, if we had good tenants I suppose we might try to rent ourselves long term. Open to other solutions. Considering selling at a loss and renting while we look for somewhere suitable (not ideal but feasible, we just have to hope the market cools a bit in the bracket we’re looking at).

Zero evidence that landlords are selling up. Some have, but the properties have been snapped up so far, by and large by other landlords who are happy to comply with the completely fair new rules.

https://www.bigissue.com/news/housing/landlords-exodus-rightmove-rental-tracker-renting/

Also - it isn’t harder to evict at all, and tenants have always been able to give 2 months notice.