If we leave London is BTL worth the hassle?

smfdurham

AlexMac wrote: »

As a small-scale amateur landlord in London (with 16-17 years experience, of one flat, and a recent second little BTL) I'd say it's worth it and not too much hassle, tax-efficient, and once you do your homework, easy to do.

Masses of advice for wannabe LLs here on this forum (I hope one of the experts will give you a link). The main things are
- is your property in an area of rental demand with a good ratio of value-to-rental income? I get 5-7% gross return p.a. on asset value before factoring in costs- all of which (except the capital repayment element of the mortgage) are tax deductible. Obviously income of ten grand a year for a flat worth £175K is better than eight grand a year on a house worth £200k
- can you distance yourself emotionally from the property - it's no longer your 'nest' and you mustn't stress that the place might be trashed or neglected; everything can be fixed for a price... but
- are you businesslike enough to reference-check and select tenants (or get an EA to ), meet your legal obligations and treat tenants right? I've been lucky, even though I self-manage, but then, I treat my occupants well; anything that breaks or wears out (beds, fridges, boilers, leaks etc) gets fixed or replaced immediately
- can your cash-flow cope with voids, bad tenants (cross fingers) and the off £2k for a new boiler?

In my case, the answer was yes all round, and frankly, it's been an income gold-mine, while retaining London capital appreciation!

So go for it

The property is in a high demand area, I could realistically rent it out now for £1,250 (it would have got £1,000 3 years ago, so in 3-5 years who knows). It’s also a 3 min walk to the Leytonstone central line station so likely to appeal to renters.

Even with £60k left on the mortgage the monthly payments would only be around £400 and the rental income should be more than £1,250. On the distancing and business like approach I work in business so think I’d be able to pull that off (although I’m sure its never as easy as you think)

dominoman

somethingcorporate wrote: »

Except now you have a mortgage to satisfy so hardly the entire tax difference better off.

Yes - but don't forget you also have a huge chunk of money that you've taken out and is earning you a return somewhere else.

The fact is you are paying much much less tax on the house by having it mortgaged. So long as you invest the money extracted from the house tax-efficiently too (e.g. VCTs, EIS or another BTL) you will be better off overall.

smfdurham

dominoman wrote: »

The opposite. Re-mortgage it to the hilt so you own as little of it as possible. Then use the money you have to put down a deposit on a new place, or just put it in the bank or an investment to earn some interest.

The reason is that all your rental income will be taxed, but you can deduct the mortgage interest payments first.

So let's say you earn 20k from it per year (not unlikely in London). You will pay 8k in tax if you are a 40% tax payer.

On the other hand if you have a 75% mortgage on it which is costing you 1500 a month in interest you will pay tax only on the remaining income. So your tax would drop to 40% of 2k, which means you end up with an extra 7000 per year in your pocket!

You'd be crazy not to do extract the max mortgage you can. You're throwing away thousands a year in extra tax if you pay off a mortgage on a property that is let out.

This is an interesting point of view which makes a lot of sense.

What are your views on this as a plan then…
- Pay off as much of the mortgage as possible now to lower repayments and interest costs in the next 3-5 years.
- When we move in 3-5 years’ time, re-mortgage the flat up to say 70% LTV
- If we do this with £60k of the mortgage remaining then we’ll have £150,000 cash from the re-mortgage
- Then we’ll be left with a flat that we can rent out with a yield of 25% or so
- We’ll also have £150,000 cash plus other savings so may be able to buy mortgage free in the north

Would appreciate your thoughts!

G_M

Keep (or extend) the mortgage (either get CTL or switch to a BTL mortgage). It's tax-deductable.

Read:

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dominoman

smfdurham wrote: »

This is an interesting point of view which makes a lot of sense.

What are your views on this as a plan then…
- Pay off as much of the mortgage as possible now to lower repayments and interest costs in the next 3-5 years.
- When we move in 3-5 years’ time, re-mortgage the flat up to say 70% LTV
- If we do this with £60k of the mortgage remaining then we’ll have £150,000 cash from the re-mortgage
- Then we’ll be left with a flat that we can rent out with a yield of 25% or so
- We’ll also have £150,000 cash plus other savings so may be able to buy mortgage free in the north

Would appreciate your thoughts!

Yes. Do that.

Pay off as much as you can from the mortgage now. When it comes to renting it out remortgage and use the cash elsewhere.

Make sure your mortgage is a BTL mortgage, or at least that you get permission to let. Also make sure you get an interest only mortgage. There's no point repaying on a BTL mortgage as you want to keep as much tax deductible as possible.

IronWolf

smfdurham wrote: »

thanks, yeah I think we can do it without too much lifestyle impact (although it will of course have some impact!)

Do you think we're best off being mortgage free or a smallish mortgage and less savings?

Its tricky, BTL mortgages carry higher interest rates, but you can offset the interest against income tax - but you cant do that with primary residence.

Also with a bigger deposit on your primary residence you will get a lower mortgage rate.

So you should do some quick sums to work out whether a mortgage on the BTL or new house works out cheaper for you including tax relief.