Sell my buy to let or keep?

abomb1969

In 2002 in sad circumstances I inherited a 3 bed detached house in a nice part of Milton Keynes. For inheritance tax purposes the house was valued at £160,000. The house is probably worth £215k now.

To buy my brother out of the house I had to take a £130k mortgage, I got a discounted deal for the first year and am tied in until December 2006 but I can sell it with no penalty then, although my tenants are in until at least February 2007.

I am achieving rent of £800pcm or 4.5% yield. I suspect that this isn't a bad yield but it only just covers my mortgage on the £130,000 with £75 profit pcm. It would seem that I am financing the tenants to live in my house to the tune of £80k, this is the equity I could remove from the house and pay off my mortgage and costs me effectively £7,200 to borrow this on my home mortgage.

I could sell this house and buy a house better suited to a buy to let scenario or just keep forking out every month. Obviously if I sell there will be an element of capital gains, but I was thinking that £80k equity might just stretch to 3 2 bed houses in a grotty area of Milton Keynes with a £100k mortgage on each.

Any comments appreciated.

Debt_Free_Chick

abomb1969 wrote:

I am achieving rent of £800pcm or 4.5% yield. I suspect that this isn't a bad yield

Purely, from a yield point of view, it's rubbish. You can get more than 5% in a savings account - without the hassle of maintenance, voids, troublesome tenants, record-keeping for tax purposes etc.

Of course, you don't get the capital appreciation with money in a savings account (OK, you do - but only by reinvesting the income i.e. keeping the interest in the account) - but who knows how the price of the property might increase in the future. Especially, as many observers predict another interest rate rise in the next few months.

From a pure investment point of view, I don't believe there are real opportunities in residential BTL at the moment.

Personally, I would sell. Perhaps with a view to going back in in the future, if house prices fall and take rental yields back over 7%. Although, I've never fancied being a landlord (landlady) so in my case, I would invest the extra cash in a much better home for my personal enjoyment.

This is my personal view - others will have theirs. At the end of the day, you'll need to identify your own goals & objectives and then see if this BTL fits them.

abomb1969

By 4.5% not being bad I meant the whole BTL sector is suffering and the average yield is only 5%, and I thought that I was actually doing quite well!

RHemmings

abomb1969 wrote:

By 4.5% not being bad I meant the whole BTL sector is suffering and the average yield is only 5%, and I thought that I was actually doing quite well!

The big question is, do you expect the house to continue increasing in value over the next few years? By enough to make it a worthwhile investment?

tomstickland

Look into the benefits of selling and paying off your own mortgage.

Redbedhead

I live in Milton Keynes and to get 3 x 2 beds at £125k each you would probably be in one of the grottier areas, which may result in more problems with tenants etc.

One of my friends has just done the opposite - sold her grottier properties in MK for less, but nicer ones. She is making the same profit but has less hassle. I suppose it depends how easy it is for you to sort out any problems you have with the properties.

savedbythebell

What i could not understand, is why did you borrow £130K, if you inherited50% of the house. And the house is still only worth £260K?

F_T_Buyer

abomb1969 wrote:

By 4.5% not being bad I meant the whole BTL sector is suffering and the average yield is only 5%, and I thought that I was actually doing quite well!

I think this sums up how bad rental yields are in general.

Personally I would sell. I wouldn't invest in other properties unless you can get around 8% yield.

Another option you have is to sell your current home as no capital gains tax needs to be paid, and live in the other house to build up taper relief. Obviously they are more than financial implications to this, so may you may not want to do this.

Mrs_pbradley936

I think that if you sell your current home and live in the other house for 3 years you would not have to pay CGT. They consider the last 3 years as relevant for your own home. If I am wrong someone will say so.

MrBen_4

I've had nothing but trouble renting out my property in the past. I personally think house prices are way overvalued, and that yield is pretty poor. Having said that your property doesn't seem so bad and shouldn't be hit as hard as 1-2 bedroom flats will be in a housing downturn.

abomb1969

Savedbythebell I refinanced to buy out my brother and bought a 300k house just outside Luton, hence the larger than necessary loan. I have a mate who has an agent who deals with his properties in the Lakes estate (grotty MK area) he gets £600 after agent fees guaranteed with little hassle and the house cost him £120k. He is advising me to do likewise.

In the next 10 years I would expect a decent increase in capital gain but I suspect it will about equal my annual opportunity cost of having the equity tied up. So I have to sell and buy something with more gearing, or as suggested move into it and try to negate capital gains which seems the most sensible option, if it sits empty for 6 months whilst I sell it its going to cost me about £1200 pcm!

I currently have perfect tenants who want to be there as long as possible, but that gets me thinking that they are enjoying the benefit of my equity.

I just wanted to open a debate here to get the grey matter churning as I know that there is excellent and wise advice available (free) from other forum members, thanks guys/gals.