Renting out a house, should we? and how?

littlened

We've got a 2 bedroomed terraced house, and without being too cocky, it's one of the best in the street, all well decorated with lovely new looking rooms. We've got 44k outstanding on the mortgage, and at the minute, it's up for sale @ 63k.

We're in the process of buying a new home, and are seriously pondering over whether to rent our existing property out. We've contacted Abbey who have gave us consent to let and we just have to pay a £95 admin fee.

We'd like the property to be towards our pension, we're both 25 and 29, and so far neither of us have any sort of pension.

Last year we took out a new mortgage on the property, and rather than putting it over 23 year, we took it over 14 year, so at the minute we've got 13 year left on the mortgage @ £419 a month. We've been told we could rent out the property for £380-£400 a month.

Long term, we plan to buy a few other houses but in a worse state than ours, re-decorate and get them in a nice liveable condition, and again, put them all towards our pension, in the hope that they are all about paid for when we retire, which leaves us to either live off the rental income, or sell up and put the money in the bank.

1) Is it a good idea, are there any flaws?

2) What should we do in terms of the mortgage. We like the idea of leaving it at 13 year left to pay as that would means we'd save around £16k in interest, but also understand that each month we'd be putting a little towards paying the mortgage, and all repairs would have to come out of our pockets. We don't like the idea of going interest free, as that to us is a big risk, as the property could be worth more than what we paid for it, and we'd end up owing money after selling the property.

I open to any advice on this one

pinkshoes

The £380 rent would cover the mortgage on the 2 bed house if you rented it out, and they'll let you rent it out as you have a reasonable amount of equity. Don't forget to allow for void periods inbetween tenants.

You don't mention anything about the new house you'd like to buy. I'm presuming you have at least a 10% deposit, plus enough cash to pay for solicitors fees etc...?

lynzpower

The £380 rent would cover the mortgage on the 2 bed house if you rented it out, and they'll let you rent it out as you have a reasonable amount of equity. Don't forget to allow for void periods inbetween tenants.

The mortgage is 419 pcm.

littlened

pinkshoes wrote: »

The £380 rent would cover the mortgage on the 2 bed house if you rented it out, and they'll let you rent it out as you have a reasonable amount of equity. Don't forget to allow for void periods inbetween tenants.

You don't mention anything about the new house you'd like to buy. I'm presuming you have at least a 10% deposit, plus enough cash to pay for solicitors fees etc...?

We've already had an offer accepted on the new house and have 15% deposit in the bank ready to pay.

poppysarah

You've got a lovely house and want to rent it out? It might not be shiny and pristine for long.

You got bored of this first house so whats to say you're not going to get bored with the new house? Sell the old one first. It's easier to sell a nice house.

63k is very cheap - where are you?

pinkshoes

lynzpower wrote: »

The mortgage is 419 pcm.

Yes, the mortgage is £419 over 13 years, which would be £325 a month repayment over 20 years, so would easily be covered by £380 a month rent. The interest portion would be about £225 a month.

Even at at 13 year repayment rate, we're only talking a difference of a packet of cigarettes and a bottle of wine a week.

hethmar

Blow me £63k, couldnt buy a rabbit hutch for that round here! And my goodness, you both have mature outlooks at your age. Good luck to you

p00hsticks

The expression 'don't put all your eggs in one basket' springs to mind. You sould really be trying to get a mixed portfolio of investments, not sinking all your money into property.

littlened

p00hsticks wrote: »

The expression 'don't put all your eggs in one basket' springs to mind. You sould really be trying to get a mixed portfolio of investments, not sinking all your money into property.

Yes, we're only planning on having property as one part, we'll have our state pension, and hopefully come when we retire my wife will still have her hair salon which we can either leave running with someone else or sell and put the money in the bank. We also want to look into a private pension as well.

We live in the north east, where houses are cheap, there's a house a few streets away which is up for 40k at the minute. We hope to buy something like that in a few years time.

As for us getting bored of our house, we're not bored of our house. We bought our house 3 year ago to simply get on the property ladder. Our friends were all taking out 125% mortgages on 90k houses and it was costing them 700-900 pound a month. We didn't want to lumber ourselves with that sort of payment, especially when house prices can drop at any time. We settled for a 2 bedroomed terraced house in a not so great area. It was 47k and cost us £310 a month. We've ripped the house apart and done it up nicely to our standards. About a month back we so a repossession on the market for 86k, 4 bedrooms, 2 reception rooms, 2 bathrooms and a garage. We decided to go for it, but an offer in and after some hoo haa got an offer accepted. Our mortgage at the minute is £419 a month, we're moving from a 2 bedroomed house to a 4 bedroomed house and we'll see an increase of about 40-50 a month on our mortgage, to me a small price to pay.

So, we're not bored, we're simply improving, we saw an opportunity and took it. Luckily we have enough money in the house for a 15% deposit.

Because this new house in our eyes was so much of a bargain, and we loved it, we simply were not willing to wait and sell our house first. Now we're in the process of buying the new house, we're thinking that it makes more financial sense to keep our existing property on and rent it out. We don't need the money that selling the house would provide, and to be honest, we'd just spend it on the new house and end up with no money in the bank anyway.

Fred1_2

This looks as if you’re in this for the long term which IMHO is the right thing to do in the property market. Over the short term you can lose a lot of money (or make a lot of money of your timing is perfect).
The first thing I’d say is that you need to treat your rental business as just that – a business. Too many people seem to think that no actual work is required. How are your organising, marketing, book-keeping and customer service skills? Add to that, this is a unique business, you are providing your customers with one of the most precious things in their lives – their home. That is a massive responsibility.
As for your mortgage, I’d seriously consider going interest only. The property is on the market now at £63k. A mortgage valuer will knock something off that in the current climate. If you can get a mortgage valuation of £58666 or above and borrow £44k or below, you’ll keep your borrowing below the magic 75% LTV figure and you’ll still be able to find some reasonable deals – possibly without changing banks.
So if you can get a £44k interest only mortgage for 6% (you should be able to better that rate) then your interest payments will be £220 per month. This gives you a gross profit of £160 per month. You’ll need to do your homework to find out whether that will be enough in your area to cover marketing, rental voids, letting agents fees and repairs. If you remember that this is a business, you will plan for and develop a strategy to minimise those costs. You’re already a long way there by having the house done up to a good standard – this will attract good tenants and allow you to charge the upper end of the range when it comes to rent.
Personally, I don’t use letting agents, but I am anal enough to spend time reading up on my legal obligations. I think I’m prepared for most things that come my way and am confident that I can find the information quickly if something I haven’t prepared for comes my way.
This is a big decision and one you should not take lightly. For what it’s worth, and it’s not worth much, hindsight tells me that I should never have sold my first house as I could have afforded to keep it even if I hadn’t rented it out and bought my second. I sold it in 1997 for £14k, even now it would be easily saleable for £70k or would be bringing in £400 pcm in rent.
I’ve come to the conclusion that I never want to sell a house again – it’s just a way of losing money.

littlened

Fred1 wrote: »

This looks as if you’re in this for the long term which IMHO is the right thing to do in the property market. Over the short term you can lose a lot of money (or make a lot of money of your timing is perfect).
The first thing I’d say is that you need to treat your rental business as just that – a business. Too many people seem to think that no actual work is required. How are your organising, marketing, book-keeping and customer service skills? Add to that, this is a unique business, you are providing your customers with one of the most precious things in their lives – their home. That is a massive responsibility.
As for your mortgage, I’d seriously consider going interest only. The property is on the market now at £63k. A mortgage valuer will knock something off that in the current climate. If you can get a mortgage valuation of £58666 or above and borrow £44k or below, you’ll keep your borrowing below the magic 75% LTV figure and you’ll still be able to find some reasonable deals – possibly without changing banks.
So if you can get a £44k interest only mortgage for 6% (you should be able to better that rate) then your interest payments will be £220 per month. This gives you a gross profit of £160 per month. You’ll need to do your homework to find out whether that will be enough in your area to cover marketing, rental voids, letting agents fees and repairs. If you remember that this is a business, you will plan for and develop a strategy to minimise those costs. You’re already a long way there by having the house done up to a good standard – this will attract good tenants and allow you to charge the upper end of the range when it comes to rent.
Personally, I don’t use letting agents, but I am anal enough to spend time reading up on my legal obligations. I think I’m prepared for most things that come my way and am confident that I can find the information quickly if something I haven’t prepared for comes my way.
This is a big decision and one you should not take lightly. For what it’s worth, and it’s not worth much, hindsight tells me that I should never have sold my first house as I could have afforded to keep it even if I hadn’t rented it out and bought my second. I sold it in 1997 for £14k, even now it would be easily saleable for £70k or would be bringing in £400 pcm in rent.
I’ve come to the conclusion that I never want to sell a house again – it’s just a way of losing money.

Thanks for that, luckily we both run our own businesses, and have done for a few year now, so we're fairly well organised and understand the business side of things.

One thing I don't like about going interest only, is that you never pay for the house. So yes, we'd make a profit each month, which would/could end up being spent on marketing or repairs. When it comes time to retire, all we'll have is any equity in the property over and above the mortgage value. So say we retire in 25 years time, we'll have paid 66k in interest, and still owe the mortgage company 44k. The property might be worth 80k by then, so we'd have 36k tied up in the property.

If we keep things as they are, and pay up the extra per month towards the mortgage, then in 13 years time we'll have paid 65k, own the house and still have another 12 years collecting rent before we retire, which then gives us around 54k over the 12 year. If we manage the save that while forking out for repairs etc ourselves, then come 25 years time, we'll have 54k in the bank and an 80k property, that's 134k.

I can see some advantage in interest only, but I'm not sure it's for us. We want to at some point own the property, and in the long term extract as much financial benefit from it as possible.