Selling To Rent

rcman

We are considering selling up and renting. We are restless to move, and hae spotted a "dream home" nearby in our overpriced area. Our income would not qualify us for a mortgage on such a property - but we can afford the monthly rent, which is little more than our current mortgage payments.

The other obvious benefit would arise if/when the housing market cools off or crashes.

I suppose that if a crash in the market occurs, then landlords would be selling too, which might mean that we lose our rented accomodation, but also might mean that by then we might afford to buy it.

Would this be a HUGE risk? Are we completely mad to be considering this?

We would have about £100,000 in equity left to invest somewhere. Where would be the best place to invest this?

Any thoughts on this from those who are perhaps more savvy than us would be appreciated.

lisyloo

Would this be a HUGE risk? Are we completely mad to be considering this?

No you are not mad.
It is certainly worth considering however you should be aware that there are risks in this startegy (as there are with anything else you do).

You used the word "IF" in relation to a crash and this is the problem.
There is a large body of opinion that says that we won' have a crash because interest rates are low and unemployment is also low.
Therefore we could be in for a period of stagnation.

Your plan would work well if the market crashes but what if it stagnates or drops at a lower rate over a long period of time.

the best thing to do is to run some scenarios in a spreadsheet and see how the figures pan out.

Bear in mind that you may have to pay tax on any large amounts of money you have (if you are married put it in the name of the lowest rate tax payer.

Spendless

When I rented my house out Bs insisted my tenants had a 6 or 12 month lease.
Though I never did it (ie tenants moved out of own accord) I assume I could have given them notice to leave once lease was up.
What if this happened to you and owner wanted property back to live in (due to relationship break up for example).
Or what if he wanted to sell and house prices continue to rise (as they are still doing in my area and other people on other boards have said same about where they live).
This would put dream home even more out of your reach and you'd also have to pay more to get your old house back.
Are you disciplined enough to not touch £100,000?

lisyloo

Yes - another risk is prices rising.

I have to say that at the moment I think that looks unlikely.
However people have been saying similar stuff for about 4 years so it's impossible to predict.

It looks like we are starting to enter a slowdown, however we have had false dusks before (London 2002 and a dip around the Iraq war) so it is possible that this is just a seasonal variation and that things will pick up.

My feeling is that they won't but it's still a risk that you need to recognise.

Unfortunately all routes carry risk (including doing nothing).
You just have to find the one that's mosr acceptable to you.

Woby_Tide

From an article in yesterdays Sunday Times

How to prepare for a crash
David Budworth



THE housing market is slowing down, writes David Budworth, but do you need to protect yourself against price falls?
Buyers



If you are thinking of buying a property, you might want to sit tight in case prices drop. Experts, however, play down the risks of making your purchase now.

Simon Tyler of Chase de Vere Mortgage Management, a broker, said: “If you intend to live in the house for at least five years, then you should be able to ride out any bumpiness in the property market. But if you have a small deposit and are intending to sell again in a couple of years, you run a higher risk of negative equity — where your mortgage is worth more than your property.”

Homebuyers might even be able to benefit from fears of a house-price crash by demanding that sellers reduce their asking prices. Rightmove, a property website, reported a drop in asking prices of 0.6% in the last two weeks in August.


Sellers

If you are thinking of moving, you may be tempted to sell now to lock in profits before asking prices fall further. You could then rent a property until the market cools off when you could get a better deal on a new home, or trade up to a bigger property that is too expensive at present.

But experts warn that homeowners who rent in the hope of making money are taking big risks. Even Capital Economics, which expects house-price falls of 20%, does not recommend selling to rent to make a profit.


Borrowers

Some borrowers are vulnerable to negative equity. First-time buyers who bought their home recently with a small deposit, or even no deposit, are most at risk. If they put down only 5% of the purchase price and the property falls in value by 10%, their mortgage would be worth more than their home.

Borrowers who have taken on a bigger mortgage in order to unlock some or all of the equity in their property could also be caught. If, for example, your property is worth £100,000 and you have an £80,000 mortgage, you could have borrowed an extra £20,000.

However, negative equity becomes a problem only if you have to sell your home. In the early 1990s some borrowers in negative equity were forced to sell up as interest rates reached a peak of nearly 15% and they could not afford to keep up the mortgage payments.

Ray Boulger of Charcol, a mortgage broker, said: “Many experts think interest rates will peak at 5% this time round, so I wouldn’t expect there to be the same problem.”

You can minimise the risk of getting into negative equity by paying off your mortgage as quickly as possible.

rcman

I have a theory that if you could get lots of homeowners in a given area to sell up and rent at once, the prices would crash and everyone could re-buy at lower cost

dunstonh

Yes - another risk is prices rising.

I have to say that at the moment I think that looks unlikely.
However people have been saying similar stuff for about 4 years so it's impossible to predict.

It's times like this when a crystal ball is handy.

You are either going to be mad, clever or no different. Ask us again in 5 years and we will let you know which it was ;D