Renting Out Current Home & Buying Second House

Luke_B

Hi everyone,

I'm after some help please - sorry if this isn't the right place to post. 

To get straight to the point, I would like to buy another house to live in but I would also like to keep my current house and rent it out to my current lodger (or any appropriate tenent). My current house is worth £100k and the new house would be worth £120k, and the two houses are in neighbouring towns.

As far as mortgages go, my current house is at 60% LTV at present and the new house would probably be at 80% LTV. Assuming I could borrow x4.5 my salary, and using some savings, I would still need to find 15k to purchase the second house.

So, I think I would do this:
1). Remortgage my current house to a tracker/non-fixed product in order to release 15k in cash (which would increase the LTV to 75%).
2). Purchase the new house using personal savings plus released equity as the deposit, alongside the new mortgage offer.
3). Move house. 
4). Convert the remortgaged-mortgage on the first house in to a BTL mortgage, and proceed to rent that house out. 

I do realise that I would become a landlord with serious legal and financial obligations, and a TSB Bank representative thinks the plan is technically feasible, so I suppose I'm asking for some opinions and advice relating to the methods required to get there.

Thank you.

Luke

[Deleted User]

Luke_B said:

Hi everyone,

I'm after some help please - sorry if this isn't the right place to post. 

To get straight to the point, I would like to buy another house to live in but I would also like to keep my current house and rent it out to my current lodger (or any appropriate tenent). My current house is worth £100k and the new house would be worth £120k, and the two houses are in neighbouring towns.

As far as mortgages go, my current house is at 60% LTV at present and the new house would probably be at 80% LTV. Assuming I could borrow x4.5 my salary, and using some savings, I would still need to find 15k to purchase the second house.

So, I think I would do this:
1). Remortgage my current house to a tracker/non-fixed product in order to release 15k in cash (which would increase the LTV to 75%).
2). Purchase the new house using personal savings plus released equity as the deposit, alongside the new mortgage offer.
3). Move house. 
4). Convert the remortgaged-mortgage on the first house in to a BTL mortgage, and proceed to rent that house out. 

I do realise that I would become a landlord with serious legal and financial obligations, and a TSB Bank representative thinks the plan is technically feasible, so I suppose I'm asking for some opinions and advice relating to the methods required to get there.

Thank you.

Luke

Presumably you've crunched the numbers and estimated how much profit you expect to make letting your current home.

Here are some recent threads from other posters considering becoming landlords.

https://forums.moneysavingexpert.com/discussion/6128866/becoming-a-landlord-for-the-first-time/p1

https://forums.moneysavingexpert.com/discussion/6129030/buy-a-property-to-rent-out-or-not/p1

https://forums.moneysavingexpert.com/discussion/6126899/tenant-arrears-and-potential-problems-with-tenants-how-often-does-it-happen/p1

[Deleted User]

New landlords (1):advice & information :see links in next post

Thanks to tbs624

Before letting a property, get a good book (below), take a course, & read the following (Applies in England/Wales):

SEE LINKS AT THE END OF THIS POST.

Research
Learn the legal obligations, & tenant's rights. See Shelter's website below. Even if using an agent, learn the basics of Landlord & Tenant law, deposit registration, inventory management, repairing obligations, notice & eviction processes. Understand the difference between Fixed Term and Periodic tenancies. Ultimately you are responsible, not the agent.

Do a detailed budget (spreadsheet). Include all costs. Base income on 10 months a year to allow for voids, & tenants who default: a) initial set-up b) routine annual c) tenant-change-over costs. Budget d) repairs & overheads - predictable and unpredictable (eg new boiler). Add agency fees, landlords insurance, tax etc. Estimate postage, phone, petrol, documentation etc. Have contingency fund for worst-case 'tenants from hell' where you have to pay a mortgage for 8 months without rent, then pay to repair damage. Read a good book.

Permissions
You'll need
* Consent To Let from your Mortgage Lender unless you have a Buy To Let mortgage (CTL/BTL).
* Consent from your Freeholder if you have a lease (ie a flat and some houses).
* Specialist landlords insurance. Normal domestic insurance is invalid if you let the property. Compare risks as well as premiums.
* in Wales, some English councils (& Scotland) you must be registered & maybe licenced (here).

Safety & the Law
Since 1/10/15, new tenants must receive the 'Prescribed Information':
* government leaflet "how to rent"
* EPC (min E rating)
* Gas Safety Certificate if there's gas
* Smoke detectors on each floor
* CO alarm if there's solid fuel heating.

* From 1/2/16 landlords must check tenants' immigration status.

* furniture - certified fire-resistant
* electrics & electrical appliances - safe.
* Security deposit - registered & 'Prescribed Information' provided within 30 days of receipt. Failure has serious consequences. Never rely 100% on an agent.
* HMOs - special rules: check local council.

Documentation
* A good tenancy agreement. Consider the OFT's unfair contract terms guidelines
* check-in inventory should be comprehensive. Use inventory clerk? Otherwise, deposit deductions will be hard to justify
* holding deposit - refundable?
* application & vetting forms. Authorisation for credit searches
* standing Order mandate for rent payment
* letters to utilities for account hand-over
* security deposit scheme application. It's the law
* tenant info folder: boiler/appliance instructions, alarm system; how to replace smoke/CO alarm batteries; location of stopcock/fusebox etc; rubbish arrangements, emergency contact no.s for repairs; colour/brand of emulsion to touch up paintwork; current utility suppliers (+ ask the T to let you know if they switch); local doctor etc

Management
Be cautious appointing a letting agent. The right agent is as important as the right tenant. Check their credentials & get recommendations/references. Check your contract with them. Can you get rid if they're no good? See link below.

Take tenant vetting seriously, either DIY or use an agent. Check ID, references, income, credit history, immigration status etc & take nothing for granted (reference the LL before the current one - he may be keen to move them on). Consider a guarantor for high risk tenants, or if you can't vet (overseas applicants, first-time renters etc). Remember a Guarantor Agreement must be Executed as a Deed/witnessed, & guarantor given the tenancy agreement in advance - many agents get this wrong.

Don't let your agent force you to renew Fixed Term contracts if a Periodic Tenancy will suit. Agents recommend new Fixed Terms as they charge fees from both sides, but a Periodic Tenancy arises automatically. See link below.

Consider carefully whether & when to increase rent. A long-term tenant is far better than a nominal rent increase. See link below.

Consider maintenance/repairs: Use your own handyman/contractor when needed, DIY, or leave it to your agent who will have contractors.... at a price.

Decide how often to inspect (be reasonable) and include in the tenancy agreement.

Tax
You're running a business, even if it's a short term arrangement or rental to family, so you have to declare rental income whether tax is payable or not. Research the Income Tax liability and allowances before you start. Note only the interest element of your mortgage repayments is tax-deductable (see below). Consider Capital Gains Tax. If going abroad, & you have no agent, read the Non Resident Landlord Scheme - see below.

Support and advice
Join a Landlord's Association and/or a web-based source (see below). Membership fees are tax deductible, & offer discounts on insurance, documents, vetting services, training and more. Some areas have local associations affiliated to one of the nationals. Check your local Council for accreditation scheme for private LLs.

Rent Guarantee Schemes
Some Housing Associations, councils, and private letting agencies offer schemes which guarantee your monthly rental income, removing the risk of costly voids between tenants. The advantage of these schemes is obviously the certainty of regular income to pay your mortgage etc. Against this you must weigh 1) the (significantly?) lower rent you will receive; 2) the removal of your freedom to select either the specific tenant or even the type of tenant; 3) the reality that the HA/agent etc will have little concern for the protection/condition of your property; 4) the reality that their priority will be to have a tenant (any tenant) in occupation. Additionally you should ensure that your landlords insurance/mortgage terms do not prohibit the type of tenant the HA/agent plans to install.

Additionally, be aware your contract will be a commercial tenancy, not an AST (Assured Shorthold Tenancy). This has significant legal ramifications (eg S21, S8, S13 Notices don't apply).

General Advice
Remember although it may have been your home, you will be handing over "exclusive occupancy" of the property, and tenants are entitled to view it as their home, without undue interference ("quiet enjoyment"). Make sure you understand the limit of your rights (ie access - a dodgy clause in your tenancy agreement does not grant you free access)

Be business-like but fair, most tenants respond in kind, looking after your property and keeping those expensive voids at bay.

And be careful letting to friends or family - will you be willing to evict if you have to? Are you concerned about losing their friendship or love?

OK - now visit the post below (New landlords (2) )for the promised links to all the research you need to do before taking the plunge!

[Deleted User]

New landlords (2): Essential links for further information

If you are a new landlord, or taking over management from your letting agent, the links below support the guidance in the previous post (New landlords (1)). This includes links to the relevant leglislation and regulations, as well as to other websites providing guidance and information.

Books - Try your library. (Check publication date as laws change):
The Complete Guide to Residential Letting 2015 (also available here)

Successful Property Letting 2017: (How to Make Money in Buy-to-Let)

Landlordzone (Landlord information + forum)

Landlord Law (Property solicitor!!!8217;s website - clinic, blog, resources, advice etc) + Landlaw Law links (more links for landlords)

Shelter England (Tenants' rights) Shelter Scotland

Shelter (Repairs in private rented homes)

Gov advice (Renting out your home: government website)

HMRC (Property taxes eg Income Tax on rent (and allowable expenses to offset tax); Capital Gains Tax, etc)

HMRC (Non Resident [= overseas] Landlord Scheme)

Deposits (Payment, protection and return)

Deposits (Gov site: rules on deposit protection)

Prescribed Information (RLA links to various deposit schemes' documentation)

HSE (Gas Safety Certificate rules)

EPC (Energy Performance Certificate rules)

How to rent (mandatory government leaflet)

ESC (Electrical Safety Council - Rules)

The Smoke and Carbon Monoxide Alarm (England) Regulations 2015 (from 1/10/15)

Right to Rent (Mandatory checks on tenants' immigration status)

RLA (Residential Landlord!!!8217;s Association - mixed reviews)

NLA (National Landlord!!!8217;s Association)

Letting Agents (Tips for selecting, and tips for sacking them)

Letting agents (Landlordzone guide)

ARLA (Letting agents' professional body)

The AIIC (Association of Independant Inventory Clerks)

ParagonAdvance (Tenant referencing provider !!!8211; there are others. Use Google) Letsure

Landlord & Tenant Act 1985 (Repairing obligations; LL's address; and much more)

Landlord and Tenant Act 1987 (Address for Notices; etc)

Protection from Eviction Act 1977 (speaks for itself really. Also makes harrasment a criminal offence)

Housing Act 1988 (Definitions and rights of various tenancy catagories - note AST is most common; creates Statutory Periodic Tenancies)

Housing Act 2004 (Deposits; Houses of Multiple Occupation; etc)

Localism Act 2011 (section 184 - updates to deposit scheme rules)

Deregulation Act 2015 (amendments to deposit penalties & S21 service, smoke alarms, retaliatory eviction rules)

Statutory Instrument 2015 No. 1646 (Prescribed Information at start of tenancies from 1/10/15 - Deregulation Act)

Requirements for new tenancies since Oct 2015 (Stat Inst 1646 & Dereg Act)

Tenant Fees Act 2019 Abolition of most tenant fees from June 1st 2019 Gov Guidance Notes

Shelter information on 2019 restrictions on tenant fees.

Written demands (for rent etc: LL's actual address needed) Beitov Properties Ltd v Martin

Rent Increases (how and when can rent be changed)

HMOs (Licencing of Houses in Multiple Occupation in England: A guide for landlords and managers)

OFT356 (Unfair Terms in Tenancy Agreements)

Housing (Wales) Act 2014 (landlord registration & licencing)

This advice is not exhaustive. Whole books are devoted to the subject.

Luke_B

Thanks @Lover_of_Lycra for that information, I'll print it off for later reading of what looks like very useful advice. 

I should say that my main concern is to do with the mortgages, and how to carry out the plan as a whole. In particular, how to do the equity release against house No. 1, and then how to (asuming it's  possible to) change that remortgage product in to a BTL mortgage. Or whether it has been known to remortgage straight to a BTL mortgage whilst also releasing equity as cash? It's difficult to know when to do what in terms of buying a house whilst also remortgaging another for rental, etc.

The bank representative thought my plan was feasible financially but unfortunately couldn't say exactly what the methods will be to achieving it, so I'm prepared to improvise but currently stumped.

[Deleted User]

Luke_B said:

Thanks @Lover_of_Lycra for that information, I'll print it off for later reading of what looks like very useful advice. 

I should say that my main concern is to do with the mortgages, and how to carry out the plan as a whole. In particular, how to do the equity release against house No. 1, and then how to (asuming it's  possible to) change that remortgage product in to a BTL mortgage. Or whether it has been known to remortgage straight to a BTL mortgage whilst also releasing equity as cash? It's difficult to know when to do what in terms of buying a house whilst also remortgaging another for rental, etc.

The bank representative thought my plan was feasible financially but unfortunately couldn't say exactly what the methods will be to achieving it, so I'm prepared to improvise but currently stumped.

Let to Buy on your current home to release some equity and then a normal residential mortgage on your new home.  If in doubt engage a mortgage broker.  Remember that the purchase will attract the higher rate of SDLT since you will be purchasing an additional residential property.

greatcrested

It's all in the stickie at the top of the forum:

**  This thread is intended to provide information to both landlords and tenants relating to Assured Shorthold Tenancies (ASTs) in England and Wales.

Updated April 2020 to include the Coronavirus Act 2020.

Topics covered:

Post 2: Repairing Obligations: the law, common misconceptions, reporting/enforcing, retaliatory eviction & the new tenant protection (2015)

Post 3: Deposits: Payment, Protection and Return.

Post 4: Ending/renewing an AST: what happens when a fixed term ends? How can a LL or tenant end a tenancy? What is a periodic tenancy?

Post 5: Rent increases: when & how can rent be increased?

Post 6: Repossession: what if a LL's mortgage lender repossesses the property?

Post 7: New landlords (1):advice & information :see links in next post

Post 8: New landlords (2): Essential links for further information

Post 9: Letting agents: how should a landlord select or sack?

AdrianC

Let's turn it around slightly...

If you didn't own property A, and just owned property B, would you consider taking out a 75% BtL mortgage to buy property A and start a lettings business a good plan?

The only real difference is that by doing it the way round that you are, you'll be paying £600 more SDLT. How long will it take for your net, post-tax, post-mortgage, post-outgoings income from the property to fully cover the £3,600 +3% SDLT and actually give you one single penny of real income?

Crashy_Time

The OP just wants to keep the original property though, not make profit? The lodger would just be a sort of caretaker on cheap rent?

[Deleted User]

Crashy_Time said:

The OP just wants to keep the original property though, not make profit? The lodger would just be a sort of caretaker on cheap rent?

Where are you getting that from? 

Luke_B

Hi @Crashy_Time, you're largely right. My lodger would be covering the costs of keeping my first home (by becoming a tenant) which would enable  me to move closer to my family, and have spare bedroom capacity across the two properties for a couple of my immediate relatives who are currently facing hardship.

I'm mostly seeking technical advice, such as that recommend by @Lover_of_Lycra to look in to Let to Buy - which I hadn't thought of, and I've since emailed a few brokers for guidance.

Thank you.