Sell or let to buy

littlepixel72

Hi,
Not sure of the order in which to do things - so looking for input from people with experience of selling and/or letting to buy.

I have a decent amount of equity in my house, enough to buy a property outright in my chosen area (moving out of London to the South Coast).

Our current property has LTV of 23%. According to zoopla it's worth £500-550k, but needs cosmetic work.

Considering an additional loan to finance it of 20k. We're not high earners - I'm part-time and my partner's freelance - but we can afford the loan repayments.

If we let it we should be able to get £1600 a month.

Should I decorate first or bite the bullet and get valuations?

Would we be mad to sell this potential goldmine considering it's our only asset (no debt apart from the £79,000 mortgage, but no savings/pension either)?

Or is it a smarter financial move to sell up, be mortgage-free and concentrate on getting better at saving - with improved quality of life and without the stress of being a landlord?

Comfortable with the idea of being a landlord but only if it's financially rewarding enough.

KiKi

I had this choice two years ago - except I was still going to have a mortgage on my new property, and I was upscaling rather than downsizing.

I chose to sell rather than let to buy, because the latter meant I'd have to put nearly ALL my cash as a deposit on my new house, rather than using the equity from my flat.

In one way, I regret it...the values of 2 bed flats in the area I left have rocketed, and I'd probably get £50k more if I'd sold now. I'd also have made around £600 each month pre-tax. However, if I had done that, I'd have had very little accessible savings to deal with issues, and it only takes one bad tenant to screw things up.

I think you have to consider: have you got enough savings in case you get a nightmare tenant, or in case things go really wrong? Presumably your flat is leasehold, and therefore you pay service charges - is it likely that you'll get a large bill in the next few years for any major repairs?

Also, what would you rather do: have the additional work and asset, or live a more carefree / mortgage-free life? If you don't have high paying jobs, then a mortgage free property could be wonderful.

Personally, I'd try and keep it - if you live in an area of London that's improving, then a flat with £79k mortgage is something I'd dream of!! But I'm a high earner with savings so could manage financially if it went wrong, and I'd only do it if I also had some cash aside to deal with issues that might come up. What sort of life would you prefer?

KiKi

AdrianC

littlepixel72 wrote: »

Our current property has LTV of 23%. According to zoopla it's worth £500-550k, but needs cosmetic work.

Considering an additional loan to finance it of 20k.

If we let it we should be able to get £1600 a month.

Would we be mad to sell this potential goldmine

So you've got a return of about 4.5-5% on your equity of about £400k, before interest on the c. £100k debt, management fees, taxes, maintenance, voids etc etc.

I think your definition of "potential goldmine" is different to mine.

Hoploz

You sound as if you would be using the equity in this to buy the new property.

That means you would take out a mortgage on the old one to buy the new one in cash. If you want to have this under a BTL mortgage, you need to leave in 25% equity, and have the repayments at 125% of the rental income in order to qualify for most BTL products. Does this work for you?

A BTL mortgage will be at a higher interest rate than a home-buyer mortgage. So you may well be better off taking the mortgage out on the new home instead of releasing the equity in the old one.

littlepixel72

Thanks everybody, great food for thought.

Kiki - it's a 2 bed house and we own the freehold. We've made improvements to the exterior in the past few years - new roof, repointing, renovating the roof terrace so no major bills likely. Internally it needs cosmetic work. We could manage financially if things went wrong, but we have conflicting wants and needs - we want to simplify and enjoy our lives, but also need to save for retirement with dwindling opportunities for career progression.

AdrianC - I see your point but as Kiki pointed out, if you’re in an area of London that’s improving a small mortgage means you're sitting pretty, as long as you like where you are. But this house has never quite suited us, and we’re nervous about our next move. From what you’re saying, it seems we might be better off selling up and buying a new property outright, either in London, or the town we move to. (We’re considering renting first to see if we like it).

Hoploz - thanks for this info - what do you mean by “have the repayments at 125% of the rental income in order to qualify for most BTL products” - do you mean that if we got £1600 per month, we’d have to pay £2000 per month mortgage repayments? There’s no way we could afford that.

Our current mortgage payment is less than £500. I need to learn more about the rules of buy to let, clearly.

I was wrong about not having savings - we have about 1 months salary. Go us!

AdrianC

littlepixel72 wrote: »

what do you mean by “have the repayments at 125% of the rental income in order to qualify for most BTL products” - do you mean that if we got £1600 per month, we’d have to pay £2000 per month mortgage repayments? There’s no way we could afford that.

No, you've got the 125% the wrong way round. The lender want you to get more rent than you're spending on the mortgage - to be making a profit, to give you room for all those other expenses without getting into cashflow problems.

A BtL mortgage lender on a property with £1,600/mo rent would be reluctant to lend more than would work out to £1,280/mo repayments.

Guest101

What happens when your tenants don't pay - can you afford the loss of £1600 a month for 4-5 months?

booksurr

125% refers to the amount by which the rent you receive must exceed the amount of mortgage you pay each month, eg: if mortgage costs £800 per month then you need to have rental income of at least 800 x 1.25 = £1,000 per month

Hoploz

:doh:
Haha sorry I wrote that the wrong way round didn't I! ....Sorry to confuse you, OP! It was late at night.

Of course, the lender needs you to be getting more in that you'd be paying out ...

littlepixel72

Hoploz wrote: »

:doh:
Haha sorry I wrote that the wrong way round didn't I! ....Sorry to confuse you, OP! It was late at night.

Of course, the lender needs you to be getting more in that you'd be paying out ...

No worries, Hoploz! :cool:

A BtL mortgage lender on a property with £1,600/mo rent would be reluctant to lend more than would work out to £1,280/mo repayments.

That makes a lot more sense, AdrianC :rotfl:

What happens when your tenants don't pay - can you afford the loss of £1600 a month for 4-5 months?

We would probably use an agency. My sister's been letting a flat for 16 years and not had that problem.

I'm more concerned about whether this is the right property to be investing in. It's always going to go up in value more slowly than others in the area because it's ex-local authority. Weighing that up with moving costs, and what we can afford to buy.

A BTL mortgage will be at a higher interest rate than a home-buyer mortgage. So you may well be better off taking the mortgage out on the new home instead of releasing the equity in the old one.

I guess the point is that the BTL mortagage should be the smaller one? We would need to release some of the equity to fund the new purchase.

wolfplayer

Can't wait for all the BTLers to begin saying hello to Section24.