Inheritance - £300k

andrewm1981

Hi,

I have recently inherited £300k, and I think I know what I want to do, but I wanted to check that it is the best plan.

The £300k is in the form of a flat. It has rental potential of around £1100/month (minus fees bills etc) which I know isn't the best yield but it's ok.

Financially I'm ok, I earn an ok wage (50k) and have an affordable mortgage, so I just want somewhere where over a long term (10-15 years) the money will be safest, and provide some return. Obviously there are variables, house prices, interest rates etc but does keeping the property and renting it seem like a fair proposal?

Thanks

kidmugsy

Do you plan to manage it yourself? Are you equipped with legal knowledge, trade skills, or any other pertinent advantage?

Are you sure that it's wise to pay interest on an owner-occupied mortgage while paying higher rate tax on the rent, and keeping a great chunk of your wealth in a single, illiquid, indivisible investment?

How would you cope with a new Rent Act, or new property taxes?

Or, on the other hand, is it a property you could imagine retiring to, or using as a weekend place in future, or having your children live in?

andrewm1981

Hi, lots of questions!

I have limited legal knowledge, although I have been a landlord for the last 10 years whilst living in the property and renting out rooms. Trade skills in regards to upkeep? Yes I can maintain a property. It really is just a 40sqm 1 bed flat so minimal maintainence is required.

With regards to the interest, this is my biggest question. At current rates of 0.5% my mortgage is minimal (BOE+0.9% for term) so paying off the mortgage and having no rental income is a poor decision unless property prices drop considerably (hence the long time frame when this would be less of an impact)or rates rise considerably. I've never invested before (other than 20k in shares) but I want a safe option, and the capital gain on houses seems fairly safe long term.

Longer term, no it would be too small for me, so I would imagine keeping it for 10 years at least, then perhaps selling to consolidate and buy a large family home

I guess I'm asking that ( and this is hugely speculative) if over the next 23 years, assuming house prices and rents go up by 2% per annum, then the flat would go from £260k to £400k and rental income (post tax and fees) would be around £200k, totalling £600k. This is of course very basic, but over this time frame what average return would basic investment return (eg bank/gold/top100?)

Thanks

Linton

andrewm1981 wrote: »

.......

I guess I'm asking that ( and this is hugely speculative) if over the next 23 years, assuming house prices and rents go up by 2% per annum, then the flat would go from £260k to £400k and rental income (post tax and fees) would be around £200k, totalling £600k. This is of course very basic, but over this time frame what average return would basic investment return (eg bank/gold/top100?)

Thanks

In the last 23 years the FTSE100, including dividend reinvestment, has increased by 600%. In the same period average non-London house prices have increased by about 150%.

atush

You haven't mentioned a pension or other savings and investments.

at 4.4%, the property would return high enough to beat current inflation, but not after HRTax perhaps.

So I would sell it, and fill S&S isas for the new few years, every year incl this one, and put some into pension as well.

You should, over a period of ten years, be able to do better (ie 5% plus inflation?)

somethingcorporate

It's quite a poor yield and there are lots of hassles being a landlord.

Unless you are dead set it is what you want to do you can do as well with your money for far less of a headache.

Where in the world do 40sqm flats rent out for £1,100? It has to be London. You can rent a 4-bed with gardens in this part of the world

bigadaj

I'd be tempted to sell and invest the money but another option might be to mortgage the flat on abuy to let and look at investing that money.

It's obviously gearing both the property and the investments but is a option, could be too high risk for many but the rental income would be written off against tax for mortgage interst purposes.

You could put nearly £10k a year into a pensions nd gain higher rate tax relief and also fill isas so investing a round £20k.

If and when you sell the rental property then you also expose yourself to capital gains tax whereas with investments you can sell partially and just use up the annual allowance.

puk999

bigadaj wrote: »

It's obviously gearing both the property and the investments but is a option, could be too high risk for many but the rental income would be written off against tax for mortgage interst purposes.

Would you mind explaining the bit about how rental income can be written off against tax for mortgage interest purposes? I lurk on this board trying to learn and I couldn't get my head around this.

kidmugsy

bigadaj wrote: »

...another option might be to mortgage the flat on abuy to let and look at investing that money.

I know you get tax relief on a BTL mortgage taken out to buy a property. Would that work if the OP already owns the flat?

If it didn't then another option would be to sell the flat and buy something better and more expensive with a BTL mortgage, and ensure that that is a property you might want to live in yourself someday.

eskbanker

puk999 wrote: »

Would you mind explaining the bit about how rental income can be written off against tax for mortgage interest purposes? I lurk on this board trying to learn and I couldn't get my head around this.

See http://www.buytolet.com/landlord-guides/the-landlords-guide-to-tax/ - rental income is taxable but you can offset mortgage interest against the income to lower the tax exposure, i.e. you get taxed on rental income minus mortgage interest (and anything else you can offset!).

Rollinghome

Linton wrote: »

In the last 23 years the FTSE100, including dividend reinvestment, has increased by 600%. In the same period average non-London house prices have increased by about 150%.

If you want to include reinvested dividends for comparison then it would be reasonable to also include reinvested net rental income (or reinvested notional rent if you live in the house).

The FTSE100 ignoring divis is up 250% in the last 25 years, 1989 or 190% in the last 23 years.

Nationwide shows national house prices up by 193%.since 1989 and in Greater London (where I assume the OP's flat is) up 260%. But as far as I'm aware that doesn't take into account unit sizes becoming smaller over the years.

The Land Registry which calculates in a different way seems to think house prices in London up 300% since 1995 (Website doesn't go back further.)

I'll let someone else do the numbers. (BTL would still be way too much hassle for me.)