Updating post from Reddit.
What would you guys do in my situation?
I have 1 rental property (used to live in the property before I moved into an inherited family home, it wasn't a buy to let).
Continue to rent it out - or sell it?
Here's my take on the 2 scenarios:
Continue to rent it out:
The last 2 years annual profit from rental after all expenses (including agency management fees) and tax deducted was:
£5,842 in tax year 2022-23
£4,151 in tax year 2023-24
£6,000 in tax year 2024-25 (predicted)
The mortgage payment for the rental is £450 per month, this is a full repayment mortgage.
Average profit per year over the 3 years is £5,331 which is £444 per month.
The property is in Central Scotland and with say a 3% increase in property value per year would be £5,700.
So £5,700 + £5,331 (average profit from last 3 years) = £11,031.
I have good tenants currently who pay on time and have been there for about 2 years.
Sell the property:
The property current value is around £190,000.
There is a mortgage remaining of £46,550. I have a fixed rate till 2028.
Purchase price was £125,000 and I'm a higher rate tax payer so £14,880 capital gains tax to pay and say 1k for conveyancing fees.
Which leaves circa £127,500 to invest.
I'm not very sure how I would invest the money to be honest.
As an example, investing in a savings account like Cynergy Bank 1 year fix paying interest 4.65% will net me £5,928 per year no risk. I presume 40% tax to be paid on that? So £3,557.
I have a Vanguard Global All Cap S&S ISA which I (almost) use up my allowance on each year so I wont be able to feed much of the investment money into that.
Investing some of the money into a SIPP could be an option but I don't know how to work out the financial gain in doing that. But defo an option for some of the money.
Conclusion:
£11,031 profit per year to keep the property is better than £3,557 to sell the property.
I was kind of hoping the figures would be closer as I'd actually like to sell as I don't like the stress of being a landlord, but these figures suggest its worth continuing.
Any obvious errors I'm making, anything I'm missing in my comparison?
For context - I'm 48, hoping to retire in 10 years. My pension pot is no better than average I would say. But currently in a Government defined benefit pension which i'll likely be in for the next 10 years.
The money raised from the property (either by selling or continuing the rental) would be partly going towards my retirement and at some point to help fund a new property to live in (we'll need to sell the inherited property due to it being shared by siblings.) I'd probably need 60K to buy a new place after my share of the inherited property proceeds.
Appreciate comments about things I've not thought about or if I'm just not thinking about this in the right way!
>I have good tenants currently who pay on time and have been there for about 2 years.
I wouldn't be evicting good tenants in order to sell unless I had no choice.
Not enjoying being a landlord isn't enough for me to turf someone out of their home - it might be my property, but it's their home.
Reassess when they come to leave of their own volition.
Yes, this is true. I should have mentioned if I do decide to sell it would only be when the current tenants depart. They have been here nearly 2 years so likely they'll be moving on soon.
We were in a similar position, sold when the tenant left. Everyone hates landlords, and the tax and regulations are getting so punishing, so we took the profit and are feeding it into ISAs.
Factor in you may have to drop 15k getting it up to the incoming energy efficiency requirements
Thanks, the property was graded at category C on the last EPC assessment. So hopefully no additional cost to comply with new regs.
C is the new requirement
Can you detail your rental income, expenses.
I am not convinced they are correct given your a higher rate tax payer.
For tax year 2023-2024 the total income from the property was £9,788. I had total expenses of £3,919 and I paid tax £1,718 which leaves the £4,151 profit. Its a little lower than the other years because at the start of the tax year there was a change in tenant and the costs that come along with that.
You’re looking at this the right way - it’s purely a maths / yield / RoI decision really if you’re comfortable with the BTL process.
There is a third way which I think would be more beneficial. You are essentially making a c£5k return on the £127k capital you could release.
Do the maths on remortgaging on BTL I interest only mortgage up to 75%.
You would release something like £90k which would cost c£3.5k per annum of the £5k but leave you with 1) an investment of £35k that you were now making £1.5k on 2) £90k to invest the same as you would the sale proceeds and 3) keep the capital gain associated with the property.
I’ve ignored tax in the above as you’ve not mentioned it, and it may be that your £5k profit is based on the repayment mortgage so the maths might be better than this.
The main point is that BTL tends to only work with maximum leverage so that your return is against the lowest amount of cash investment, and your yield probably needs to be over 6%.
I’d just run the maths all ways and go with the better option, but intuitively, keeping it feels the better option given the capital growth gives it an immediate head start.
Thanks, some interesting points there I hadn't considered. Some things to think about for sure
Im curious, what would you do if you had a property owned out right (rented for 1.1k) and you lived in your partners house? Property is worth about 200k and my partner wants to start doing buy to let buy releasing some money through a remortgage. Everybody on here seems to be doom and gloom with BTL with the changes that are coming. Apologies but I liked your comment breakdown so thought I would try my luck lol
The yield is c6.6% so it’s in the right range. I’m not doom and gloom at all. It’s not what it was I accept, but there is money to be made.
The best return you’ll get is with a fully leveraged property - so if mortgage to 75%.
Done properly, you can get to a c9% return on the £50k you now have tied up, and with property rising at around 2.5%, again that is a 10% return on your £50k.
The leverage works because your yield is higher than the mortgage rate. Without making that profit on someone else’s money, it starts to not make much sense against say an index tracker.
You’d also have £150k cash to do something else with - either put into other properties with the same maths or an index tracker.
Debt really is your friend in the BTL world and with rates trending back down, the margins will improve tenfold as rents continue to rise.
I can give a more detailed P&L breakdown if you like to demonstrate the returns but remember I’m talking pre tax here so that is a consideration too.
Thank you.
Thankfully, (we’ll be able to save a bit of cost) I’m an accountant so I’ve managed to put together some P&L estimates and approximate taxes due.
I think my issue is more that I’m new to the “property industry” so to say, so although I can do the numbers I don’t truly understand the market. For example I’m unsure as to whether it’s worth going with an interest only mortgage.
My accountant brain tells me to go to equity, yet I see and hear many comments that interest only makes more sense. I can appreciate the savings in cash flow can go to further investments etc. So I’m a bit unsure on what is the most optimal approach (we would like to one day maybe buy 2-3 more houses and have a small portfolio, with me releasing some equity from mine once I have built enough).
Interest only is almost certainly the way to go from a return balanced with cash flow point of view.
The trick is in the properties you select - so things like low maintenance, newish build, EPC C and in areas that will attract high quality tenants.
Buying well is key and being straight up mathematical about it. I’ve bought houses that I’ve made low offers on and openly said that it’s was purely a yield based calculation. Some accept, some don’t.
Make sure you know all the legislation and stay on top of them and you’ll be fine.
In terms of buying 2 or 3 more, you’re already there. It’s area dependent, but around me, between £180k and £250k is the sweet spot where you get those high quality house without going so expensive the yield falls.
If that’s the same around you, then the £150k you’ll release by remortgaging is enough for 2, may be 3.
I see no reason why you’d not end up with an annual return of at least £15k on the £200k total as well as property value around £800k growing at another £20k per annum.
Set you tax structure up right which you obviously know how to do - unequal shares etc and you’ll struggle to find a better investment.
It’s not as liquid as some but it’s certainly secure and you either have high rents when demand is high and lending is tight or high capital growth during the good times when everyone can borrow to buy.
Let me know if there’s anything else you’d want to know. Without being too specific, I’d happily look at the area you’re looking in and send some examples of decent options.
Currently on those figures and good paying tenants keep it for now. When they move reconsider under the prevailing climate at that time. Use the rent to pay the mortgage pay ment if you can. It then “ wipes its face” as the saying goes. There is such a small amount remaining it is hardly worth selling it. If you do you could buy Bitcoin wrapped in an ISA leaving it there for a while to see what’s happens. Buy some Starlink shares if Elon Musc decides to incorporate them they will be equivalent to the next Google or Microsoft stock we’re in the nineties.
Amazing when an honest post like this comes around the landlord "hate brigade" stay silent.
The OPs post is exactly why so many small landlords are selling up.
OP, it will largely depend on your personal circumstances. Time, future plans.
Financially the property is more of an asset than income. Think of it as a good place for your savings to be rather than a savings account. It's also safer than stocks etc given the current world political system.
A house as an asset can always be sold later if you need the funds for things like a medical issue, family, etc.
If you've good tenants, try to keep them. Life is easier that way for both of you. I'm sure there will be hiccups like a burst pipe etc down the road but a good tenant will mop it up, call you, call an emergency plumber, look after your place Vs a bad tenant who will complain their contents are destroyed, want compensation, and will secretly be looking forward to new flooring, paint etc.
Just my take on it.
I’d keep the property. It’s turning over a profit and it’s a repayment mortgage so you’ll get your mortgage cleared in a few years. Teo good reasons to keep things going. There is quite a lot of volatility in the stock market and likely to be for quite some time given Trump
Thanks, hopefully mortgage paid of in 7/8 years!
What's stressful about renting a property out via an agency (you say agency management fees, so I presume this)? We rent one property out directly, but our margins are a lot tighter than yours. £675 rental income a month and a monthly repayment mortgage of ~£525. Tenants usually stay for at least a year, amd never had any bad ones, but its a moderate amount of maintenance hassle for very little income. We used to make more on it, but remortgaged and took cash out. We are trying to sell because it feels a bit of an inefficient place to have equity tied up in. I'd love your figures!
There's not a huge amount of hassle right now, that's true, but I feel quite lucky so far that I've not had difficult tenants. Guess I'm just anxious about bad stuff that might happen in the future in terms of non payment, damage to property etc. Prob not the best way to look at life I suppose!
Some agencies guarantee rental income even if the property is untenanted. Do yours? That would remove stress. Also, are you in an area where a HMO would work? That would get you more £££, but admittedly more effort required.
They do, but the extra cost was significant and their fees were already higher than average. The property isn't suitable for HMO, it's just an end terrace 2 bed. Just hope the current tenants are happy and remain for a long time!
I would go for an alternative combination of both - continue to rent it out until you retire and then sell as an additional nest egg for your retirement.
The pros here are you will continue to pay off the mortgage and have better asset return upon selling in 10 years - unless your mortgage is interest only and then maybe consider changing that. Also property value on average increases 4-5% per year so in 10 years it should be worth at least £250k as a fairly conservative figure. Also selling the property is a valid reason for eviction under the new renters bill so you’re unlikely to have issues there.
The cons are of course being a landlord there may be unforeseen costs for repairs and any non payment from tenants.
I would advise treating the property as an asset investment rather than monthly income until you retire. As long as you’re not losing money you’re fine, and any income is a bonus. Focus on mortgage repayment and good quality repairs where needed, and that means when you do sell you’ll be able to get the maximum asset value.
That will set you up better for retirement, if you do it soon after you retire when your income is likely a bit lower so you should also save on tax compared to selling now.
But of course being a landlord is work, you do have responsibilities and that can be stressful; so if ever it does become too much then you should sell rather than becoming resentful of being a landlord, making mistakes and then possibly suffering other financial costs.
Thanks, some good points there, especially about the capital gains tax when I've already retired being lower. It's already a repayment mortgage and I do keep on top of repairs. Thanks for the advice.
Can you lease it to the local council ( when the current tenants move)? Two five year leases will fit in with your retirement plans or reassess in 5 years
I'm not sure. Something to consider tho. Thanks, again I hadnt thought about the council. That would eliminate the need for a management agency too.
You should be using it to increase your property, holding with the tenant paying most of the mortgage in a double linear sequence.
Otherwise, there are other investments with better yields
Repayment mortgage is £450 per month and after all expenses and tax I receive £444 per month (averaged over past 3 years).
I honestly wouldn't sell a profitable rental property with good tenants in your circumstances unless there was some massive maintenance bill coming in in few years or your salary income dropped temporarily that would help you minimise capital gains tax. I note you said you are epc c currently so as long as there isn't a massive change in the methodology, you should be ok there.
I did end up evicting great tenants to sell the house but the profitability of rental income was questionable, the property would have needed work to bring the epc up and my income was dropping significantly due to parental leave so I could reduce cgt notably.
Thanks, its only if the current tenants left I would need to make this decision. For as long as they are there I'll continue to rent it to them. Its just always a worry getting new tenants in and maybe that would be the time to get out. But as many have said, it is profitable and perhaps more stable than S&S's.
The current government's indication is to destroy independent landlords so only conglomerates can own tenanted properties. Please ensure you are fully aware of the additional compliance factors that are to be implemented, including mandatory EPC ratings, so you can factor those fees into your calculations. Good luck, I would always usually recommend keeping a property especially if the Tennants are good, even add to your portfolio if you can as it will reduce compliance fees
Thanks - current EPC is rated C - so hopefully no major expenditure there.