negative equity, bought a lemon, now working over seas

Dithering_Dad

Mug punters buy high and sell low. If you bought this property as a long-term investment then you'll be fine, just continue to treat your tenants well and they will repay you by paying off your mortgage. The only extra thing you could think about, if funds permit, is to make some mortgage overpayments to reduce the debt and perhaps increase the rent if possible (lots of 1st time buyers cannot get mortgages, so the rental market will start booming).

Your number 1 priority should be to get to the point where the whole of your costs (mortgage, insurance, management, checks, etc) are covered by your tenants. You can achieve this with overpayments/rent increases.

As far as negative equity is concerned, this is only an issue if you decide to sell. If you hold then in 20 yrs time the house will be worth several times what you paid for it and your tenants would have paid off the mortgage for you.

keeprenting

Dithering_Dad wrote: »

As far as negative equity is concerned, this is only an issue if you decide to sell.

A bizarre comment. Negative equity doesn't matter unless you sell? If I shut my eyes and put my fingers in my ears when the house price crash reports come on the telly, will this mean the house price crash isn't actually happening at all?

Suppose the OP could sell now at £100,000 and (as most people expect) house prices continue to fall, so that in two years' time it is only worth £80,000. Are you saying this would "only be an issue" if he sold at £80,000? This is just plain wrong. He would make a loss of £20,000 and sticking his head in the sand (I'm not selling! I'm holding on to the property! I haven't really made the loss at all!) would not change that.

Anyway, if the OP wants a decent answer to his question, he will need to post numbers e.g. what rent is the property bringing in, what is the interest cost, what will the interest cost be when he gets put on the SVR (as he inevitably will - because in the real world negative equity does matter, even if you don't sell the property).

Dithering_Dad

keeprenting wrote: »

A bizarre comment. Negative equity doesn't matter unless you sell? If I shut my eyes and put my fingers in my ears when the house price crash reports come on the telly, will this mean the house price crash isn't actually happening at all?

Suppose the OP could sell now at £100,000 and (as most people expect) house prices continue to fall, so that in two years' time it is only worth £80,000. Are you saying this would "only be an issue" if he sold at £80,000? This is just plain wrong. He would make a loss of £20,000 and sticking his head in the sand (I'm not selling! I'm holding on to the property! I haven't really made the loss at all!) would not change that.

Anyway, if the OP wants a decent answer to his question, he will need to post numbers e.g. what rent is the property bringing in, what is the interest cost, what will the interest cost be when he gets put on the SVR (as he inevitably will - because in the real world negative equity does matter, even if you don't sell the property).

I highlighted the pertinent words in your response. Sell, Sold, Loss. Quite right. I'm glad you agree that the guy is a mug if he sells his long-term investment right now.

The secret here is the word "long-term". Yes, he could make a 'loss' of 20k if he sold next year, but who know what the marketr will be like in 5 years or 10 years?

Do you really believe that house prices will continue to fall until they pay you to have one? No, over the next decade prices will recover. Meanwhile there will be a good market of renters from a pool of people who are waiting for prices to hit rock-bottom before they buy or those who cannot get a mortgage due to the stricter lending rules and so have to save up deposits for years. There is also the usual pool of migrant workers, young people, etc who will always rent.

The OP doesn't have to sell, it's not as though he can't afford to pay the mortgage and it's not as though he wants to move to another area. I'm assuming he views the house as a long-term investment and as such, he'll be fine. And no amount of outraged 'shouting/ranting' on your behalf will change that.

The OP's actual problem is not neg equ, it's the fact his tenant's rent is not covering all of his costs. Once he addresses that issue (and I'd urge him to have a look on the MFW board to see just how small cutbacks and overpayments can make a huge difference) he'll be able to forget about this property and let the management company manage it and the tenants pay it off. In 20 years time he'll be mortgage free and will have a property worth many more times what he paid for it. Simple economics

phil_b_2

I agree with DD.

The bulls are all too quick to suggest that when house prices increase, you only actually make money if you sell. It works the other way around too.

A house will always be a good long-term investment IMO. Even if you buy at the peak of a cycle. It would obviously be better to buy at the bottom.

If you lose £150 per month on the property for 10 years that is £18k down, but I'd expect the property to be worth at least £30k more than you paid making a 12k profit. Leave it another 5 years on top of that and you could have a lot more.

You have only lost money once you release the asset and your balance sheet shows a - symbol.

keeprenting

Dithering_Dad wrote: »

I highlighted the pertinent words in your response. Sell, Sold, Loss. Quite right. I'm glad you agree that the guy is a mug if he sells his long-term investment right now.

The secret here is the word "long-term". Yes, he could make a 'loss' of 20k if he sold next year, but who know what the marketr will be like in 5 years or 10 years?

If you accept my estimates (he could sell now at 100k but would only get 80k in two years' time) then the rational course of action would be to sell, irrespective of where the market will be in ten years' time. If he agrees that there is a point when the market will start booming again, he should make sure he has repaid his debt and possibly saved up some money with a view to re-entering the market at that point.

In effect, what you are saying is that there is no bad time to own propety - a common fallacy amongst property bulls. Historically, the property market has run in boom-bust cycles. Common sense should tell you that it is a very bad idea to own property in the "bust" part of the cycle - which we are now in - just as it is a very good idea to own property in the "boom" part of the cycle.

Do you really believe that house prices will continue to fall until they pay you to have one? No, over the next decade prices will recover

People will be looking to re-enter the market when it bottoms out - including myself. Personally, I hope the government will introduce measures to prevent another unsustainable and damaging bubble when the market does bottom out.

Meanwhile there will be a good market of renters from a pool of people who are waiting for prices to hit rock-bottom before they buy or those who cannot get a mortgage due to the stricter lending rules and so have to save up deposits for years. There is also the usual pool of migrant workers, young people, etc who will always rent.

The reality is that NAEA figures show that rents are falling. Historically, rents drop in an economic downturn, so they may have further to fall.

The OP doesn't have to sell, it's not as though he can't afford to pay the mortgage and it's not as though he wants to move to another area. I'm assuming he views the house as a long-term investment and as such, he'll be fine. And no amount of outraged 'shouting/ranting' on your behalf will change that.

What do you mean by "it's not as though he wants to move to another area"? I think you need to read the original post a little more closely. The OP says that he is working abroad now.

keeprenting

phil_b wrote: »

A house will always be a good long-term investment IMO. Even if you buy at the peak of a cycle.

If you are in a position to buy at the peak of a cycle, the money will be far better off in the bank picking up interest than invested in a depreciating asset. That really should be a no-brainer.

Even if it were correct that property will start booming again after the current bust (I'm not expressing a view one way or the other), this would not prove that it is a good idea to buy at the peak of the cycle. Obviously, it is a disastrous idea. Far better to put your money in the bank and wait for the bottom of the market.

Dithering_Dad

keeprenting wrote: »

What do you mean by "it's not as though he wants to move to another area"? I think you need to read the original post a little more closely. The OP says that he is working abroad now.

Exactly, so the house is no longer a home it has become an investment property. Usually people have to sell their houses at a loss either because they can't afford the mortgage or because they have a job in another area and need to buy a new house (i.e. they have a family to settle). The OP is neither of these, hence my comments. I suggest you read my posts a little more closely!

I'm glad that you're not my financial advisor - "if he sells now, he'll only make a loss of £33k, but if he sells in a year's time he will have a 53k loss!". Putting aside the fact that you don't know how low the price will drop, if he doesn't sell then the only loss is the amount he has to subsidise his renters for. I believe another poster on this thread has already done the calculations. I suggest you look at them.

Let's also remember that he had to pay solicitors fees & stamp duty to buy the house and will have to pay solicitors fees & estate agent fees if he sells now - so the cost of selling (and therefore his losses) will be even greater than the £33k (anything upto 40k).

He will not lose a penny if he holds and continues to rent the house, especially if he pays down the mortgage as I have suggested.

p.s. your remarks about buying at the peak of the market are a little moot here. The OP made the mistake of buying at the peak - lets not compound this error by telling him to sell in a trough.

BobProperty

Dithering_Dad wrote: »

The OP's actual problem is not neg equ, it's the fact his tenant's rent is not covering all of his costs. Once he addresses that issue (and I'd urge him to have a look on the MFW board to see just how small cutbacks and overpayments can make a huge difference) he'll be able to forget about this property and let the management company manage it and the tenants pay it off. In 20 years time he'll be mortgage free and will have a property worth many more times what he paid for it. Simple economics

I'll let DD square that with the OP's comments from the linked post:
...and I'm now letting the property out at a loss of about £100 per month after expenses- which I can cope with for the foreseeable future. Unfortunately, when my mortgage 'deal' comes to an end in 12 months ill go on to the standard rate of about 7.5%, raising my monthly loss to 250 per month, which Is still sort of OK. But if property values continue to fall in value my lender may decline further requests to let it out, leaving me high and dry and in negative equity. They also might have problems with me working over seas. To make things worse, I might be liable to income tax in Belgium, that I wont be able to offset against the mortgage interest, raising my monthly loss to as much as £500 or 750 euros Which would really badly hurt.
So he's subbing it by £100 pcm now, £250 pcm next year and if the tax situation goes against him it could be £500 pcm. But it's all good because he in it for the long term. I suggest someone works out how much he's actually going to have to put into this "in the long term" to see if it is worthwhile. (ps can I get some Euros at your exchange rate? )
Don't know much about Belgian tax law but I think if you can get assessed on all your income as a Belgian resident then you can claim lots of costs associated with the house being rented out, you need professional advice on that for certain.

keeprenting

Dithering_Dad wrote: »

Exactly, so the house is no longer a home it has become an investment property. Usually people have to sell their houses at a loss either because they can't afford the mortgage or because they have a job in another area and need to buy a new house (i.e. they have a family to settle). The OP is neither of these, hence my comments. I suggest you read my posts a little more closely!

I'm glad that you're not my financial advisor - "if he sells now, he'll only make a loss of £33k, but if he sells in a year's time he will have a 53k loss!". Putting aside the fact that you don't know how low the price will drop, if he doesn't sell then the only loss is the amount he has to subsidise his renters for. I believe another poster on this thread has already done the calculations. I suggest you look at them.

Let's also remember that he had to pay solicitors fees & stamp duty to buy the house and will have to pay solicitors fees & estate agent fees if he sells now - so the cost of selling (and therefore his losses) will be even greater than the £33k (anything upto 40k).

He will not lose a penny if he holds and continues to rent the house, especially if he pays down the mortgage as I have suggested.

p.s. your remarks about buying at the peak of the market are a little moot here. The OP made the mistake of buying at the peak - lets not compound this error by telling him to sell in a trough.

I guess I was the one who needed to read the OP more closely.

However, this doesn't excuse what you have been writing. "If he doesn't sell then the only loss is the amount he has to subsidise his renters for." The idea that it doesn't matter if the value of your property drops, so long as you don't sell, is wholly untenable. If my house is worth 100k and drops to 80k, I have made a loss of £20k irrespective of whether or not I sell at 80k. I could have sold at 100k and re-bought at 80k, leaving me in the same position but with 20k more cash (minus costs).

I will have a look back at the numbers posted by the OP in this thread and write a more detailed post when I have time...

Dithering_Dad

BobProperty wrote: »

I'll let DD square that with the OP's comments from the linked post:
...and I'm now letting the property out at a loss of about £100 per month after expenses- which I can cope with for the foreseeable future. Unfortunately, when my mortgage 'deal' comes to an end in 12 months ill go on to the standard rate of about 7.5%, raising my monthly loss to 250 per month, which Is still sort of OK. But if property values continue to fall in value my lender may decline further requests to let it out, leaving me high and dry and in negative equity. They also might have problems with me working over seas. To make things worse, I might be liable to income tax in Belgium, that I wont be able to offset against the mortgage interest, raising my monthly loss to as much as £500 or 750 euros Which would really badly hurt.
So he's subbing it by £100 pcm now, £250 pcm next year and if the tax situation goes against him it could be £500 pcm. But it's all good because he in it for the long term. I suggest someone works out how much he's actually going to have to put into this "in the long term" to see if it is worthwhile. (ps can I get some Euros at your exchange rate? )
Don't know much about Belgian tax law but I think if you can get assessed on all your income as a Belgian resident then you can claim lots of costs associated with the house being rented out, you need professional advice on that for certain.

The tax situation cannot go against him simply because he isn't making a profit on the rent and so his rental 'income' will not need to be declared. If he can afford £250 pcm now then I'd suggest he start paying that onto the mortgage to try and reduce it. As far as the mortgage lender is concerned, provided he continues to pay his mortgage they will not give a hoot about him renting the property.

As I keep saying all along, his real problem is that the rent does not cover his costs. If he does overpayments (and it sounds liek he can afford to) on his mortgage, eventually he'll be OK. I'm not saying this is an ideal scenario but as he's bought the house now, he has to make the best of it. he options are:

Sell the house at a loss of say £30k and have to get a 30k unsecured bank loan and try to pay this off over the next 10 years (if you can get a bank loan at all). In 10 years he'll be back to zero with nothing to show for it.

or overpay the £30k onto the mortgage and in 10 years have a property that 'pays' for itself via rental income.

I know which I'd choose, but then I'm not one of the financial guru's that offer 'unbaised' advice on this website