Updating post from Reddit.
Hi all, hoping someone can help me think this through.
A few years ago, I inherited a property along with my sister – I own 75% and she owns 25%, just the way things were divided. When we inherited it about five years ago, it was valued at around £40,000. It’s now worth approximately £120,000.
We’ve been renting it out, initially at £550/month and recently increased to £625. There’s around £5,000 - £8,000 worth of work that will likely need doing in the next couple of years.- roof and pointing has been flagged as urgent
My sister is very keen to sell and has offered to sell me her 25% share for £25,000. I’m trying to decide whether to go ahead with that and keep the property, or just sell the whole thing and walk away.
Some extra context: - The area has been quite stagnant for years but is currently in high demand so potentially this property could be worth a lot more in 5-10 years - it’s a 4 bed terrace house • I’m not a full-time landlord – I inherited this property and am also a partial owner of a few other properties, though none of those are likely to be sold any time soon. • I don’t urgently need the cash, but if I were to sell, I’d be looking at a significant capital gains tax bill – probably £20k+. • At the original valuation (£40k), the rental yield was strong. But now, with the current valuation of £125k and rent at £625/month, I’m not sure how the yield stacks up, especially with upcoming maintenance costs. • Is £25,000 a fair price to buy out my sister’s 25% share? • Or would I be better off just selling and taking the profit now while the market is high (even after CGT)?
Would really appreciate any input – especially from anyone with experience in UK property, rentals, or CGT planning. Trying to work out if this is something worth holding onto for the long term or if I’d be smarter to exit now.
Thanks in advance!
Depends if you want to keep going as a landlord. Personally I would buy it from your sister, remortgage it and take out all the equity after keeping in 25%, use the cash to do the repairs, and the remainder to start on the next one. But obviously more property means more work, so you would need to think long term. If it’s not for you, do as some of the other comments have said and sell up.
The usual question is, if you had £120k cash right now and could exchange it for this house, would you?
Allowing an amortized £1500/year towards maintenance, you're at 5% yield which is maybe 1% better than you'd get in a bank and about the same as you'd get in a money market fund. Although, when you factor in that the CGT would reduce your capital amount to more like £100k, the equivalent yield starts to look more like 6% to me.
Is the very slightly higher yield and the extra potential upside of property price rises, worth it to you against all the hassle of being a landlord? Only you can answer that.
I wouldn't personally buy out a family member at less than market value. If the house is really worth £120k and she owns 25%, I would pay her the £30k she is due. Remember she will also need to pay CGT even though she's buying you out.
Current BOE rates are at a high and will eventually reduce further as outlined in their forecast. While your yield may have 'reduced' due to the revised valuation, rent will continue to increase over time and so will the valuation of the house.
Rents and valuations will probably continue to increase, but neither of us has a crystal ball.
In comparing the yield to investment you need to consider that the capital in the house is usually inflation proofed at least. 4 percent return is 0 after 4 percent inflation.
Other factor is tax, cud be 40 percent on house. Investment could be 0 percent in ISAs, but not much help if little gains in real terms.
The yield is somewhat irrelevant as you own the property outright so minus maintenance the profit after taxes is all yours.
Let's do a deep dive:
To sell you would pay around 28% capital gains tax plus around 1% estate agents and solicitor fees of around £1500.
If you sold for 125k
125000-40000=85000 Estate agents £1250 Solicitors £1500 So gain will be 85000-2750=82250
CGT is 28% of 82250=£22030
So selling potentially you will receive:
125000-22030-1250-1200=100520
You receive 75% share 100520*0.75=£75390
Bank interest on this per year is around 3.5 to 4.5% let's choose 4% so 75390*0.04=£3015.60 before taxes.
Rental on property is after a 25k investment to give to your sister would be 625pcm so £7500 a year less taxes and upkeep.
You mentioned an additional renovation upcoming budget so you need to factor in these costs too. So if your investing 50k half to sister and half for renovations look at if the additional 3.5k per year plus future property value gains is worth the 50k investment. The hassle of renting and risk should also factor in your decision.
Will your house be easy to get to EPC C in a few years time?
Does your house have an EICR certificate and a GSC certificate. You will need good insurance to mitigate risk often £500 to 1k for that alone.
Will you self manage or use an agent... Agents cost money and generally crap. Will you have contingency funds if the property needs a new boiler, kitchen and or bathroom. What are your likely future costs and do you want the hassle.
If it was me I'd need to be certain the property would rise in value in the next 5 years otherwise I'd say better selling now as 17.5k potential additional profit over 5 year period doesn't sound attractive to me for the hassle of being a competent LL.
At the most simplistic level 120,000 pounds in the bank (even as simple fixed deposit) would earn roughly £500/month. So even ignoring any expenses, voids, rogue tenants you are not going to be making any money at all here. Everything relies on property prices increasing and that's a big doubt at this point in time.
The tripling in price over five years sounds highly implausible. HMRC is likely going to be sniffing around the probate valuation.
I agree, £40k to £120k in 5 years doesn't pass the sniff test.
Area is stagnant but tripled in value in 5 years (+25% annually), and you think there's a fair chance it could worth a lot more in the next 5-10 years. Can you imagine if was a growing area!?
Which part of the country is this? That jump in value doesn't seem quite right
The current government is out to screw landlords. Making tax digital will mean, eventually you will have to make quarterly declarations to HMRC.
Then after that the real bother starts, with many local authorities upping fees to register, inspections, gas and all the rest.
IMHO look after your sister and get the property sold, then there is no come back, which where money is concerned can screw up family relationships. Your sister wants out, why not support her in this, (she will get around 35-37.5k) and get out yourself. She will be delighted with the incoming.
You can always do something else with the proceeds which doesn’t involve dealing with councils,taxes,HMRC banks estate agents and all the rest of it.
Good luck, you deserve it
Pay her out and keep. Good pension pot for later.