Renting out primary residence - worth it or not?

antilles

Hi, girlfriend and I currently both own our own properties (mortgaged). I am planning to move in with her - I have 2 children from a previous relationship so we are planning a trial basis to see whether things work out. I also have a fixed rate mortgage with a redemption penalty so don't want to sell my place for that reason at the moment either.

I've been researching renting out my house (zero experience as a landlord), and have a rough idea of what's involved - legal responsibilities, costs of finding a tenant, safety checks, tax, consent to let, calls in the middle of the night etc, etc. I also know several BTL landlords and have talked to them about the downsides and am OK with all that - famous last words .

The main thing I'm struggling with at the moment is whether it's even financially viable and whether it would be better to basically 'shut down' the property, remove or reduce utility usage (e.g. minimal heating, cut off broadband/TV etc), and leave it as empty as the home insurance will allow, until I'm in a better position to sell.

I wonder if anyone could be helpful enough to cast their eyes over the figures and give me some help please? Financial details are as follows:

I am just on the verge of being a higher rate taxpayer (45.5k salary) and I think that renting out would push me into higher rate tax (it's likely a pay rise in March will take me into the higher band anyway - I also am aware that there's a band increase coming).

Current mortgage is £492 a month, at interest rate of 1.69% (fixed for the next 2 years). Potential rent is £650 - £700 per month according to my research on similar properties.

I understand that the tax rules have changed and are gradually phasing in this new '20% credit' on the interest, which will mean I would be paying a lot more tax as a 40% taxpayer. This is the bit I'm concerned about - as I may have the added responsibility of being a landlord while still having to pay a significant amount of money to service the house - hence why I am wondering if it's just better to 'shut it down' and wait it out.

The calculations seem easy enough on an interest only mortgage but I'm struggling to get my head around the calculations for a repayment mortgage, as the interest portion would be changing every month.

Is there any easy/fancy way to do a 'finger in the air' calculation (taking into account annual expenses like landlord insurance, gas safety, etc) to see if this is worthwhile or not?

Thank you all for any help.

sal_III

I would say it's not worth it in your case. Ignoring all the financial viability, one of the major factors is you have 2 kids. What happens if the "trial" fails and you want to move back in your property? Even if the tenants are on a 1 month rolling contract if they dig their heels in it might take you 3-6 months if not more to evict them.

antilles

sal_III wrote: »

I would say it's not worth it in your case. Ignoring all the financial viability, one of the major factors is you have 2 kids. What happens if the "trial" fails and you want to move back in your property? Even if the tenants are on a 1 month rolling contract if they dig their heels in it might take you 3-6 months if not more to evict them.

Thanks - I agree that does make sense, I would be stuck for a while. But I still want to look at the financial viability if possible, that might kill the idea off completely.

need_an_answer

Check with your council re council tax payments on an empty property...each council is different but I believe a double council tax can kick in after a property is empty for a certain length of time...maybe as low as 6 months but certainly after a year in most cases

Youll need consent to let too from your lender too they may not grant it unless the mortgage is transferred to BTL

I guess its a finger in the air Q back to you but how long will your trial be for?

Its not best LL practice to get a tenant and then decide that you want the property back 6 months or even a year later.

Tenants invest quite a bit into moving what with referencing and possible agency fees,they like to stay until they pull the plug rather than the LL saying "my circumstances have changed and I now want the property back"

No one knows what the future holds by my gut feeling is that if you want a "trial" you might not be ready for the move....

tlc678910

Hi,
Let’s imagine you let the property for £650 a month you would take £7800 before any other costs and assuming no void and that the tenants are paying.

If we round your mortgage to £500 and assume it is £250 mortgage interest and £250 capital repayment. You should dig out your mortgage statement to see what interest you actually paid last year. The £250 each month of mortgage interest is taxed at your rate (40%?) with a 20% credit back for higher rate tax payers so in effect £250 x 12 = 3000 tax would be £600

So you would have income of £7800
With £4800 taxed at 40% and £3000 (effectively taxed at 20% if 40% and then 20% credit)
Income after tax of £2880 + £2400 = income after tax of £5280.

You will also have costs including gas checks, landlord insurance, maintenance and repairs, (voids and possibly non paying tenants may reduce income). These costs would be fully deductible before tax is calculated.

If the income from the tenants has paid for most of the mortgage and expenses then you will need to find the tax money from your own cash flow income.

I think it is worth you renting the property out as you intend to keep it anyway and otherwise you will have to find the mortgage money yourself each month so you might as well find the (lesser) tax money instead. It also won’t do your property any good to not be lived in. It will not be adequately heated or ventilated and it’s condition will deteriorate. A good tenant will keep the property in better condition.

Price the property competitively so you are able to choose your preferred tenant. I would recommend tenants that can prove they can afford the rent/pass referencing and credit checks. I recommend using a well regarded local agent to manage as you are beginning from scratch and they will help to guide you to meet your obligations.

Obviously there is an element of luck in your letting experience but if you are careful in your tenant choice as a higher rate tax payer you may as well receive around 60% of something rather than 100% of nothing in my opinion.

The exception being if you find you cannot attract “good tenants” that you have reasonable confidence will look after the property and pay the rent then I would rather leave it empty as tenants that don’t pay and trash the place obviously won’t be doing you any favours. Better the place is empty for a little while while you find good tenants than to take anybody just to get tenants in quick.

Start with asking for consent to let from your lender to see if your plan can get off the starting blocks.

Tlc

Pixie5740

antilles wrote: »

Hi, girlfriend and I currently both own our own properties (mortgaged). I am planning to move in with her - I have 2 children from a previous relationship so we are planning a trial basis to see whether things work out. I also have a fixed rate mortgage with a redemption penalty so don't want to sell my place for that reason at the moment either.

I've been researching renting out my house (zero experience as a landlord), and have a rough idea of what's involved - legal responsibilities, costs of finding a tenant, safety checks, tax, consent to let, calls in the middle of the night etc, etc. I also know several BTL landlords and have talked to them about the downsides and am OK with all that - famous last words .

The main thing I'm struggling with at the moment is whether it's even financially viable and whether it would be better to basically 'shut down' the property, remove or reduce utility usage (e.g. minimal heating, cut off broadband/TV etc), and leave it as empty as the home insurance will allow, until I'm in a better position to sell.

I wonder if anyone could be helpful enough to cast their eyes over the figures and give me some help please? Financial details are as follows:

I am just on the verge of being a higher rate taxpayer (45.5k salary) and I think that renting out would push me into higher rate tax (it's likely a pay rise in March will take me into the higher band anyway - I also am aware that there's a band increase coming).

Current mortgage is £492 a month, at interest rate of 1.69% (fixed for the next 2 years). Potential rent is £650 - £700 per month according to my research on similar properties.

I understand that the tax rules have changed and are gradually phasing in this new '20% credit' on the interest, which will mean I would be paying a lot more tax as a 40% taxpayer. This is the bit I'm concerned about - as I may have the added responsibility of being a landlord while still having to pay a significant amount of money to service the house - hence why I am wondering if it's just better to 'shut it down' and wait it out.

The calculations seem easy enough on an interest only mortgage but I'm struggling to get my head around the calculations for a repayment mortgage, as the interest portion would be changing every month.

Is there any easy/fancy way to do a 'finger in the air' calculation (taking into account annual expenses like landlord insurance, gas safety, etc) to see if this is worthwhile or not?

Thank you all for any help.

Do a mortgage amortization calculation to work out the interest portion of your mortgage payments. There are calculators online or if you Google "loan amortization Excel" you can build your own spreadsheet.

antilles

tlc678910 wrote: »

Hi,
Let’s imagine you let the property for £650 a month you would take £7800 before any other costs and assuming no void and that the tenants are paying.

If we round your mortgage to £500 and assume it is £250 mortgage interest and £250 capital repayment. You should dig out your mortgage statement to see what interest you actually paid last year. The £250 each month of mortgage interest is taxed at your rate (40%?) with a 20% credit back for higher rate tax payers so in effect £250 x 12 = 3000 tax would be £600

So you would have income of £7800
With £4800 taxed at 40% and £3000 (effectively taxed at 20% if 40% and then 20% credit)
Income after tax of £2880 + £2400 = income after tax of £5280.

You will also have costs including gas checks, landlord insurance, maintenance and repairs, (voids and possibly non paying tenants may reduce income). These costs would be fully deductible before tax is calculated.

If the income from the tenants has paid for most of the mortgage and expenses then you will need to find the tax money from your own cash flow income.

I think it is worth you renting the property out as you intend to keep it anyway and otherwise you will have to find the mortgage money yourself each month so you might as well find the (lesser) tax money instead. It also won’t do your property any good to not be lived in. It will not be adequately heated or ventilated and it’s condition will deteriorate. A good tenant will keep the property in better condition.

Price the property competitively so you are able to choose your preferred tenant. I would recommend tenants that can prove they can afford the rent/pass referencing and credit checks. I recommend using a well regarded local agent to manage as you are beginning from scratch and they will help to guide you to meet your obligations.

Obviously there is an element of luck in your letting experience but if you are careful in your tenant choice as a higher rate tax payer you may as well receive around 60% of something rather than 100% of nothing in my opinion.

The exception being if you find you cannot attract “good tenants” that you have reasonable confidence will look after the property and pay the rent then I would rather leave it empty as tenants that don’t pay and trash the place obviously won’t be doing you any favours. Better the place is empty for a little while while you find good tenants than to take anybody just to get tenants in quick.

Start with asking for consent to let from your lender to see if your plan can get off the starting blocks.

Tlc

Thank you, appreciated. Superb info, exactly what I was looking for. I managed to figure out the calculations from this and it works out on 40% tax I'll end up having to 'top up' to pay the tax bill, but it's not a lot of money from what I can see, and far cheaper than paying out 8-9 grand (mortgage plus utilities and council tax) to keep what is essentially an empty property running.

I will probably use a local agent as suggested - seems sensible rather than trying to save money and possibly mess up the legal bits/paperwork.

It was also suggested I could reduce taxable income by paying more into the corporate pension, which would possibly bring me back out of 40% tax - not sure how accurate that is so I'll check that with an accountant.

Next step as suggested I will contact the lender to see if I can obtain consent to let.

Appreciated.

antilles

Pixie5740 wrote: »

Do a mortgage amortization calculation to work out the interest portion of your mortgage payments. There are calculators online or if you Google "loan amortization Excel" you can build your own spreadsheet.

Thanks - this is what I did in the end - appreciate the help!

antilles

need_an_answer wrote: »

Check with your council re council tax payments on an empty property...each council is different but I believe a double council tax can kick in after a property is empty for a certain length of time...maybe as low as 6 months but certainly after a year in most cases

Youll need consent to let too from your lender too they may not grant it unless the mortgage is transferred to BTL

I guess its a finger in the air Q back to you but how long will your trial be for?

Its not best LL practice to get a tenant and then decide that you want the property back 6 months or even a year later.

Tenants invest quite a bit into moving what with referencing and possible agency fees,they like to stay until they pull the plug rather than the LL saying "my circumstances have changed and I now want the property back"

No one knows what the future holds by my gut feeling is that if you want a "trial" you might not be ready for the move....

Thanks for the reply, cheers! I checked with council and there's a 50 percent supplement on empty properties.

We discussed the 'trial' last night and we basically realised that we've already been living in each other's houses for well over a year (including kids) anyway - so I don't think that's an issue - we barely spend a night apart but are basically paying for 2 houses.

Also as you suggested, I agree that it wouldn't be good (or nice) to try and kick out a tenant who has invested fees, etc. into building a home. So I think this would be a case of once a tenant is in...unless they moved out, I'd just leave the house as BTL (and convert the mortgage properly when required). If the tenant moved out and we could sell when the redemption penalty is gone, then we'd look at that option when it came up.

Appreciate the advice!

James1236

good points above but I would say it's worth getting some sort of covered in my experience. Get a tenant reference, this is normally done by your letting agent via a third party.

have you thought about some rent guarantee insurance A number of providers offer it. MSE have an article on it and companies like Van Mildert offer this.