Are my rental sums correct?

Jeanclaudvandamme

Ok, my finances have got so complicated I just can't think straight anymore! Would be grateful for advice please. Please see in bold for the sums I'm wanting confirming if you don't have time for my complex life story!

I own a £206k house jointly with my ex-partner, we owe £147k (equity £59k). We bought a £60k property outright which we planned to rent out but we broke up 18 months and it remains empty. All the equity was mine from inheritance and we've agreed that we will sell the rental property and he can take £40k as a deposit for his own property. So plan was I would keep and live in our main house, use £20k from the sale of the other house to reduce the mortgage and apply for the mortgage in my name only. I was just under the higher tax payer bracket salary wise, and I have rented out a room to help with my massive £760 a month mortgage, and I figured on my salary after paying £20k off I'd be allowed a £127k mortgage on my own.

Then I lost my job, currently job hunting but it's unlikely I will get back on a similar salary straight away. No mortgage protection. My partner and I split very amicable, in fact although he briefly moved out and lived in the rental property, the area is quite rough and the neighbours threatened him so he soon moved back in. Now I'm not in a position just yet to apply for the mortgage on my own. The 2 yr mortgage term is up the May.

So now the options I'm thinking through are...

Original plan - sell rental house, pay £20k from my mortgage, give ex £40k. Will need to get a decent salary job (before may) to apply for mortage on my own.

Keep living together (allows more time to find the right job) and rent out rental property. £5400 annual rental income = £4,320 after 20% tax which we could split. Not much if a big repair is needed or other probs. Plus if sold it and reduced my mortgage by £20k would be paying about £1200 a year less too so real extra income from rent is about £3k between us. My ex is basic rate tax payer, I get on a similar wage as before I could go over the threshold into higher tax payer, with rental income, though not sure how joint incomes are treated with rental income. Generally doesn't seem worth the hassle for such little return.

Keep living together and use our £60k equity in the rental house to get 3 more properties (circa £60k) so 4 buy to let mortgages in total. That would mean £21,600 in gross rental income. Mortgage for each property would be £272 repayment or £150 interest only. I understand George Osborne's changes means landlords will soon no longer be able to deduct all their mortgage interest when they work out their profits. So I think that means we can only claim £122 a month as a cost for tax relief if we went for repayment. I think most landlords go for interest only. So based on interest only, according to my calculations on 4 houses gross profit £21,600 minus interest only mortgage costs of £7,200 = £14,400. Minus tax at 20% = £11,520 profit a year. Is that roughly right? I read there's now extra stamp duty on second homes and landlord's properties so according to an online calculator that's £1,800 per house, total cost £7,200. That would have to go on a credit card and paid off over a year, eating into first year profits. I'm not sure what would happen tax wise if I did get a job in the higher tax bracket, how they treat your joint rental income if one is lower tax and the other higher. And must take into account I'd be paying £1200 more a month on main house mortgage than if we sold up and I paid a lump off.

Selling up and putting £40k into a savings account doesn't seem worth it = at just under 2% two ISAs would only yield about £800 a year. I'm reluctant to take risks on stocks and shares etc. Anyone know of a Swiss bank account or something offering better?! Legally!

So tempted to go for the 4 houses option, only £4K profit first year but £11k a year after, if no major repairs. We are happy to live together as friends for the near to mid future (we see other people no issues, except a little insecurity with new partners to deal with!). I'd have to wait till I have a job presumably to get the buy to let mortgages but we could rent out the empty property right now if we're keeping it. Then if we lived together for say the next five years we could each have made £25k, with him saving extra he could have his own deposit sooner. Then we can separate our main house and I'll take over it and we will continue to each benefit from £5,750 a year in rental profit plus we'd still have the £60k shared equity which could be a pension for us both. Plus I'd personally always be paying that extra £1,200 a year on the main mortgage which would be my responsibility. What scares me is if there are major repairs on the rental houses and if I've misunderstood the rules and miscalculated my sums!

I do worry about the impact of us living together as exes on new relationships, but neither of us are in serious relationships yet and we both want to set ourselves up for the best mutual financial outcome. If we meet people who are understanding about us living together still, then even if my ex met someone serious and wanted to move in with her, there's no reason he can't do that and we continue our financial set up (new person our age 30//40s likely to be set up with their own place). It would prob be mortgage fraud not to declare him living elsewhere but hey ho!

Any help is appreciated. Sorry this is so long, it's so complicated!

Jeanclaudvandamme

I've just found an online landlord profit calculator based on the new rules and it's different to my sums so I'll (partly) answer my own question!!

The calculator (on the Telegraph website) says...
Net profit after tax as of 2016 = £14,470
Net profit after tax as of 2020 = £14,440

Hardly any difference. That's based on no tax deductible costs which there may be some and I put in an estimate of what my salary will be, within basic tax payer but I'm still unsure of how joint incomes are treated?

Doozergirl

Have you asked your ex? It's their money you're spending.

In all honesty, people often move on relatively quickly.

I'll leave the main maths to someone else, but of two people I know that split up two years ago, one has been living with his new partner (met after the split) for over a year and the other took longer to meet someone but they have just moved in together and got engaged.

Second of those people left his wife and money in the house saying he was keeping it as a nest egg. Funnily enough, he wants to sell it now he's moved in with someone. What situation would that be if they'd managed to tie up all their cash since splitting up in a BTL empire?

I also know two couples that split in 2016 and one person from each relationship has already found someone else.

I don't know anyone that would be overjoyed at their partner living with their ex. I'm positively laid back, but that little unwanted voice in the back of my head would have a field day.

Advice here is never to buy with friends. It's good advice. That is what your ex is now, but with even more conotations attached. Your ex may find it harder to get a residential mortgage if they have a trail of BTLs already.

You are complicating everything. If you want BTL empire do it yourself. Keep your £20k in the house and take out a BTL mortgage.

Your ex has just had a taste of the reality of that type of BTL. Not a nice area, the other residents can be intimidating. That means your tenants either want to leave soon after they move in or you have tenants that are intimidating. They either don't pay rent, ruin the house or both. If you're lucky enough to have a good tenant who can stand up for themselves, it still doesn't last forever. The rental return is not as high as it looks and maintenance knocks out huge amounts of income, let alone when your tenants purposely wreck a house and steal all the appliances!

If you're not put off than you can buy my BTL which is going on the market after 10 years; it is in the same price bracket and is in better condition than most houses in the area and worth more than £10k less than I paid for it. It's like a never ending episode of Jeremy Kyle. Personally, I would experience the reality of being a landlord before you buy more of the same.

If correct, £14,400 a year in 'profit' leaves you with £3,600 each house to put towards maintenance, cover voids and put towards paying off the mortgage. Money will need to be spent on it every year.

Owning five houses but putting stamp duty on a credit card is shocking.

booksurr

quick comments re tax

in tax law a property owner is deemed to be entitled to the income arising from letting the property, so "joint" owners would be deemed to have a share of the rental profit

but, where the joint owners are not married (to each other obviously) they are free to split the profit anyway they want (including 0/100 if one of them has taken leave of their senses). So with one basic rate and one high rate taxpayer it is up to you how you share the profits as patently you are not married to your co-owner.

the tax changes to mortgage interest have absolutely zero impact on a basic rate taxpayer, however, the rental income can now push someone into the higher rate bracket due to the fact that the interest cannot be deducted first so the taxable profit is potentially much larger than under the old rules. If someone is already a higher rate taxpayer then they will be paying more tax than before under the new rules

Jeanclaudvandamme

Hi

Thanks for your response! My ex is keen to make his share of money go further for him by investing in BTL, and it seems it's easier, less risky to do it jointly. The £60k house is both of ours, initially we agreed a £40k:£20k split to him:me. We could therefore share rental profit split with him getting more but I think equal is roughly fair given that I'm paying on my own the main mortgage and will have a £1,200 extra cost I could have reduced if we had sold the other property.

But yes I see what you're saying about new relationships changing things. I have met someone who is in the army and likely to be posted away and he has his own house so we wouldn't have any plans to co-habit in the near future at least. My ex has only just met someone new so early days. Even if we go ahead with these plans he is free to move out at any point, we'd just be tied together as a financial arrangement. But yes he could meet someone who he wants to make financial plans with and this situation could then be a major problem which does concern me. But on the other hand he may not meet anyone for years or settle with someone with their own house who he doesn't need to get financially involved with and then we'd have wasted this opportunity to invest together which we started out to do. Tricky one.

The £14k plus profit was after mortgage payments. But yes I think with my basic sums I've done quickly I'm not accounting for all the extras, landlord insurance, repairs, wear and tear and the risk of someone wrecking the place. That's what worries me about taking the leap, with the Government's changes it's quite a tight margin per house and if anything goes wrong it can seriously eat into your margin.

I have a credit card that's interest free for 18 months btw!

Thanks for mentioning your house is on the market but I'm based in Merseyside and would prefer a house locally to keep an eye on.

How many rental properties do you own and have you found it profitable/worthwhile?

Jeanclaudvandamme

booksurr wrote: »

quick comments re tax

in tax law a property owner is deemed to be entitled to the income arising from letting the property, so "joint" owners would be deemed to have a share of the rental profit

but, where the joint owners are not married (to each other obviously) they are free to split the profit anyway they want (including 0/100 if one of them has taken leave of their senses). So with one basic rate and one high rate taxpayer it is up to you how you share the profits as patently you are not married to your co-owner.

the tax changes to mortgage interest have absolutely zero impact on a basic rate taxpayer, however, the rental income can now push someone into the higher rate bracket due to the fact that the interest cannot be deducted first so the taxable profit is potentially much larger than under the old rules. If someone is already a higher rate taxpayer then they will be paying more tax than before under the new rules

Hi, thanks for your answer. I just read up on the rules, so you can essentially fix the percentage you each own to avoid one of you going into the higher tax bracket if one of you earns more.

Ah ok thanks your explanation about the mortgage interest change, makes sense now, I was struggling to get my head around that! I think if I got back on the salary I was previously on, just under the higher tax threshold, I'd be best going to a financial advisor about all of this, because if it ended up pushing me over then taking on 4 houses with the tighter margins these days wouldn't be worth it at all.

Thanks.

FBaby

One big thing you don't seem to have factored in: the management of those 4 properties. There is this assumption that being a LL is straight forward and that if you have property that require little maintenance, it will be the case of doing a visit once a year and that's it.

The reality is totally different. Even low maintenance properties need looking after. As a general rules, tenants don't make things last as long as owners and things break, deteriorate much quicker. Mould appears where there was none before etc... and most importantly, tenants come and go.

You seem to have factor no management costs, loss of rental income, repairs, insurance etc... That's totally unrealistic. Also, who will deal with the issues when things go wrong? Him? You?

tom9980

As a landlord I think this idea is complete and utter madness given the personal circumstances not to mention the thin margins involved. I highly suspect after the tax changes and factoring in all costs you may make a loss. Just stick to selling, finding a job and getting a mortgage on your current property.

MyOnlyPost

£60k won't buy you 4 houses at Circa £60k. As well as the deposits at £15k each have you considered £800-£1k per house in legal fees and searches, £100-£200 buildings insurance, £500-£1,000 for a structural surevy on each house (As someone who once didn't bother trust me, you don't want to ignore this) and you're already putting £1,800 Stamp duty per property on a credit card?

Assume you buy 4 houses Circa £55k and add all these other costs. At that price where I have my BTL very few houses are ready to rent and need a little sprucing up and you then have no cash left to do it. Or what if a house stands empty for 3-6 months and you have to pay the energy bills and the council tax.

As an example of what can happen I am projecting a profit of £1,200 this year on £14,700 turnover with just £750 in finance costs. That's without any accounting wizardry, simply lower than expected rent due to a fallow spell in each of 4 properties and higher than expected repair costs.

Finally as regards how the rent is treated, each joint owner pays tax on their share of the rent at their marginal tax rate. So if you had a job in the 40% tax bracket then you would be taxed at 40% of your rental profits before mortgage interest. Using your figures and assuming no running costs you personally would make £10,800 from the rent assuming 50% share and be liable for £4,320 tax. Against that tax burden as I understand the new legislation you could then claim a 20% tax relief on your mortgages, £720.

Income £10,800
Mortgage -£3,600
Tax Burden -£3,600
Profit (Before any running costs) £3600

iantojones40

So, to summarise, you've already got one unsuccessful BTL property, you've got a large mortgage on your own property, your going through a separation and you've lost your job.

And you think the answer to all your problems is to buy 3 more BTL properties in equally undesirable areas as your first one paying the stamp duty on a credit card and also probably committing mortgage fraud.

You make the The Big Short look like a tale of financial prudence and judicious, clear sighted practice.

TBagpuss

Why not sell the BTL now and use the fuinds to reduce your joint mortgage.

Agree to live in the main house as a house share for the next 6 months then review.

Agree that you will sell the main house if neither of you is in a position to buy the other out after a set period of time (e.g. 6 -12 months) andget a written agreement in place which sets that out, including setting out what % each of you will be entitled to from the sale.

You can then spend the next 6-12 months getting a new job and also working out whethre you want to stay put, to sell and downze (possibly, depending on the numbers, you could chose to try to get a BTL at that point)

If you and your partner decide that you do want to start a BLT business together then make sure that you have a proper, formal Partnership Agreement drawn up and a ckear understanding and agreement of your respective rights and responsbilities.

In terms of your figures, I'm not a BLT landlord but on the face of it you appear to be basing your figures solely on gross rental income, without factoring in void periods, maintenace and repairs, advertising or agents fees etc. i think you would need to sit down and work out the figures taking al of those factors into account to get an idea of what your realistic return might be.