Possible sale of BTL - am I missing anything?
Discussion
Good evening all,
I'm fortunate enough to be in the position where I am considering selling my rental property. I've had great help and read fantastic advice down the years on PH, so would be grateful if anyone has the time to read, digest and give me a steer. I will try to keep it simple but include relevant info where necessary. I have to say I recognize it's an extremely fortunate position to be in and I have been very lucky with timings (and benefited from money inherited from grandparents) - first world problems and all that.
Reviewing the full life costs as a long term asset:
I look at the news and current markets, and whilst I am far from being an expert, I do wonder how long this situation - with rising house prices, in London at least - can last. Whether that is due to imposed controls on landlords reducing the attractiveness of rental properties, or the result of a crash/depression in the market due to global conditions/over extension of credit etc.
Just to complicate matters further, if I were to sell, any profit made would be overpaid into my current domestic mortgage - any overpayment would result in a equal saving in reduced interest over the mortgage term. i.e a £50k overpayment would reduce the mortgage but also mean I would pay £50k less in interest over the remainder of the mortgage. I am late twenties so the idea of being well set up on my domestic mortgage (long term home with no need to move in the next 10+ years) really strikes a chord.
If you're still with me, I would really appreciate your input on the matter.
What would you do? I am interested in people's unbiased opinions, whether I am missing anything (possibly obvious!), things to consider if I were to go ahead with a sale etc
Thanks for reading!
I'm fortunate enough to be in the position where I am considering selling my rental property. I've had great help and read fantastic advice down the years on PH, so would be grateful if anyone has the time to read, digest and give me a steer. I will try to keep it simple but include relevant info where necessary. I have to say I recognize it's an extremely fortunate position to be in and I have been very lucky with timings (and benefited from money inherited from grandparents) - first world problems and all that.
- I currently own (just me) and rent out a one bedroom flat. I lived in the flat from 2011 to 2014 (just over 3 years).
- I purchased the flat for £180k with a £110k mortgage in 2011.
- Last year I remortgaged the property and converted to a BTL mortgage to facilitate the purchase of a larger house with my girlfriend.
- At the point of remortgage I had £105k remaining on the original mortgage.
- During this remortgage process in mid-2014 the flat was market valued at somewhere around the £260k mark.
- For the remortgage purposes the flat was valued at £220k and I took a 75% interest only mortgage of £165k on a 35 year term, leaving £55k of equity in the flat.
- I have had a tenant in the flat for the past year. The yield (which I take to be post tax profit over the mortgage value) is around 1.8%pa.
- Any profit is made as overpayment into the mortgage.
- The flat is in a block with a £1-£1.2k pa service charge (eating a big chunk of profit).
- The flat has 67 years remaining on a 99 year lease.
- Initial investigations have indicated extending the lease will cost at least £20k.
- I am assuming that in the past year, being in London, the property price will have probably risen to around £270k.
- Prior to renting it out, I refurbed and fitted a new kitchen, new bathroom, decorated, new carpets/flooring throughout - the property is in great condition.
Reviewing the full life costs as a long term asset:
- Profit simplified and assumed at £3k pa over the course of the 35 year term = £105k.
- Then taking into account the need for the lease extension = -£25k --> £80k
- Then a couple of refurbishments (inc kitchen/bathroom/carpet/furniture etc at least over the term = -£10k --> £70k
- Then a 10% contingency -£7k --> £63k.
- Subtract this from the £165k mortgage and the end of the term there would still be significant (£100k) amount remaining.
I look at the news and current markets, and whilst I am far from being an expert, I do wonder how long this situation - with rising house prices, in London at least - can last. Whether that is due to imposed controls on landlords reducing the attractiveness of rental properties, or the result of a crash/depression in the market due to global conditions/over extension of credit etc.
Just to complicate matters further, if I were to sell, any profit made would be overpaid into my current domestic mortgage - any overpayment would result in a equal saving in reduced interest over the mortgage term. i.e a £50k overpayment would reduce the mortgage but also mean I would pay £50k less in interest over the remainder of the mortgage. I am late twenties so the idea of being well set up on my domestic mortgage (long term home with no need to move in the next 10+ years) really strikes a chord.
If you're still with me, I would really appreciate your input on the matter.
What would you do? I am interested in people's unbiased opinions, whether I am missing anything (possibly obvious!), things to consider if I were to go ahead with a sale etc
Thanks for reading!
If you sell your going to have to pay capital gains tax as it's increased in value since you moved out. Are you going to extend the lease before you sell? It might be very tricky to sell with such a short lease.
How fast is that bit of London increasing at currently? Although the rent and costs give you a poor return if the asset is increasing at 5% a year then that's a much better return and worth holding onto for a while longer ?
As for prices taking a big dive anytime soon, in London on what seems to be the cheap bit of London I doubt it very much.
So many factors to weigh up.
How fast is that bit of London increasing at currently? Although the rent and costs give you a poor return if the asset is increasing at 5% a year then that's a much better return and worth holding onto for a while longer ?
As for prices taking a big dive anytime soon, in London on what seems to be the cheap bit of London I doubt it very much.
So many factors to weigh up.
sparks85 said:
- During this remortgage process in mid-2014 the flat was market valued at somewhere around the £260k mark.
- For the remortgage purposes the flat was valued at £220k and I took a 75% interest only mortgage of £165k on a 35 year term, leaving £55k of equity in the flat.
- I have had a tenant in the flat for the past year. The yield (which I take to be post tax profit over the mortgage value) is around 1.8%pa.
I am confused?
Perhaps you could also tell us what the rent is?
BoRED S2upid said:
If you sell your going to have to pay capital gains tax as it's increased in value since you moved out. Are you going to extend the lease before you sell? It might be very tricky to sell with such a short lease.
How fast is that bit of London increasing at currently? Although the rent and costs give you a poor return if the asset is increasing at 5% a year then that's a much better return and worth holding onto for a while longer ?
As for prices taking a big dive anytime soon, in London on what seems to be the cheap bit of London I doubt it very much.
So many factors to weigh up.
The way I understand it I could price it competitively to include the lease extension as part of the sale (rather than fund it myself).How fast is that bit of London increasing at currently? Although the rent and costs give you a poor return if the asset is increasing at 5% a year then that's a much better return and worth holding onto for a while longer ?
As for prices taking a big dive anytime soon, in London on what seems to be the cheap bit of London I doubt it very much.
So many factors to weigh up.
From a quick search of some of the property websites, prices of flats appear to have risen around 9% in the past 12 months.
I'm just skeptical that the market growth can continue at this rate. On one hand you have simple supply and demand, but on the other surely there is a ceiling for credit and we will soon reach the point where lenders will not lend to the amounts the market begins to demand (therefore capping the market naturally). Huge simplification I know...
ex1 said:
sparks85 said:
- During this remortgage process in mid-2014 the flat was market valued at somewhere around the £260k mark.
- For the remortgage purposes the flat was valued at £220k and I took a 75% interest only mortgage of £165k on a 35 year term, leaving £55k of equity in the flat.
- I have had a tenant in the flat for the past year. The yield (which I take to be post tax profit over the mortgage value) is around 1.8%pa.
I am confused?
Perhaps you could also tell us what the rent is?
I could have valued the flat at the market rate of ~£260k but then had to leave £65k @ 25% in the flat, not providing enough equity for the house and at the same time making the flat mortgage repayments unfeasible. Just a balancing act really.
BoRED S2upid said:
If you sell your going to have to pay capital gains tax as it's increased in value since you moved out. Are you going to extend the lease before you sell? It might be very tricky to sell with such a short lease.
Capital gain since he moved out is less than the allowance, so no tax payable?BoRED S2upid said:
If you sell your going to have to pay capital gains tax as it's increased in value since you moved out.
After allowing for the 18 months relief, and the CGT allowance they'll be f
k all CGT to pay
People calculate Yield in one of two ways
1/ Annual rent received against what the property actually cost
or
2/ Annual rent received against what the property is currently worth
I wouldn't personally buy a leasehold property for a BTL due to service charges. They simply eat into your profit.
Sir Bagalot said:
People calculate Yield in one of two ways
1/ Annual rent received against what the property actually cost
or
2/ Annual rent received against what the property is currently worth
People who do 1. are financially illiterate.1/ Annual rent received against what the property actually cost
or
2/ Annual rent received against what the property is currently worth
The OP has done some random third method that is even more mad.
Clearly I have used the wrong approach to calculate yield?
Rent is £975pcm = £11.7kpa
- 9% agent fee leave £10.65k
- interest only mortgage leaves £4780
- £1.2k service charge and ground rent leave £3580
- around £600 for insurances (B&LL)
- Leaves approx £3k pa pre tax
- Therefore £2250 post tax (ignores 10% wear and tear for simplicity here)
So the market value is - say - £270k
The outstanding mortgage is £165k
Remortgage costs were a few £k
I always took net rental yield to be the post tax annual profit against the total financial exposure (in this case the mortgage, fees, SDLT etc ). I.e a Benefit to Risk ratio, that changes to measure exposure at a specific point in time.
so £2250/£167k = 1.35% (its getting worse!)
Please do correct me if I am wrong!
Rent is £975pcm = £11.7kpa
- 9% agent fee leave £10.65k
- interest only mortgage leaves £4780
- £1.2k service charge and ground rent leave £3580
- around £600 for insurances (B&LL)
- Leaves approx £3k pa pre tax
- Therefore £2250 post tax (ignores 10% wear and tear for simplicity here)
So the market value is - say - £270k
The outstanding mortgage is £165k
Remortgage costs were a few £k
I always took net rental yield to be the post tax annual profit against the total financial exposure (in this case the mortgage, fees, SDLT etc ). I.e a Benefit to Risk ratio, that changes to measure exposure at a specific point in time.
so £2250/£167k = 1.35% (its getting worse!)
Please do correct me if I am wrong!
sparks85 said:
...if I were to sell, any profit made would be overpaid into my current domestic mortgage - any overpayment would result in a equal saving in reduced interest over the mortgage term. i.e a £50k overpayment would reduce the mortgage but also mean I would pay £50k less in interest over the remainder of the mortgage.
That's just coincidence related to the term and interest rate of the mortgage.All you need to know is that £50k overpaid into the mortgage will save you X% per annum in interest, where X is the interest rate of your mortgage.
More importantly the question you have to ask is "If I sell now, what do I do with the capital?"
You have several options:
- Overpay your mortgage to save X% per annum risk-free (as above).
- Stick it in a pension and reap the tax saving up front, but limit access to the funds and maybe pay tax on exit, plus inevitably invest in something more risky.
- Stick it in an ISA - risk/reward up to you.
- Buy another, higher yielding, lower maintenance (i.e. no lease extension needed) BTL.
We don't know what other savings/investments or debts you might have. So no one can comment on the best mix of investments for you.
I would strongly recommend a sit-down with an IFA.
But since you have done well with BTL and are clearly comfortable with it, I would be looking to see what I could do with the capital invested into a different BTL as a first check before selling.
sparks85 said:
Clearly I have used the wrong approach to calculate yield?
Rent is £975pcm = £11.7kpa
- 9% agent fee leave £10.65k
- interest only mortgage leaves £4780
- £1.2k service charge and ground rent leave £3580
- around £600 for insurances (B&LL)
- Leaves approx £3k pa pre tax
- Therefore £2250 post tax (ignores 10% wear and tear for simplicity here)
So the market value is - say - £270k
The outstanding mortgage is £165k
Remortgage costs were a few £k
I always took net rental yield to be the post tax annual profit against the total financial exposure (in this case the mortgage, fees, SDLT etc ). I.e a Benefit to Risk ratio, that changes to measure exposure at a specific point in time.
so £2250/£167k = 1.35% (its getting worse!)
Please do correct me if I am wrong!
What ever method you use to calculate, the yield is rubbish and about to get worse!Rent is £975pcm = £11.7kpa
- 9% agent fee leave £10.65k
- interest only mortgage leaves £4780
- £1.2k service charge and ground rent leave £3580
- around £600 for insurances (B&LL)
- Leaves approx £3k pa pre tax
- Therefore £2250 post tax (ignores 10% wear and tear for simplicity here)
So the market value is - say - £270k
The outstanding mortgage is £165k
Remortgage costs were a few £k
I always took net rental yield to be the post tax annual profit against the total financial exposure (in this case the mortgage, fees, SDLT etc ). I.e a Benefit to Risk ratio, that changes to measure exposure at a specific point in time.
so £2250/£167k = 1.35% (its getting worse!)
Please do correct me if I am wrong!
With the new rules on interest only getting 20% relief, assuming you're in the 40% tax bracket your £100k invested will net you around £50pm and thats if nothing goes wrong. IMO that is a poor investment. You may get capital growth but you are as likely to be subsidising it if you get any rent free periods/unforeseen costs/rate rises etc.
Sell it and reinvest somewhere you can get a better return. Paying off your mortgage is a fallacy, it simply takes away one of many outgoings. Why the rush to pay off one of the cheapest forms of borrowing? I have friends who proudly tell me how they have paid off their mortgage. They live in a 3 bed semi, still have £2k+ pm outgoings, no passive income and are tied to jobs they find unrewarding.
It feels great until you realise you have still got - council tax, water, electric, car insurance, mobile, broadband, petrol, etc, etc, etc.
ex1 said:
What ever method you use to calculate, the yield is rubbish and about to get worse!
With the new rules on interest only getting 20% relief, assuming you're in the 40% tax bracket your £100k invested will net you around £50pm and thats if nothing goes wrong. IMO that is a poor investment. You may get capital growth but you are as likely to be subsidising it if you get any rent free periods/unforeseen costs/rate rises etc.
Sell it and reinvest somewhere you can get a better return. Paying off your mortgage is a fallacy, it simply takes away one of many outgoings. Why the rush to pay off one of the cheapest forms of borrowing? I have friends who proudly tell me how they have paid off their mortgage. They live in a 3 bed semi, still have £2k+ pm outgoings, no passive income and are tied to jobs they find unrewarding.
It feels great until you realise you have still got - council tax, water, electric, car insurance, mobile, broadband, petrol, etc, etc, etc.
So if you have a large mortgage they give you the utilities for free? With the new rules on interest only getting 20% relief, assuming you're in the 40% tax bracket your £100k invested will net you around £50pm and thats if nothing goes wrong. IMO that is a poor investment. You may get capital growth but you are as likely to be subsidising it if you get any rent free periods/unforeseen costs/rate rises etc.
Sell it and reinvest somewhere you can get a better return. Paying off your mortgage is a fallacy, it simply takes away one of many outgoings. Why the rush to pay off one of the cheapest forms of borrowing? I have friends who proudly tell me how they have paid off their mortgage. They live in a 3 bed semi, still have £2k+ pm outgoings, no passive income and are tied to jobs they find unrewarding.
It feels great until you realise you have still got - council tax, water, electric, car insurance, mobile, broadband, petrol, etc, etc, etc.
Granfondo said:
So if you have a large mortgage they give you the utilities for free?
Just something to think about. Most people seem to think paying off their mortgage is the road to financial freedom. My point was that investing the money to create a passive income is something to consider. He can effectively borrow £100k at less than 2%.
ex1 said:
Granfondo said:
So if you have a large mortgage they give you the utilities for free?
Just something to think about. Most people seem to think paying off their mortgage is the road to financial freedom. My point was that investing the money to create a passive income is something to consider. He can effectively borrow £100k at less than 2%.
Granfondo said:
The average mortgage in this country is around £600pm so you would need an investment that would generate over £7k to be as well off as having no mortgage!
Another way to look at it would be £100k over 18 years at 3% = £600pm on a repayment mortgage.
£100k invested with a 7% return = £7kpa. If you take away the income tax element that investment will pay your mortgage repayments and keep on giving long after that mortgage has been paid off. In 18 years you could be mortgage free and still have £7kpa, plus any increases for inflation + capital growth on your investment + capital growth main property.
If you get a bit smarter and make investments that aren't as passive then a return over 7% is easily achievable.
All depends where you are in life and what you are looking to achieve, but paying off your mortgage early isn't always the panacea some people think.
sparks85 said:
So the market value is - say - £270k
The outstanding mortgage is £165k
Remortgage costs were a few £k
I always took net rental yield to be the post tax annual profit against the total financial exposure (in this case the mortgage, fees, SDLT etc ). I.e a Benefit to Risk ratio, that changes to measure exposure at a specific point in time.
so £2250/£167k = 1.35% (its getting worse!)
Please do correct me if I am wrong!
You're wrong.The outstanding mortgage is £165k
Remortgage costs were a few £k
I always took net rental yield to be the post tax annual profit against the total financial exposure (in this case the mortgage, fees, SDLT etc ). I.e a Benefit to Risk ratio, that changes to measure exposure at a specific point in time.
so £2250/£167k = 1.35% (its getting worse!)
Please do correct me if I am wrong!
The rental yield is the gross rent over the value of the house.
So 4.3%. (£11.7k/£270k).
However what you are trying to calculate is your own net return on investment.
This uses YOUR financial exposure, not the banks!!!!
So your capital at risk right now is £270k less the mortgage less the transaction fees.
So say 270 - 165 - 270*2% (estate agent fees) - 1k legal fees = c£99k.
That's how much cold hard cash you would realise if you sold the house. (There is no stamp duty when you SELL a house.)
So your net yield on that cash is simply £2,250/£99k so just over 2%.
ex1 said:
Paying off your mortgage is a fallacy, it simply takes away one of many outgoings. Why the rush to pay off one of the cheapest forms of borrowing? I have friends who proudly tell me how they have paid off their mortgage. They live in a 3 bed semi, still have £2k+ pm outgoings, no passive income and are tied to jobs they find unrewarding.
It's not a "fallacy" but I completely agree that many people pay it off without really thinking about it or understanding whether they can get a better return on their money elsewhere.Take the OP - he doesn't really understand how to compare the return he is getting from his capital tied up in the house vs. putting it elsewhere.
Yes it is possible to keep a mortgage going and invest what you would have saved elsewhere to earn a higher net return.
And obviously if you think you can generate 7% returns "easily" then it would be foolish to pay off a mortgage instead.
However for many people it is just ONE of their savings vehicles, alongside ISAs and pensions which are more risky but higher return.
Remember that we have very low interest rates right now and that if you are a higher rate taxpayer then you lose a significant chunk of any returns to income tax.
Even if you got a GUARANTEED 4% interest on your cash then that is still worse than paying off a 2.5% mortgage because 0.6 x 4.0% = 2.4%.
walm said:
ex1 said:
If you get a bit smarter and make investments that aren't as passive then a return over 7% is easily achievable.
I am guessing you don't actually work in finance because 7% returns are very very far from "easily" achievable without taking on a significant level of risk.sparks85 said:
Clearly I have used the wrong approach to calculate yield?
Rent is £975pcm = £11.7kpa
- 9% agent fee leave £10.65k
- interest only mortgage leaves £4780
- £1.2k service charge and ground rent leave £3580
- around £600 for insurances (B&LL)
- Leaves approx £3k pa pre tax
- Therefore £2250 post tax (ignores 10% wear and tear for simplicity here)
So the market value is - say - £270k
The outstanding mortgage is £165k
Remortgage costs were a few £k
I always took net rental yield to be the post tax annual profit against the total financial exposure (in this case the mortgage, fees, SDLT etc ). I.e a Benefit to Risk ratio, that changes to measure exposure at a specific point in time.
so £2250/£167k = 1.35% (its getting worse!)
Please do correct me if I am wrong!
No such thing as Net Yield. You have Yield and Net Profit.Rent is £975pcm = £11.7kpa
- 9% agent fee leave £10.65k
- interest only mortgage leaves £4780
- £1.2k service charge and ground rent leave £3580
- around £600 for insurances (B&LL)
- Leaves approx £3k pa pre tax
- Therefore £2250 post tax (ignores 10% wear and tear for simplicity here)
So the market value is - say - £270k
The outstanding mortgage is £165k
Remortgage costs were a few £k
I always took net rental yield to be the post tax annual profit against the total financial exposure (in this case the mortgage, fees, SDLT etc ). I.e a Benefit to Risk ratio, that changes to measure exposure at a specific point in time.
so £2250/£167k = 1.35% (its getting worse!)
Please do correct me if I am wrong!
Your Yield is 4.33%
Two things are eating into your profit
1/ The Service Charge. This is why many BTL'ers don't have Flats. Wait until you get an additional charge! Your Yield with Service charge is 3.94%
2/ The Agents Fee.
BTW, why are you paying £600 for insurance? That should all be included in your Service Charge.
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