Finance Review

JPin

Hi All,

I was hoping to attain some financial advice on here, from the outset I should mention that I am a landlord and I know many on here don't like people like me, please refrain from attacking me. The landlord area has not been overly profitable with a number of cases in which my house was left ransacked with sometimes thousands of pounds needed for repairs in addition to unpaid rents.
I am 36, recently married with our first kid on the way. Some of my specifics are below:
Full Time job, salary = £31k
Pension pot = £50k - I pay in 5% of my salary which is matched my my employer.

Cash Accounts
1. HSBC Current = £1000
2. HSBC Regular Saver @ 5% = £1750.
3. Nationwide Current Account = £1000
4. Nationwide Regular Saver @ 5% = £2500
5. First Direct ISA @ 0.55% = £6000
6. First Direct Regular Saver @ 5% = £1750
7. TSB @ 3% = £2000 (3% only paid on first £1500)

Properties
1. Property 1 - Valued at £125k, mortgage = £25k @ 2.24% and monthly repayments are at £405. Rental income is £475, council tax is £700 p/a.
2. Property 2 - Valued at £67k, mortgage = £20k @ 2.24% and monthly repayments are at £334. Rental income is £400, council tax is £500 p/a. Within this house my brother has a 20% share, however I am the person fully liable for the mortgage as his investment was made in full.
3. Property 3 - Valued at £70k, mortgage = £33k @ 3.89% and monthly repayments are at £292. Rental income is £480, council tax is £900 p/a. Within this house my brother has a 10% share, however I am the person fully liable for the mortgage as his investment was made in full.
4.. Property 4 - Valued at £85k, mortgage = £60k @ 2.86% and monthly repayments are at £339. Rental income is £510, council tax is £550p/a.

Other
I live in my wife's house and pay £200 rent per month, other maintenance items such as phone, heating and food = £200 per month.
My wife wants to move to a house priced at £250k, her one and only house is valued at £100k, having initially been bought for £80k, there is a £60k mortgage still on the house. I am not overly keen on us moving with a kid on the way and any new property will be 50:50 ownership.

What are my options? 
Thanks

SonOf

I was hoping to attain some financial advice on here
The board is not authorised to give financial advice.  Anything posted here is opinion and discussion only. Some things posted will be correct. Some incorrect.  

 I should mention that I am a landlord and I know many on here don't like people like me,
Not on this section of the board.   

What are my options? 
Options for what? 
Are you properties held by you or within a limited company (the latter being the most suitable nowadays for most)

bowlhead99

So she only has £40k of equity and wants a £250k house that you'll own 50:50. Moving house when there is a baby on the way or when the baby is newly born is not ideal but presumably a £250k house will be nicer and/or larger to bring up your growing family, than your wife's current £100k home. It is also tax-efficient to have money in your personal property rather than rental properties in terms of not needing to pay CGT on the growth in house value over time.

If you are going to get a £250k property that she puts £40k into and you only put in £40k of equity too, a £170k mortgage would be needed (ignoring the costs of moving, legals, stamp duty, additional stamp duty for second home-owners so the total stamp is £10k).

A lender may think that a £170k mortgage (about 5.5x your salary) may not be supportable if your wife does not have much of a salary and is soon to stop work to make a baby.  However, something like a £130k mortgage should be supportable with your salary as it is only a 4.2x multiple and presumably your wife has a salary too if she has a mortgaged property, so you would have enough joint income (even when she drops down to maternity pay levels) to borrow that sort of money. Without knowing details of your wife's income or your plans once the child is born (will she go back to work?) it's difficult to comment further.  But I'll assume you would both be happy to take a £130k mortgage on the £250k house which is a comfortable 52% LTV.  

That means you would need £120k of equity between you and there will be ~£40k of equity from the sale of your wife's current home sand you don't say that she has significant savings or other investments, so you need to get together the £80k plus closing costs out of what you have listed above.

Property 1 (if the valuation is realistic) has £100k of equity in it; has a low rental income compared to its value  (by comparison against the yield of some of the others); does not have the complexity of having your brother own part of it; has relatively low interest costs compared to its value meaning the 'tax shield' from the interest costs being tax-deductible is not as useful as some of the other mortgage arrangements. 

So, if your tenants at property #1 don't  have long to go until you can give them notice on their tenancy and sell up, it would seem to be a good one to sell. The £100k of equity less costs to sell would adequately cover your (assumed) £80k equity on the new place plus costs to buy, with some money left over. On the face of it, that £20k surplus would cover the selling costs of both of your properties plus the various costs and £10k stamp duty associated with buying the new one.

You don't mention what you paid for property #1, or if you have ever lived in it, both of which would factor into a tax bill. But even if it had gone up £100k and you'd never lived there, you are only looking at a £10k CG tax bill, which would be mostly covered from the fact that your selling and purchasing costs will be less than the £20k surplus. It might need you to use some of your cash balances to cover it, but not an insurmountable problem and the tax will not be due immediately.

If there is not much of a CG tax bill the left-over money will be useful for making the new place nice or generally supporting your new family lifestyle, or starting to build up some non-property, tax-efficient investments (e.g. S&S ISA, extra pension contributions for you and wife when her income falls, etc). If you are finding the landlord business to not be very profitable you could consider selling further properties and just investing in S&S ISAs and pensions instead, together with giving a more comfortable cash buffer to cover your new family lifestyle, income shortfall from wife not working and a better cash buffer for void periods and exceptional repairs on the remaining rentals.

You say 'what are my options' and clearly one option is just to sell the first property on your list, and use the money together with your wife's equity to buy the new home. Job done.  There are a myriad of other permutations of what you could do to raise money for a new place to live, because you could feasibly extend the mortgages on #1 and #2 and #3, or sell different combinations of them, choose to have a larger or smaller mortgage on the new place, etc etc. Listing every feasible option here would be exhausting. But you should certainly go through all the options for yourself.

eskbanker

JPin said:

I live in my wife's house and pay £200 rent per month, other maintenance items such as phone, heating and food = £200 per month.
My wife wants to move to a house priced at £250k, her one and only house is valued at £100k, having initially been bought for £80k, there is a £60k mortgage still on the house. I am not overly keen on us moving with a kid on the way and any new property will be 50:50 ownership.

What are my options?

I'd hazard a guess that most married couples on here wouldn't feel the need to specify that the family home would be owned 50:50, so one option would be to act like a couple, share all your assets and resources, and take financial (and other) decisions jointly, except where mutually advantageous to use individual allowances, etc....

JPin

eskbanker said:

JPin said:

I live in my wife's house and pay £200 rent per month, other maintenance items such as phone, heating and food = £200 per month.
My wife wants to move to a house priced at £250k, her one and only house is valued at £100k, having initially been bought for £80k, there is a £60k mortgage still on the house. I am not overly keen on us moving with a kid on the way and any new property will be 50:50 ownership.

What are my options?

I'd hazard a guess that most married couples on here wouldn't feel the need to specify that the family home would be owned 50:50, so one option would be to act like a couple, share all your assets and resources, and take financial (and other) decisions jointly, except where mutually advantageous to use individual allowances, etc....

Fair point but she doesn't want the liability nor mortgage payments. I had hoped the properties would represent our financial security in the future. 
Is it worth seeing a financial advisor? 

bowlhead99

JPin said:

eskbanker said:

JPin said:

I live in my wife's house and pay £200 rent per month, other maintenance items such as phone, heating and food = £200 per month.
My wife wants to move to a house priced at £250k, her one and only house is valued at £100k, having initially been bought for £80k, there is a £60k mortgage still on the house. I am not overly keen on us moving with a kid on the way and any new property will be 50:50 ownership.

What are my options?

I'd hazard a guess that most married couples on here wouldn't feel the need to specify that the family home would be owned 50:50, so one option would be to act like a couple, share all your assets and resources, and take financial (and other) decisions jointly, except where mutually advantageous to use individual allowances, etc....

Fair point but she doesn't want the liability nor mortgage payments. I had hoped the properties would represent our financial security in the future. 
Is it worth seeing a financial advisor? 

She doesn't want the liability of what? The things that could go wrong with running a leveraged landlording business using the family's assets? Or she doesn't want any mortgage payments on the property the family will be living in, even though she wants a property that's more than twice as valuable as the property she currently lives in that has a 60% mortgage on it?

After taking out your brother's share you do have about £190k of equity in the properties before taxes. If you served notice on all the tenants at the next opportunity, and used the proceeds all plus her equity to buy your next family home, you would only need a relatively paltry mortgage, so from that perspective would have lots of 'financial security' as well as losing the headaches of being a landlord.

However, whether it's better to have a small mortgage on your home and no investments, or a larger mortgage on your home and a portfolio of investment funds or investment properties, is a personal choice. If your preferences are significantly different in this area you may benefit more from a counsellor than a financial advisor

IFAs can be useful if you have lots of investible assets and want to create 'financial security' in the future. Advising on the merits of individual rental properties is not really  what they do, sticking instead to mainstream regulated financial products and helping you understand the pitfalls.  If you were going to liquidate your property portfolio and get £180-£190k from it before taxes, it could definitely be worth your while spending a few thousand on engaging with an independent adviser to figure out what to do with the proceeds. 

However if you would in practice be putting £150k of the £190k into the new home to keep the mortgage down, and spending £20k on CGT, and keeping the last £20k in cash reserves to give a good emergency fund for your growing household, then there is nothing left for the advisor to advise on, other than the money you put aside from your day job going forward.

Personally I don't have any appetite to be a landlord but with interest rates pretty low as they are, I wouldn't be trying to get the mortgage on my home down to the last 10-20%, I would rather have the comfort of a pile of savings and investments to weather the storms of what life throws at me. If I lost my job, the fact my mortgage was low would not really defray the other costs of running a household, so reducing the mortgage on your main home isn't the be all and end all.

But if you keep the other properties on instead, it would be pretty unwelcome to lose a job while also having a tenant stop paying at one of the properties and  suddenly having extra mortgage and council tax to pay as well out of your pocket together with eviction costs and eye-watering repairs and renovations bill to get new tenants in, at the same time as having mortgage and bills on your home.  I wouldn't really want the hassle of that if I had a screaming baby at home too.

Cptralls

Surely you can afford to keep your properties and buy the new one, assuming your wife at least earns the same as you? 

Alistair31

Seems like far too much exposure to property but each to their own I guess.

GiddyInvestor

A small side point but why do you list council tax on the properties. Unless they are not let your tenants should be paying that not you.

bowlhead99

GiddyInvestor said:

A small side point but why do you list council tax on the properties. Unless they are not let your tenants should be paying that not you.

He mentioned "The landlord area has not been overly profitable with a number of cases in which my house was left ransacked with sometimes thousands of pounds needed for repairs in addition to unpaid rents".

When the tenant stops paying rent and trashes the place before abandoning it once evicted, and the landlord is trying to put it back together while paying the costs of remarketing and signing up new tenants, and coping with the lack of rent, he is still going to be paying the £50-75pm council tax as well as the £300-400pm mortgage while waiting for the rental income to restart.  There are other ongoing costs of course like insurance, but that will typically be dealt with up front annually to avoid a cost for credit, whereas council tax will be a month to month cost that you incur in the times that you don't have a tenant.

The problem with investing in rental properties is that to spread the risk you need a number of properties. When you only have less than a couple of hundred grand of equity, and you need multiple properties, they can only be cheap properties. While we shouldn't generalise because nice people exist at all parts of the wealth spectrum, cheap properties at £300-400 a month may attract people who are crap tenants or less able to pay. The people paying £2000-3000 a month for a property will probably not be funding it through benefits or living in squalor, taking a dump on the kitchen floor before leaving. So, although the mortgage costs on a cheap property might be low, you need a good buffer of cash to coast through the 'no rent' periods, repair the disasters, and cover the standing charges like council taxes and the fixed elements of utilities.

JPin

bowlhead99 said:

GiddyInvestor said:

A small side point but why do you list council tax on the properties. Unless they are not let your tenants should be paying that not you.

He mentioned "The landlord area has not been overly profitable with a number of cases in which my house was left ransacked with sometimes thousands of pounds needed for repairs in addition to unpaid rents".

When the tenant stops paying rent and trashes the place before abandoning it once evicted, and the landlord is trying to put it back together while paying the costs of remarketing and signing up new tenants, and coping with the lack of rent, he is still going to be paying the £50-75pm council tax as well as the £300-400pm mortgage while waiting for the rental income to restart.  There are other ongoing costs of course like insurance, but that will typically be dealt with up front annually to avoid a cost for credit, whereas council tax will be a month to month cost that you incur in the times that you don't have a tenant.

The problem with investing in rental properties is that to spread the risk you need a number of properties. When you only have less than a couple of hundred grand of equity, and you need multiple properties, they can only be cheap properties. While we shouldn't generalise because nice people exist at all parts of the wealth spectrum, cheap properties at £300-400 a month may attract people who are crap tenants or less able to pay. The people paying £2000-3000 a month for a property will probably not be funding it through benefits or living in squalor, taking a dump on the kitchen floor before leaving. So, although the mortgage costs on a cheap property might be low, you need a good buffer of cash to coast through the 'no rent' periods, repair the disasters, and cover the standing charges like council taxes and the fixed elements of utilities.

The last house ransacked was done so by a nurse and her partner who worked in property maintenance.