Is a Let to Buy worth it or should I sell my little house?

[Free_30_day_trial]

I currently live mortgage free in a little 2 bed semi-detached house which is starting to feel very small, and I'm wanting to move to a much larger 5 bedroom new build house with a double garage which is being built in the near vicinity of where I live.

My dilemma is that I've lived in this little house for 12 years and I've become very attached to it, plus if things go wrong in the future it will be a nice safe place to move back in to should the need arise.

I'm trying to work out whether it's financially sensible to keep the house and rent it out to get an additional income. I think this should work because I'm not the highest earner, and even with the rental income I would still be just shy of the 40% tax bracket and even further away assuming I can claim the repairs, management fees, and anything else against tax.

Small House
Current value £230k
Let to Buy Mortgage £172.5k
Mortgage payments £235 pm Interest Only
Rental Income £825 pm Gross and not including a FULLY managed fee expected to be around 10%
Equity left £57.5k

Big House
Current Price £490k (including all upgrades)
Stamp Duty £29k (stamp holiday will be over when I complete, and includes the 3% sting for 2nd property)
Residential Mortgage £147.5k
Mortgage payments £625 pm Repayment

I estimate that I'll be making around £4.7k (net) a year with it rented, and able to afford the repayments in the case it's not rented for any reason.

I understand I might get a better yield by selling it and putting the money into cheaper properties, but that's not really the aim here. Maybe after a few years I'll become less attached and even decide to sell it getting the stamp duty of £15k back too.

Any thoughts?

Have I missed something really obvious here?

Thanks.

[98elise]

Yield is on the low side. What are the chances of getting a good, trouble free tenant?

[andy43]

I'd manage yourself if at all possible - much cheaper.
Another point is emotion - will you be ok with somebody else trashing your kitchen worktops, ignoring your garden or growing mould round your bath?

[Free_30_day_trial]

98elise said:

Yield is on the low side. What are the chances of getting a good, trouble free tenant?

That's why I'd prefer to have it fully managed and insured, I want to stay as hands off as possible and concentrate on my new place.

Andy43 said:

Another point is emotion - will you be ok with somebody else trashing your kitchen worktops, ignoring your garden or growing mould round your bath?

I'm okay with a bit of DIY so don't think decorating it would be an issue come changeover / sale time.
The kitchen is only a few years old but it's nothing special, just modern and in keeping with a small property.

[Mr Pointy]

I'm no expert on rental & returns but it looks like you have a £230k asset on which you are going to get £4.7k yield a year (at the very most), which is 2%. That doesn't even cover inflation although admittedly at the end you will have the capital asset.

I'd say one key question is are you the sort of person cut out to be a landlord? How will you react when this house you are so attached to ends up dirty & damaged becasue the tenant didn't care about your property?

Mr Groat would say you just hand over the keys to a proper managing agent & let them do all the work, although I'm not sure he would even look once at such a low yield.

[Mr Pointy]

OP: have you read this thread?

https://www.pistonheads.com/gassing/topic.asp?h=0&...

[Free_30_day_trial]

Mr Pointy said:

I'm no expert on rental & returns but it looks like you have a £230k asset on which you are going to get £4.7k yield a year (at the very most), which is 2%. That doesn't even cover inflation although admittedly at the end you will have the capital asset.

I'm very new to all this, but if I'm cashing out £172.5k on interest only to use against my new house, doesn't that leave me with only a £57.5k asset?

[DanL]

Free_30_day_trial said:

My dilemma is that I've lived in this little house for 12 years and I've become very attached to it...

Having read a few threads about nightmare tenants on here, I’d say you shouldn’t let out somewhere you’re attached to. It’ll be depressing if / when the tenants don’t look after it.

[Pothole]

Mr Pointy said:

OP: have you read this thread?

https://www.pistonheads.com/gassing/topic.asp?h=0&...

My first thought, too.

[Jamp]

I was in a similar position a few years back - moving out of my bachelor pad which I'd had a long while and was very attached to, plus I'd put a lot into sorting out the leasehold issues (flat). My long term plan had been to let it, but in the meanwhile I'd ended up looking after a disabled relative's properties and realised how much ball ache tenants and letting agents can be (there is no such thing as "fully managed", or certainly not "fully sensibly managed", in my experience at least - although my experience is exacerbated by being 150 miles from the rentals). So I sold my place to a nice owner-occupier who was going to enjoy my old place the way I had. I intended to reinvest the cash in a fresh BTL, but in the end the experience with my relative's places plus the tax discouragement for BTL meant I've just kept it offsetting the mortgage on my new place for now. I've no regrets with that, even if it isn't financially optimal.

What I would say though is make sure you capitalise on being able to be chain-free. It may not be so applicable to a new build, but I got 5% off my new house because I was chain-free, even though they had an asking price offer but with a chain. The second home stamp duty is refunded if you sell the first home relatively quickly (6mo..?), but keep the two transactions separate if that helps your negotiation position.

[Free_30_day_trial]

Mr Pointy said:

OP: have you read this thread?

https://www.pistonheads.com/gassing/topic.asp?h=0&...

Wow that is depressing. I should probably add that I let out a house that I inherited last year. The tenants were good although I never met them. The letting agent was rubbish though and every time we tried to get viewings (because the aim was always to sell eventually) they wouldn't be allowed entry. Although the lettings agent was useless, because it was fully managed I didn't have too many concerns. If the tenants stopped paying then the lost revenue was insured, if they trashed the place then that was insured too. As it was we evicted them after 6 months because we needed viewings to go ahead... and they left the place cleaner than when they moved in

And I realise it would all have been easier to deal with the tenants directly... but I really don't want the hassle and am prepared to take less money.

[NickCQ]

The additional stamp duty hit you are taking on the big house is c. £15k, which is in excess of three years of rental income.

You don't talk about other assets / investments / pensions, but if the £60k equity you have "spare" after buying the big house is the majority of it, you may be better off diversifying & holding something more liquid and tax-advantaged.

[NickCQ]

Also, if you love the house it will be doubly tough if you are unlucky with tenants.

[Free_30_day_trial]

NickCQ said:

The additional stamp duty hit you are taking on the big house is c. £15k, which is in excess of three years of rental income.

You don't talk about other assets / investments / pensions, but if the £60k equity you have "spare" after buying the big house is the majority of it, you may be better off diversifying & holding something more liquid and tax-advantaged.

I'm 47 and paying into a small pension at present. I'm also maxed out on all my ISAs and premium bonds and have no mortgage or loans.
I estimate that I'll have around £20k savings left after the house purchase and buying furniture etc. plus I might sell my £40k car and PCP something in a year or two as well.

I'm lead to believe that if I decide to sell my small house within 3 years I can get that £15k stamp duty back.

I'm thinking after 18 months in the new property I'll be less attached to my small house by then, and maybe I'll want to sell and put that £57.5k and £15k into my mortgage or something that returns higher interest than my mortgage anyway.

Edited by Free_30_day_trial on Friday 7th May 12:07

[Free_30_day_trial]

One thing that has me confused is my ROI.

I thought I would be returning around 8.2% by taking £4.7k net (and after income tax) on my owned £57.5k of the small house.

Surely I can't be working on the £230k figure when most of that will be owned by the mortgage company on interest only?

Isn't 8.2% a really healthy ROI?

Edited by Free_30_day_trial on Friday 7th May 12:12

[Mr Pointy]

Free_30_day_trial said:

One thing that has me confused in my ROI.. I thought I would be returning around 8.2% by taking £4.7k net on my owned £57.5k of the small house.
Is that not the correct way to look at it? Surely I can't be working on the £230k figure when most of that is owned by the mortgage company on interest only?

Maybe I had it wrong. I suppose the amount you're actually investing is £57.5k plus the additional stamp duty which you wouldn't have to pay if you only had one house so £72.5k (is it really £15k you'd get back?). That makes the return nearer 6.4% which is better, but still not stellar. You'd need to be sure you'd calculated all your outgings & taxes correctly to be sure you are really getting that return.

As I'm sure you know having one property makes you very vulnerable to voids & bad lets which would kill your return.

I'm surprised there isn't an online calculator to work out the income, outgoings taxes & overall return as it's a question that comes up quite often.

[Free_30_day_trial]

Mr Pointy said:

Maybe I had it wrong. I suppose the amount you're actually investing is £57.5k plus the additional stamp duty which you wouldn't have to pay if you only had one house so £72.5k (is it really £15k you'd get back?). That makes the return nearer 6.4% which is better, but still not stellar. You'd need to be sure you'd calculated all your outgings & taxes correctly to be sure you are really getting that return.

That's a very good point I hadn't considered, if I keep it over 3 years then I do need to factor in the stamp duty of £14,475 that wouldn't get returned.

That would take my ROI down to 6.5% without repairs and upkeep.

[Caddyshack]

Free_30_day_trial said:

Mr Pointy said:

I'm no expert on rental & returns but it looks like you have a £230k asset on which you are going to get £4.7k yield a year (at the very most), which is 2%. That doesn't even cover inflation although admittedly at the end you will have the capital asset.

I'm very new to all this, but if I'm cashing out £172.5k on interest only to use against my new house, doesn't that leave me with only a £57.5k asset?

Yes, I am in the business and it is a £57.5k asset in terms of yield.

The inflation / growth is based on the gross value of the property though.

[Gooose]

I recently sold mine, didn’t let it for long, every tenant was filthy. I managed two other for family and both are getting ready to be sold. All the same issue, I don’t see how you can make more stress free money than wisely investing tbh, being a landlord is stressful, thankless and the tax implications are depressing. I would sell your house, enjoy a bit of cash, invest in isas sipps whatever and be free of worry.

It’s been very liberating getting my houses off the rental market

[Sir Bagalot]

Free_30_day_trial said:

My dilemma is that I've lived in this little house for 12 years and I've become very attached to it

This is your biggest problem. If you're letting out your old home then you need to cut all emotional ties with it and treat it just as a business.

Easier said than done.

Owing a BTL can be great, it can be an utter PITA and it can also be expensive. (I have one where in the past 18 months I've spent in the region of £25K).

Only you can decide why you want a BTL? I have mine to provide additional income in my retirement