Should I let out and buy again rather than lose money?

Southend1

hannah1977 wrote: »

I think we panic bought and we ending up buying a flat that we loved even though it was more pricey than other flats on the street. It was 2007 and one flat we looked at went up 10k from organising the viewing to the actual viewing. Then we paid even more to renew the lease. So we'd have to really do some searching to get a good deal to balance this out I think.

I also thought that we seem to bit behind in that all our friends have much bigger houses than us. And this might be our way to catch up. In say 10 years we could sell both properties and buy a bigger one which we couldn't do if we just kept one property. Or is this crazy?

Ah ok, I understand the logic now. But it seems a bit like good money after bad to keep the flat and rent it out. Sometimes judgements we make turn out not to have been the best, but I would just bite the bullet and sell. Look on it this way... You've had several (hopefully happy!) years living there so it was money well spent from that point of view. And don't worry about your friends having bigger/better houses, life isn't a competition- the main thing is you are happy and have a wonderful family! Just my opinion but in the end you need to weigh up the options and do what seems best to you.

princeofpounds

OK, I'm going to roll out another version of my little wannabe buy to let (or in this case let to buy) chat. Because it's clear to me you don't truly understand the business model that your advisors are proposing. That's not a criticism - you are clearly open minded - but it's wise to truly understand the risks.

The problem with BTL is that in truth it is a financial game. Being a good landlord is only half the battle, and in fact has relatively little bearing on the eventual long term profit of the venture (which is a shame, because if being a good landlord were better incentivised we'd have better housing stock).

Two concepts you really need to understand.

1) Gearing. Getting more debt to buy houses and 'gear up' or 'leverage' your exposure to property is a risk, in both the positive and negative senses of the word. The positive side of the business model (which has worked since the early 90s until 2008) goes as follows:

- you have 10 equity.
- you borrow 90 to buy a property worth 100.
- the property goes up in value 10%.
- you sell the property (or remortgage using the property to extract cash) for 110.
- you pay off financing charges of 5, but let's assume that's covered by the rent.
- you pay off the 90 mortgage.
- you are left with 20 equity... you doubled your money! You are a genius!

The problem is that gearing also works in the opposite direction. It amplifies losses as well as gains. If the value of the property had fallen 10 you would have lost EVERYTHING. Anyone who can see through the brainwashing fog of 20 years of unprecedented house price booms would realise that, but many (including the banks) forgot this lesson.

BTL is a popular business strategy because it's one of the few ways the man on the street can get hold of low-cost, high leverage financing and consequently take a risk to get rich. That's it; there is nothing special about the business model when you understand it.

There is an argument that it generally pays over the long term to own real assets like houses and land, and use nominal debt to finance the exposure, because countries often choose to debase their fiat currency which will inflate away the value of the debt over time. That may be true, but the leverage involved in BTL is very high, and if you buy at the peak you'll have to be very, very patient (As the experience of ever-sliding Japanese property prices tell us, the long run can be generational in timescale)

2) The other thing to understand is the true nature of the liability you finance the asset with. I.e. the mortgage. Looking at it in a static manner (what is the rental value? what is the repayment on the mortgage quoted when I take the mortgage out?) is the fool's way to look at it. Unfortunately it's about as sophisticated as most of the general public gets.

This is especially true when we are talking about variable mortgages. Your payment might be nicely covered by the rent now, but will it be if interest rates were to hit 7% (plus the mortgage margin you pay on top of that!)? That sounds like a big leap, but it's not far off the long term average for this country and so even if rates stay low for a long time you should be prepared as a risk. In the early 90s rates hit the mid teens.

At the very least, if you increase your exposure to property consider long term fixed rate financing. It's more expensive at the current time, but that's mostly because interest rates are seen to be heading up at some time in the future, and if a 10yr fix is 6%, that's the market telling you that the average variable rate over the next 10yrs will be 6% (simplistically speaking) so even if you don't choose a fixed rate mortgage it's not a bad idea to ensre you could afford one in theory.

Sorry that's not an especially coherent rant, but you really need to understand some financial concepts and even if I have not explained well google around and you'll learn a few things.

hannah1977_2

Southend1 wrote: »

Ah ok, I understand the logic now. But it seems a bit like good money after bad to keep the flat and rent it out. Sometimes judgements we make turn out not to have been the best, but I would just bite the bullet and sell. Look on it this way... You've had several (hopefully happy!) years living there so it was money well spent from that point of view. And don't worry about your friends having bigger/better houses, life isn't a competition- the main thing is you are happy and have a wonderful family! Just my opinion but in the end you need to weigh up the options and do what seems best to you.

I think the idea of viewings and haggling over price and chains just seems like a lot as well. To me this seemed like a positive way of getting out of a loss. I am a bit jealous that other people can fit their pram through the front door or afford to live in this area but really I just want the best for us all. And I wonder if some hard work now might pay off later when we have more room and more options where we can live? Obviously if the finances work out. Also hopefully because when we buy we have no chain we will be in a better position to get the good buy we messed up the first time round. But you're right I'm going to do the numbers and then have a big think about landlord-ness and whether we'll be happy doing it.

lynneinjapan

hcb42 wrote: »

But that is because I wouldnt want the hassle! Some tenants are just nightmares, even if they are educated and well paid etc. My sis had one recently who refused to change a lightbulb, she had to send an electrician in paying him £60 for his trouble (she lives overseas) ..it was something else as silly as that every month, and they were a professional couple, house in v desirable/expensive area.

A tenant is legally expected to behave in a "tenant-like manner", which means they should change lightbulbs, try to unblock their own drains, etc. We provide our tenants with a house manual that lists the kinds of things they're expected to do and gives advice on the general domestic troubleshooting (electrical appliance not working, water not heating up, etc), and makes it clear that they'll be held responsible for the cost of any necessary call-outs.

If anyone would like to PM me with an email address then I'll send you a copy of the current version.