buying second house and renting first

jim5589

I am going to get some professional advise on this soon but thought i would put it here also incase someone has any experience in this situation.

So i currently own my current house outright. but we are looking to move (myself and wife) to a larger house. Ideally i want to keep this house and rent it rather than selling it. This house is valued at about 200k. The houses we are looking at are around £320-£350k. we have 100K saved up. my wife earns about 35k a year and i have my own business but at the moment am not able to pay myself very much so probably in the last couple of years i have only taken £12k a year to cover the basics.

Now of course when we move into the new house we would then have the extra rental income from the old house. but we dont have this currently so i assume this cannot be taken into account when applying for morgages, Doing the simple online " how much can i borrow" calculators we will not be able to borrow enough to buy the new house and keep the old one based on our income alone. but i assume that my situation maybe different as we do own the house outright so could that not be used as a garantee to borrow against for the new house. or would we have to move out the house and rent it for a while so the rent can be added to our income for applying for a morgage.

Like i say i will go to an advisor in the new year as clearly i dont understand how it will work if it is even possible. but if anyone has been in a similar situation and can give me an idea of what to expect please let me know

Pixie5740

You know yourself that you will not be able to borrow enough to purchase another property for £300k to £350k on those incomes with only a £100k deposit. £14k to £18k of your savings will be used up just paying the higher rate of SDLT.

You could release some equity in your current home using a Let-to-Buy mortgage but the rental property would need to be able to at least wipe it's own face or it will impact your affordability for the new home.

What makes your current home a good rental property? What kind of yield are you expecting to make?

agrinnall

Your finances don't work, it would be much better to sell your current house so that you can buy the new one. If you want to become a landlord (and it's not really a great business to get into these days) you can consider doing so at a later date when your income is more stable and you can target your purchase at a property that is particularly suitable for rental.

JoJo1978

Ideally you want to keep the house you are in, but why? If it's for an income stream a landlord can be time consuming and tricky to make a decent living from even if the property is very suitable to rent out in your area.

Income you make will count as a second income because you are both currently working so taxed accordingly, and if you buy another house the stamp duty will be at a higher rate. If the rental income doesn't cover your landlord costs it may adversely affect mortgage affordability for a new home.

Having been an accidental landlord myself, my advice would be to sell the current property, add the proceeds into your savings and then only take a smaller mortgage on a new home. Is that not a possibility?

jim5589

Thanks for the replies. The estimate rental for my property is between 900 and 1000 PCM. Yes the other option is to sell the house and just buy a new house with next to no morgage which may well be what we end up doing. but my plan originally has always been to keep this place and rent it if i can afford to. but maybe thats not going to happen

Pixie5740

Assuming you achieve £1,000 pcm that a gross yield of less than 5% which isn't that attractive.

AnotherJoe

jim5589 wrote: »

but my plan originally has always been to keep this place and rent it if i can afford to. but maybe thats not going to happen

Why?
Why this house (when there almost certainly more suitable ones for renting out)
Why this method of investment (which is subject to multiple and increasing rules, low returns,high risk, can't be sheltered from tax)

Even if you are determined to run a letting business despite the above, a better plan would probably be to sell this house, buy your new residence, then later mortgage your new property to release funds to enable buyinga suitable rental property or two (for example two small apartments may well provide mor income than one house).

You’d also pay less in extra SDLT by buying cheaper properties rather than incurring it on your more expensive residential house.

jim5589

AnotherJoe wrote: »

Why?
Why this house (when there almost certainly more suitable ones for renting out)
Why this method of investment (which is subject to multiple and increasing rules, low returns,high risk, can't be sheltered from tax)

Even if you are determined to run a letting business despite the above, a better plan would probably be to sell this house, buy your new residence, then later mortgage your new property to release funds to enable buyinga suitable rental property or two (for example two small apartments may well provide mor income than one house).

You’d also pay less in extra SDLT by buying cheaper properties rather than incurring it on your more expensive residential house.

I live in leigh-on-sea close to southend airport and train links into london. Both my parents and my uncle have all bought houses in this area similar to mine and rented them out successfully for years. Also i know atleast 3 of the houses in my road which are the same as mine are rented rather than owned. so i would not have an issue renting my house. But yes your point about not paying the extra SDLT makes alot of sense. i guess i just thought whats the point in selling this house only to buy one like it again down the road to rent. But i can see from everyones comments this may not be the best way to do it.

AnotherJoe

jim5589 wrote: »

I live in leigh-on-sea close to southend airport and train links into london. Both my parents and my uncle have all bought houses in this area similar to mine and rented them out successfully for years.

As the saying goes, the past is a different country. There was different tax treatment, far laxer rules and regulations, plus an almost unparalleled period of house price inflation. None of that is likely to reoccur. So, going forward, beinga landlord is likely to be a much less lucrative proposition than in the past.

jim5589 wrote: »

I Also i know atleast 3 of the houses in my road which are the same as mine are rented rather than owned. so i would not have an issue renting my house.

Thatsa good start but not the point . Suppose that your £200k house woudl rent at £1k a month. Might it be, for example, that a £100k flat might rent for £750, and therefore two fiats would spread the risk of a bad tenant and bring in 50% more income? I don’t know this, but it seems unlikely that the house you chose to live in initially is also the one that gives you the best rental return. What are the odds of that ?

Typhoon2000

Having no mortgage on you first property puts you in a very powerful position when it come to raising finance and an enviable position for claiming mortgage interest against tax, especially as you are both basic rate tax payers ( so get 100% relief on mortgage interest).

You could raise say £100,000 on you first property and and with your saving, left to raise £120k by residential mortgage on your new place.
However you will be able you get relief on the full £200k worth on interest payments on the BTL ( assuming as you say your property is work £200k), not just the £100K on the BTL mortgage. Essentially you will be getting mortgage interest tax relief of £100k on the BTL mortgage and first £100k on you new residential mortgage.

So you are in a much better position than than most looking to buy a second property - you introducing your first property into the business which you own out right and you are basic rate tax payers.

Cakeguts

The point about rental properties is that they have to be what the local rental market needs not some house that you bought to live in and think you might let.

The fact that other people have let houses in your road doesn't mean that this is what the rental market in your area needs. You have to find out what lets best in your area. What you don't want are bad tenants who don't pay the rent or lots of times when the property is vacant.

Get onto Rightmove and look at the type of properties that are in the shortest supply on the rental site. For example where we let houses what people are looking for are 3 bed houses semi or detached with driveways. Houses with parking at the back from access roads or cottages with no drives or 2 bed terraces are much more difficult to let so they hang about for ages. Anything not in walking distance of shops and transport is also more difficult to let. The 3 bed houses with drives are only available for a really short time. You have to look for what people want to rent not what you have already got and think might be a good idea.

It is always better to have more than one rental so that if something goes wrong you are not going to be stuck with no income (unless you are extremely unlucky)