Advice wanted - do I sell my rental property?

Helen36

Hi all,

I'm hopeless with finance (work in education) so just wanted some general opinions from people in the know.

My husband and I are public sector workers, so have been on pay freezes for ages. We live in the south-east and things are getting increasingly tight. I have a flat from before I was married, which I rent out, and probably, after I've paid all my taxes, maintainence charges, interest only mortgage etc., I make about £200 a month from it.

We also have an interest only mortgage on the house which we live in, which we are growing to hate, as the neighbourhood has completely changed. We have neighbours leaving rubbish all over the place, filling the car park with clapped out cars, their kids are running riot etc.

We've been thinking that maybe it's time that we looked for jobs elsewhere in the country where we would get more for our money and sold both properties. My tenant has just moved out, leaving the flat in a right state and needing complete redecoration, so things are even tighter now. We made the decision last night to put my rental on the market as the first step, hope that it sold quickly (it's in a very popular area), pay off a chunk of our current mortgage, and go to a repayment mortgage while we look for new jobs. Then this morning I've had a call from the letting company who have found us a new tenant. I don't know whether to press ahead with selling, or to just rent again for another year and tread water for a while.

I really know nothing about what the forecasts are for the property market, how long it's taking on average for properties to sell etc., so was wondering if I could ask what other people would / are doing.

Many thanks,

Helen

brit1234

I would sell you flat quickly before people realise that prices are still falling. If you act now you may be able to capitalise on the spring bounce propaganda. It's a shame you didn't do it sooner before the stamp duty changes.

DannyboyMidlands

What is the flat worth? How much equity?

What's your current mortgage rate on the house? On the flat?

Considering that the area has gone down hill since you bought, how much equity in the house at the moment?

Helen36

Flat is worth about £210,000, with a mortgage of £140,000 on it. I'm expecting to have to pay about £30,000 tax on it though, as I bought it for about £30,000 (the block only had a ten year life at the time, although I and all the other owners spent about £40,000 each to save it).

We bought the house at £290,000 (at the peak of the housing boom!), and have a mortgage of £170,000 on it. It's a large 4 bed ex-council home, and needed a lot of renovation which we're finally coming to the end of. We had it revalued a couple of years ago to re-do our mortgage, and that valuation was £230,000 although our mortgage broker said that was way out (it was a valuer who wasn't from the area, and didn't know there is a shortage of affordable housing here - loads of huge executive homes which cost a total fortune but not very much that is large but more affordable). However, our glorious neighbours hadn't moved in at that point!

Helen

DannyboyMidlands

Well there is plenty of equity knocking around so you would seem to have plenty of options.

However the return you are currently getting on the flat is truely awful.

How many kids do you have?

Helen36

Two and, much to our surprise, soon to be three! All under school age, and the reason I've been holding out on selling the flat is that our childcare fees are enormous, and I don't want to turn round in a few years time and realise that any profit I made on the flat has been swallowed up by childcare costs. Things are very tight, but, if it doesn't sound too silly, I'd rather that we struggled but when this lean period is over, we still had some assets left.

DannyboyMidlands

Congratulations.

If I were you I'd do what you initially suggested. Sell both (properties), take my total equity of say £150k, top it up with a £50k mortgage if neccessary and move somewhere nicer. And I mean nicer, not just cheaper. As you've recently discovered it's not just about the biggest house you can get.

What kind of places have you been considering?

If you really want to be a landlord, there's nothing stopping you doing that in future.

franklee

Suggest you redo your rental profit sums taking into account the "complete redecoration" costs and voids and also the loss on any return on the equity present. For example if you took the cash out by selling it could go in a two year fixed ISA (tax free) at 4.00%. Also include maintenance charges etc. when looking at your profit/loss.

As the mortgage is interest only you aren't paying off any of the debt so you're not making headway there. What type of mortgage deal is it, if you are on a lifetime tracker at a low rate I'd think very carefully before letting it go as deals like that aren't available now. OTOH if you are about to get to the end of any deals and revert to the lenders SVR then make sure you budget for that. Also include any early redemption charges in your plans.

One thing I would not recommend is mixing letting and selling, so I'd suggest you pick one and go with that at least for a while.

Oh and get up to date valuations on both properties as two years is a long time ago in this market.

I suppose most money saving would be to move into the flat but I guess it's too small?

Kynthia

Your situation is very similar to mine. You need to look at your sums to make sure renting is really worth it once you take into account the expenses, voids, tax and maintenance costs. I'm currently going to court to evict a tenant who hasn't paid rent this year and has damaged the property. Everyone thinks it's great to keep this asset long term but sometimes it's more of a millstone round your neck that can cost you lots of money and prevent you moving onto new things.

Are you sure about needing to pay £30k if you sell? I assume this is CGT? Have you taken into account PPR, letting relief, capital expenditure, etc?

MissMoneypenny

Helen36 wrote: »

Two and, much to our surprise, soon to be three! All under school age, and the reason I've been holding out on selling the flat is that our childcare fees are enormous, and I don't want to turn round in a few years time and realise that any profit I made on the flat has been swallowed up by childcare costs. Things are very tight, but, if it doesn't sound too silly, I'd rather that we struggled but when this lean period is over, we still had some assets left.

Do you receive Tax Credits? If you do, then you might want to read about the Welfare Reform bill which has now been passed and include that in your decisions.

At the moment, Tax Credits is the only income based welfare payment where capital isn't counted, but that anomaly will be rectified when Tax Credits end and are incorporated into the new Universal Credit (where all the income based welfare payments will be rolled into one payment). UC starts from 2013.

"Capital means your savings, investments and the value of property and land owned but not occupied by you."
http://www.dwp.gov.uk/publications/specialist-guides/technical-guidance/rr2-a-guide-to-housing-benefit/working-it-out/income-and-capital/

It seems that under the new Universal Credit, the capital limit will remain at 16k; and you have more than that in your tenanted flat.

Helen36

Thanks for the advice. I don't receive tax credits, and know that I could probably eke a bit more out of the flat, but my gut reaction is that I don't want the worry of it anymore, after the last rental experience. I was very emotionally attached to the flat as I'd been very happy when I was living there, but the experience of the last few weeks has rather severed that attachment! The prospective tenants want a bit more time to think about things and sort out their guarantors, so that's given me the breathing space to arrange for some estate agents to come in and value the property so that we can make a more informed decision.

I've got lots of reading up to do from some of the things that people have raised - thanks. I'll probably be back with lots of tax questions later!