Possible sale of BTL - am I missing anything?

[sparks85]

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.

• 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.

With me so far? Great!

• 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.

So being objective I am sitting on a modernised asset that has experienced significant capital gain during my ownership, provides relatively low yield and presents a fairly large financial risk with the lease needing extending sooner rather than later. I understand as the lease reduces the potential costs increase as the freeholder gains more leverage, and a reduced lease proves difficult to secure a mortgage for any potential buyer.

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.

This of course does not take into account any change in interest rates - which at the current rates can only really get worse. This also does not take into account market movement (in both directions)

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!

[sparks85]

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).

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...

[sparks85]

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.

Valued at £260k but only £220k for mortgage = £165k mortgage with £55k equity.

I am confused?

Perhaps you could also tell us what the rent is?

Yes sorry, I didn't explain it too well. At the time of remortgage I needed to release a certain amount of equity for the house purchase. But at the same time, to get a BTL mortgage I had to retain a certain level of equity in the flat. £55k was the max I could afford to retain in the flat, whilst drawing enough equity to support the house mortgage.

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.

[sparks85]

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!