Buying a flat in London with the aim of renting it out in 5 years' time

homebuyer2020

My husband and I live in London, but we're planning to move to abroad in 4-5 years' time. In the meantime, we are anxious to get on the property ladder and stop spending money on renting. We have a deposit of approximately £65K saved up, and we're considering buying a flat in London around the £320-340K mark. We would like to rent this property out when we move abroad, as we're not sure if the move will be permanent, and we feel like owning a London flat is a solid investment.

How feasible is this plan? We are researching and there is a lot to consider - will we definitely have to switch to a buy-to-let mortgage? Will this cost us a lot more on a monthly basis? Will we have to pay tax on our rental income? This won't be a feasible option for us if the rental income won't stretch to cover our mortgage, agency fees, insurance, etc. Is this too much of a risk?

foxy-stoat

homebuyer2020 wrote: »

How feasible is this plan?
will we definitely have to switch to a buy-to-let mortgage?
Will this cost us a lot more on a monthly basis?
Will we have to pay tax on our rental income?
Is this too much of a risk?

You need to crunch the numbers.
You will have to switch at some point yes.
It will most likely cost more.
You will need to pay tax yes, if you do it properly then your tenant should deduct the income tax before paying you and pay it to the HMRC.
For me yes, it is too much of a risk, but its not my money. If I was moving country in 5 years time I would rather take my £65,000, plus whatever capital you will pay, plus what ever the price increases will happen in the next 5 years and be happy in knowing that I dont have to deal with tenants, voids, damage and all that stuff.

homebuyer2020

foxy-stoat wrote: »

You need to crunch the numbers.
You will have to switch at some point yes.
It will most likely cost more.
You will need to pay tax yes, if you do it properly then your tenant should deduct the income tax before paying you and pay it to the HMRC.
For me yes, it is too much of a risk, but its not my money. If I was moving country in 5 years time I would rather take my £65,000, plus whatever capital you will pay, plus what ever the price increases will happen in the next 5 years and be happy in knowing that I dont have to deal with tenants, voids, damage and all that stuff.

Thank you! In your opinion would it be worth it to buy a flat and sell it in 4-5 years' time? Or is that too short of a timeframe to make any return on investment given the cost of legal fees, etc?

sendu

homebuyer2020 wrote: »

How feasible is this plan? We are researching and there is a lot to consider - will we definitely have to switch to a buy-to-let mortgage? Will this cost us a lot more on a monthly basis? Will we have to pay tax on our rental income? This won't be a feasible option for us if the rental income won't stretch to cover our mortgage, agency fees, insurance, etc. Is this too much of a risk?

You'll also most likely be charged a small fee granting you permission to rent by the freeholder.

You'll need a good managing agent to find tenants and handle repairs etc., since you'll be out of the country. Expect to be charged about 2 months rent for this.

You need to work out all the numbers, but there's a good chance you'll make a loss month-to-month.

On the other hand, you can hope that maybe one day the value will increase and then when the mortgage is finally paid off you'll make a tidy profit. Or the housing bubble could burst and you make a loss.

Personally I wouldn't risk it. Consider investing in more liquid areas such as shares. A passive global fund will be zero hassle, eventually zero tax (put £20k/yr in to an ISA), and on a long enough time line should still make a profit despite any market crashes.

foxy-stoat

Depends what the house prices are like in that part of London.

If your paying say £1000 a month rent at the moment and the same amount for a mortgage, in 5 years you should of paid £25,000-ish off the capital. Buying and selling fees will probably be close to that.

homebuyer2020

Thank you for all your responses!

Do you think it's worth buying a flat, living in it for 4-5 years, and then selling up before we move abroad, instead of renting it out? So that we could spend the next 4+ years paying into our own mortgage rather than renting... or is 4-5 years too short of a timeframe to make a purchase worthwhile financially?

hazyjo

homebuyer2020 wrote: »

Do you think it's worth buying a flat, living in it for 4-5 years, and then selling up before we move abroad, instead of renting it out? So that we could spend the next 4+ years paying into our own mortgage rather than renting... or is 4-5 years too short of a timeframe to make a purchase worthwhile financially?

Depends if house prices are going up or down. And unfortunately nobody here has a crystal ball.


You may find that, with interest on the mortgage payments, it'd be cheaper to rent. Or prices may double over 5 years. I've been in both situations myself - neither predictable.


How definite are these 'moving abroad' plans? Five years' time is a long time to make a prediction on your plans. What's stopping you moving abroad now?

homebuyer2020

hazyjo wrote: »

Depends if house prices are going up or down. And unfortunately nobody here has a crystal ball.


You may find that, with interest on the mortgage payments, it'd be cheaper to rent. Or prices may double over 5 years. I've been in both situations myself - neither predictable.


How definite are these 'moving abroad' plans? Five years' time is a long time to make a prediction on your plans. What's stopping you moving abroad now?

Moving abroad to be closer to family members and home. Staying in London for the next four years minimum for career growth, and to hopefully have a baby (excellent maternity leave package and work flexibility not available in the other country).

The idea behind renting was so that we would have somewhere to come back to if the move doesn't work out, if we don't like it, etc.

I have been back and forth on these decisions for a while now and unfortunately, it seems that the advice of "buy a house to live in, not to get on the property ladder/make a profit" ring very true... We are sick of renting and throwing money away, not being able to decorate, etc. but we won't be in London forever. Appreciate all the advice and questions to ponder!

gingercordial

homebuyer2020 wrote: »

The idea behind renting was so that we would have somewhere to come back to if the move doesn't work out, if we don't like it, etc.

But if you don't buy, move abroad then decide to come back you would have flexibility to move to where you want to, rather than being stuck with the place you picked several years ago and which might not be suitable for you now. Your circumstances (a child, possibly thinking about a second, having to find a new job if you left the old one to go abroad) will be different so why not be in the better position of being able to choose what you want at that point?

Whereas if you have bought and come back, not only are you stuck with that place which may not be suitable in size/location any more, but you will have to go through getting your tenants to vacate and remember they may not do so on your timescale.

AdrianC

homebuyer2020 wrote: »

Do you think it's worth buying a flat, living in it for 4-5 years, and then selling up before we move abroad, instead of renting it out? So that we could spend the next 4+ years paying into our own mortgage rather than renting... or is 4-5 years too short of a timeframe to make a purchase worthwhile financially?

£65k equity and £340k purchase price means £275k mortgage.
https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/
Taking all the defaults gives £1,377 of monthly repayment.
In four years, you'll owe £245k, so have repaid £30k from the principal, but £36k of interest.
In five years, £237k so £38k, but £45k of interest.

Then there's the £2k of SDLT if you're both FTBs, £7k if one of you has previously owned property - and, of course, the purchase and sale fees. Let's say £5k for both.

So simply owning the property could cost you £57k in interest and fees over the five years - as well as adding £38k to your equity, assuming price stasis.

How much are you paying in rent now?
How flexible do you want to be when an opportunity to emigrate comes along?
What return could you get on your £65k equity in the meantime?

[Deleted User]

I personally wouldn't be somewhere if I was going to be selling it less than 5 years later. I bought my home 4.5 years ago with a view to living in it long term but as Rabbie Burns said, "The best laid schemes o' mice an' men, gang aft a-gley," and here I am living abroad for the foreseeable future. Prices have fallen a bit since I bought my home although I'm not in negative equity because I put down a decent sized deposit . (The property isn't in London). I'm hedging my bets and I have considered leaving the property empty for a couple of years until I know what's what but instead I might break the cardinal rule of letting a property I have an emotional attachment to, at least I'm not going for the double and letting it to family as well. :rotfl:

If I had remained renting the move overseas would have been easier. Rents have also dropped as well as house prices so with 20/20 hindsight I would have been better (financially speaking) renting for the last 4.5 years. Mind you, if I had done that I would probably be lamenting not being on the property ladder.

Letting the property isn't hugely attractive given the money I'll need to spend complying with various bits of legislation such as installing more wired smoke detectors (no I do not begrudge spending money to ensure the tenants are safe), paying someone to manage the property in my absence, tax, etc, etc. If I break even then I'll be doing well.

I could be wrong but I was under the impression that house prices and rents were dropping a bit in London or at least stagnating although I know that past performance is no indicator of future performance.

#FirstWorldProblems