Advice on letting out my flat and purchase of new property

MovingForwards

@theartfullodger do you have any words of wisdom due to being in the business up here?

Grumpy_chap

If you can rent the flat for £500 and the mortgage payments on the flat are £430 per month (which will increase when switched to BTL mortgage), then the overall monthly position will be a net contribution to the property rental business.  That is sometimes sensible, but it needs to be a properly informed decision and entered 'eyes wide open'.  The net contribution to the property rental business will also affect affordability for buying a new property to live in.

83dons2

Ok I see the 4% figure now. However if I sold Id still be due likely 2% anyway on the new property so the difference is 2% as I stated Worth bearing in mind though.

Of the 500 rent I reckon costs will be ongoing 200 a month all of which I can offset against income tax I reckon. First couple of months excepted with setup costs. So I reckon about 300 of the 500 is taxable at about 30% (in between bands just now) so lets say I lose 90 to tax a month that leaves £210 in my pocket. That is a shortfall of £220 each month on my mortgage payment.

Yes I think in 12 months when my mortgage runs out I need to switch to a BTL mortgage and I haven't been able to get a quote on one yet to see how much more expensive it might be to the residential one I have now.

I do intend to sell the flat once the market turns round but to sell it now would involve a long wait and at best a 30K loss I would say on its purchase price. I reckon £220 a month will delay things quite far compared to an straight up 30k loss. Although I suppose the equity back from selling going on a new mortgage minus the 2% extra charge is going to make a fair difference on a new property mortgage...I was thinking if the market turns round in a couple of years and I sell then the money lost on renting would be less than gained on the value upturn...

Sounds like basically the advice is don't bother renting it out and stick it on the market yes?

[Deleted User]

83dons2 said:

Ok I see the 4% figure now. However if I sold Id still be due likely 2% anyway on the new property so the difference is 2% as I stated Worth bearing in mind though.

Of the 500 rent I reckon costs will be ongoing 200 a month all of which I can offset against income tax I reckon. First couple of months excepted with setup costs. So I reckon about 300 of the 500 is taxable at about 30% (in between bands just now) so lets say I lose 90 to tax a month that leaves £210 in my pocket. That is a shortfall of £220 each month on my mortgage payment.

Yes I think in 12 months when my mortgage runs out I need to switch to a BTL mortgage and I haven't been able to get a quote on one yet to see how much more expensive it might be to the residential one I have now.

I do intend to sell the flat once the market turns round but to sell it now would involve a long wait and at best a 30K loss I would say on its purchase price. I reckon £220 a month will delay things quite far compared to an straight up 30k loss. Although I suppose the equity back from selling going on a new mortgage minus the 2% extra charge is going to make a fair difference on a new property mortgage...I was thinking if the market turns round in a couple of years and I sell then the money lost on renting would be less than gained on the value upturn...

Sounds like basically the advice is don't bother renting it out and stick it on the market yes?

I'm not sure I'm following your LBTT logic.  If you sell your current home and purchase a new one at £200k you would need to pay £1,100 in LBTT.  If you keep your current home your LBTT bill will be £9,100.  That isn't a 2% difference.

What are the £200 of costs you think you can offset against tax?

You will need to apply to for a licence to become a landlord within the council area.  Before applying for your licence you will need:

1. A current gas safety certificate if there are gas appliances in the property
2. A current electrical installation condition report (EICR) or electrical installation certificate (EIC)
3. PAT for all electrical appliances you leave in the property
4. The property will need to meet the statutory requirement for fire, smoke and heat detection. https://www.gov.scot/publications/fire-safety-guidance-private-rented-properties/
5. The property will need to meet the statutory requirements for CO detection https://www.gov.scot/publications/carbon-monoxide-alarms-in-private-rented-properties-guidance/
6. You will need a valid EPC and the property must meet the minimum requirement for energy performance.
7. You will need a Legionella risk assessment

Plus you will need to protect the tenant's deposit if you take one and should you wish to evict a tenant then you can only do so with one of the 18 grounds for eviction.

https://www.mygov.scot/private-tenant-eviction/grounds-for-eviction-private-residential-tenancies-if-your-landlord-starts-the-eviction-process-before-7-april-2020/

As you can see there will be quite a bit of outlay before you can even get your licence.  Then if you choose to use a letting agent either to manage the let or just to find a tenant that's more cost to you.

grumiofoundation

83dons2 said:

Ok I see the 4% figure now. However if I sold Id still be due likely 2% anyway on the new property so the difference is 2% as I stated Worth bearing in mind though. No the difference is an extra 4% - did you read what I posted? 

Of the 500 rent I reckon costs will be ongoing 200 a month all of which I can offset against income tax I reckon. First couple of months excepted with setup costs. So I reckon about 300 of the 500 is taxable at about 30% (in between bands just now) so lets say I lose 90 to tax a month that leaves £210 in my pocket. That is a shortfall of £220 each month on my mortgage payment.

So 200 costs and 430 mortgage = £630 cost per month
get 500 back of which ~300 taxed = ~£210 + 200 = £410

So yes loss of ~£220 every month. 

So after 1 year you are guaranteed to be down 4% of new house + 2520 (more unless is rented very day of the year) + costs of setting up (GSC etc as posted above) 



Yes I think in 12 months when my mortgage runs out I need to switch to a BTL mortgage and I haven't been able to get a quote on one yet to see how much more expensive it might be to the residential one I have now. Look on a mortgage comparison site?

I do intend to sell the flat once the market turns round but to sell it now would involve a long wait and at best a 30K loss I would say on its purchase price. I reckon £220 a month will delay things quite far compared to an straight up 30k loss. Although I suppose the equity back from selling going on a new mortgage minus the 24% extra charge is going to make a fair difference on a new property mortgage...I was thinking if the market turns round in a couple of years and I sell then the money lost on renting would be less than gained on the value upturn... And if you can't sell it because you have signed a contract with a tenant and no-one wants to buy with tenant in situ? 

Sounds like basically the advice is don't bother renting it out and stick it on the market yes?
Do you want to be a landlord? If no - sell. If yes - do A LOT more research into being a landlord 

You are basically betting on the market getting better, but every year you wait you will be losing money - when will it be worth what you paid for it again? Will it go up more than your costs every year? Why is it worth so much less than you paid for it? 

Having this month-to-month loss making business in the background is going to count against you in your affordability for the new mortgage. So by keeping this property you are not just losing all the costs detailed above, losing money each month but you will be able to buy a smaller property - therefore you might see yourself in the same situation as you do now in a few years. 

MovingForwards

And then there is capital gains tax to add into the extra costs when selling the flat, after it's been a rental and not your primary residence.

Grumpy_chap

I don't think that CGT will be an issue.  OP days the flat is currently worth £30k less than purchase price and only plans to let until it will sell for the purchase price (i.e. recover the loss).  In that case, there is no CGT liability arising.