How to figure out if I'm better selling my BTL and putting the money in savings, or not...

7sefton

Hi. 

As some of you will know from my previous posts, I am currently renting out a flat in London that I previously lived in (LTV approximately 60%). My job has taken me away from London for the foreseeable, and even if I return to London in a year or two I think I'd want to move & buy a different flat (that's bigger, in a nicer area, etc.).

I was planning on buying another flat near where I now work, but a combination of tax headaches and the uncertainty in the housing market is making me reconsider this. I could rent, or stay with family for free.

Which leaves the question of what to do with the London flat, and it's just been vacated by the last tenants. The type of flat it is means I struggle to get private tenants, leaving me with Council/DSS tenants as an (obviously risky) option. However there are some major works planned on it over the next two years, which should improve its appearance and help add value.

So I'm considering my options:
1) Sell it in the current market and keep the cash in the bank until things are clearer and I know where I want to be permanently. Obvious downsides are a bad housing market and low interest rates.
2) Rent it out for another year, progress with the major work to add value, then reassess next year. Downsides include tenant risks.
3) Move back there myself, commute to my job as and when necessary (it's a 2.5hr commute by intercity train), but make the most of the 'new normal' of WFH. Downsides include living in London on a non-London salary, the headache of potential long & expensive commuting when things stabilize.

I'm trying to work out a formula that will help me see if my equity in the flat (over £100K) is better kept in the flat with rent coming in, or put in the bank so I'm free of the headaches of being an accidental landlord.

Any advice much appreciated. Thanks!

steampowered

The house price minus the outstanding mortgage is your "invested capital".

The profit you make each year (after tax, costs and mortgage repayments) is your "net profit".

Your net profit, divided by your invested capital,  is your annual return on investment. Multiply that by 100 to get a percentage - that's the annual percentage return you are getting. 

You might also get a return on investment from increasing house prices (or indeed a negative return if house prices drop).

The average long term return generated by the large stock markets over the past 50 years or so is 7-8% per year, which is highly attractive if held through a S&S ISA. Though that could be lower (or higher) in future.

The other consideration is that selling your flat would give more flexibility; since if you did decide to move back to London you'd need to either pay the additional stamp duty charge or wait for the tenants to leave.

Marvel1

7sefton said:

Hi. 

As some of you will know from my previous posts, I am currently renting out a flat in London that I previously lived in (LTV approximately 60%). My job has taken me away from London for the foreseeable, and even if I return to London in a year or two I think I'd want to move & buy a different flat (that's bigger, in a nicer area, etc.).

I was planning on buying another flat near where I now work, but a combination of tax headaches and the uncertainty in the housing market is making me reconsider this. I could rent, or stay with family for free.

Which leaves the question of what to do with the London flat, and it's just been vacated by the last tenants. The type of flat it is means I struggle to get private tenants, leaving me with Council/DSS tenants as an (obviously risky) option. However there are some major works planned on it over the next two years, which should improve its appearance and help add value.

So I'm considering my options:
1) Sell it in the current market and keep the cash in the bank until things are clearer and I know where I want to be permanently. Obvious downsides are a bad housing market and low interest rates.
2) Rent it out for another year, progress with the major work to add value, then reassess next year. Downsides include tenant risks.
3) Move back there myself, commute to my job as and when necessary (it's a 2.5hr commute by intercity train), but make the most of the 'new normal' of WFH. Downsides include living in London on a non-London salary, the headache of potential long & expensive commuting when things stabilize.

I'm trying to work out a formula that will help me see if my equity in the flat (over £100K) is better kept in the flat with rent coming in, or put in the bank so I'm free of the headaches of being an accidental landlord.

Any advice much appreciated. Thanks!

In case OP decides to delete this one also.

AdrianC

Surely it's a simple question... What was your taxable profit on the flat over the last few years?

[Deleted User]

Why would you simply put the money in the bank? You could put it into a S&S ISA instead or put it, or some of it, into your pension or use it to bolster your deposit for somewhere in London.  Lots of better ways to invest the money than leaving it languishing in the bank. 

numbercruncher8

TBH I reckon they only mean that as a figure of speech. 
With interest rates at zero the returns are nil. From a diversified range of assets including stocks the range could be quite big, anything negative to positive.

There are too many unknowns on each side of the equation, but IMO at these sort of figures I guess there will be little in it either way. 

Selling up gives you the money, which can be invested to produce a return. But you need to find another place to stay, and returns aren't guaranteed unless you want to settle for 1%. 
Renting out means the money is still tied up in the property. Assuming paying higher rate tax, and making a provision for repairs/voids/other issues, a £1,000 monthly rent may translate to a few thousand net profit a year.
Moving in means taking on an additional expense, that kind of train journey isn't going to be cheap especially if you're in peak hours. If the intention is to sell for a year, the expected price in London would be less in 1 year (market expectations, not a statement of fact).

Another option may be to take a lodger and make the most of the tax break. But I'm guessing this property may not be suitable (ie lack of bedrooms). 

If it were me, I'd just go. It sounds like the only real certainty in your future for you is that you want to buy somewhere bigger and better. Question is how quick the property sells. I can't get my mind around despite being London, having £100k equity and 60% LTV, it is only a property that attracts DSS. Even £200k flats in less than nice areas sell to people getting on the property ladder. It isn't Woolwich is it?

AdrianC

numbercruncher8 said:

Assuming paying higher rate tax, and making a provision for repairs/voids/other issues, a £1,000 monthly rent may translate to a few thousand net profit a year.

Substantially less than that, with a 60% LtV mortgage on a property with London yields at BtL rates. I'd be surprised if it's actually in the black, by the time everything's accounted for.

numbercruncher8

Yeah actually you are right. 
There is a calculator here: https://taxscouts.com/calculator/rental-income-tax/

Assuming zero profit then I suppose it may depend on how you feel on the housing market. The worst case scenario, citing the Bank of England, is that house prices decline 16%. Not all properties get hit in the same amount, but I would guess flats in London may suffer greater than the average. A 25% on a £200k place will wipe out a lot of your equity.

It may take some time for prices to recover. In my own experience in London, prices did dip in the past global financial crisis. The average fell by 20%. In my area there was quite a slow recovery for the next few years, but prices really shot up from 2014 and probably peaked at Brexit.  If you don't want to sell at a lower price, you may have to wait and there is no guarantee a recovery will be quick and could take some time.

The best case scenario is that a correction does not occur and prices increase by the time you sell. Maybe the place is close to something important. Crossrail for instance. 

You will see people be nebulous and say 'nobody knows what is going to happen', to prevent expressing an adverse opinion, thus implying an equal chance of each happening. In my view the London recovery last time was boosted by several factors. In the early stage, interest rates going to zero, the Olympics and associated investment. Later on, better mortgage affordability as the average term stretched to 30/35 years and help to buy. It seems difficult to see as many catalysts this time around. 

Last point is that you say a bad housing market is a downside when you come to sell. Actually if you're looking to go up the ladder this becomes an upside because the properties you want become cheaper (assuming factors like mortgage/price discount remains constant).

Aberdeenangarse

Marvel1 said:

7sefton said:

Hi. 

As some of you will know from my previous posts, I am currently renting out a flat in London that I previously lived in (LTV approximately 60%). My job has taken me away from London for the foreseeable, and even if I return to London in a year or two I think I'd want to move & buy a different flat (that's bigger, in a nicer area, etc.).

I was planning on buying another flat near where I now work, but a combination of tax headaches and the uncertainty in the housing market is making me reconsider this. I could rent, or stay with family for free.

Which leaves the question of what to do with the London flat, and it's just been vacated by the last tenants. The type of flat it is means I struggle to get private tenants, leaving me with Council/DSS tenants as an (obviously risky) option. However there are some major works planned on it over the next two years, which should improve its appearance and help add value.

So I'm considering my options:
1) Sell it in the current market and keep the cash in the bank until things are clearer and I know where I want to be permanently. Obvious downsides are a bad housing market and low interest rates.
2) Rent it out for another year, progress with the major work to add value, then reassess next year. Downsides include tenant risks.
3) Move back there myself, commute to my job as and when necessary (it's a 2.5hr commute by intercity train), but make the most of the 'new normal' of WFH. Downsides include living in London on a non-London salary, the headache of potential long & expensive commuting when things stabilize.

I'm trying to work out a formula that will help me see if my equity in the flat (over £100K) is better kept in the flat with rent coming in, or put in the bank so I'm free of the headaches of being an accidental landlord.

Any advice much appreciated. Thanks!

In case OP decides to delete this one also.

Do you mean this one?

7sefton said:

Hi everyone,

I have been renting out a flat for the past year, everything has been going smoothly but it’s obviously not the money spinner it once was: I’m paying 40% income tax and many of previous allowances have disappeared (eg mortgage interest relief, wear & tear). I’m just about breaking even, but happy to do so because it keeps my options open in case I want to live in the flat again.

Last month my lovely tenants activated their break clause due to work issues around Covid. Since then I’ve had a few discussions with friends in similar situations, mainly about how to find tenants in these difficult times.

To my complete shock, both have openly said they don’t declare the income, and one even accused me of being ‘an idiot’ for doing so. These are quite well-off friends: one is an City trader and the other a solicitor in a Northern market town. The trader doesn’t even have a BTL mortgage or consent to let - he’s renting out on a residential mortgage!

To make matters worse, I’ve been exploring the option of letting to the Council to house council tenants. The council cover the deposit and add on an ‘incentive’ payment because they’re low on supply. I asked the council by email if the incentive was taxable, and got a phone call back from the housing advisor telling me ‘landlord to landlord... nobody declares it so don’t worry about it.’ 

I’m in complete shock: firstly because I would never have expected this from two of my closest friends, and secondly because of the audacity of the council worker basically encouraging me to evade tax.

I know what I’m doing is morally right etc etc, but I do feel like a fool when everyone else seems to be making +40% more than me on their rental 

freesha

DSS tenants? Unlikely to get any of them, seeing as the DSS hasn't existed since 2001. What else aren't you up to date with, one wonders?

macman

If you are unable to calculate whether the return on BTL is currently better than investing the money elsewhere, then you really shouldn't be in the BTL business...
We have absolutely no idea what your attitude to risk is. If it's low-risk, then the most you can get in short term savings is about 1.2%. If it's high risk, you might get 8% or more taking a punt on a rising market in certain equities. Aviation shares, anyone?
Clearly, £100K in the bank is going to bring you a miserly return of £1,200pa before tax, so 'leaving it in the bank' is not really a serious investment strategy.