Shall I borrow more, to upgrade home, or rent out home and have 2 properties?

tallmandat

Hi Guys
we're a family of 4, boy is 9 girl is 7 and me and the wife. At moment we live in a modest 2 bed house. The kids currently share a bedroom and I can split it to make it two bedrooms but it'll be 2 very tight box rooms, enough for a single bed and storage, which is fine. However, it would be nice to move into a bigger home, and live in a nicer area too. 

So at moment I've got about £85k left on my mortgage, about 24 years remaining. I am 41. The options I've been thinking are these two:
1. Split bedroom, kill the 85k mortgage as quick as possible. I've got about £160 equity in this property, and I reckon I'd get £320k for it in sale.
2. Move and upgrade to a 3 bed house 
3. Rent existing home out which goes for approx £1200 a month, take on the pro's n cons of becoming a landlord and potentially own a 3-bed home as well as the rented existing 2 bed home. 
What are your thoughts and experiences of above? is option 3 any more benefitial than option 2, I mean, the romantic idea of owning 2 properties seems enticing, having the rental income basically pay for a larger mortgage? But apart from the landlord headaches, laws, costs, etc. what's the catch if any? Would like opinions and experiences please....

Thanks!

Crashy_Time

tallmandat said:

Hi Guys
we're a family of 4, boy is 9 girl is 7 and me and the wife. At moment we live in a modest 2 bed house. The kids currently share a bedroom and I can split it to make it two bedrooms but it'll be 2 very tight box rooms, enough for a single bed and storage, which is fine. However, it would be nice to move into a bigger home, and live in a nicer area too. 

So at moment I've got about £85k left on my mortgage, about 24 years remaining. I am 41. The options I've been thinking are these two:
1. Split bedroom, kill the 85k mortgage as quick as possible. I've got about £160 equity in this property, and I reckon I'd get £320k for it in sale.
2. Move and upgrade to a 3 bed house 
3. Rent existing home out which goes for approx £1200 a month, take on the pro's n cons of becoming a landlord and potentially own a 3-bed home as well as the rented existing 2 bed home. 
What are your thoughts and experiences of above? is option 3 any more benefitial than option 2, I mean, the romantic idea of owning 2 properties seems enticing, having the rental income basically pay for a larger mortgage? But apart from the landlord headaches, laws, costs, etc. what's the catch if any? Would like opinions and experiences please....

Thanks!

Sure, the banks used this one for years to get people into multiple mortgage debt, but as the banks are now tightening up on lending it will probably all boil down to how secure your jobs are and how well they pay, probably the best idea you have mentioned is killing the 85k debt as quickly as possible. Unless you really know what you are doing the landlord idea is best forgotten IMO.

[Deleted User]

tallmandat said:

Hi Guys
we're a family of 4, boy is 9 girl is 7 and me and the wife. At moment we live in a modest 2 bed house. The kids currently share a bedroom and I can split it to make it two bedrooms but it'll be 2 very tight box rooms, enough for a single bed and storage, which is fine. However, it would be nice to move into a bigger home, and live in a nicer area too. 

So at moment I've got about £85k left on my mortgage, about 24 years remaining. I am 41. The options I've been thinking are these two:
1. Split bedroom, kill the 85k mortgage as quick as possible. I've got about £160 equity in this property, and I reckon I'd get £320k for it in sale.
2. Move and upgrade to a 3 bed house 
3. Rent existing home out which goes for approx £1200 a month, take on the pro's n cons of becoming a landlord and potentially own a 3-bed home as well as the rented existing 2 bed home. 
What are your thoughts and experiences of above? is option 3 any more benefitial than option 2, I mean, the romantic idea of owning 2 properties seems enticing, having the rental income basically pay for a larger mortgage? But apart from the landlord headaches, laws, costs, etc. what's the catch if any? Would like opinions and experiences please....

Thanks!

There are hundreds of not thousands of threads on this very topic already on the forum. You have all the details so you tell us what net return you’ll make renting out your current home and how long it will take to recoup the additional SDLT you will need to pay. How much extra mortgage interest will you need to pay if you have two properties? 

Have you read the sticky about tenancies at the top of the board yet? 

dimbo61

Why not make life easy.
Do up your current home ready for selling.
Save like mad for you next bigger home and then put your current home on the market once you have found the bigger home you want and need for your kids and wife.
Sell and buy.
Consider an offset mortgage and that way you can overpay every month and build up that deposit you need for the BTL business you want to start.

AdrianC

tallmandat said:

So at moment I've got about £85k left on my mortgage, about 24 years remaining. I am 41. The options I've been thinking are these two:
1. Split bedroom, kill the 85k mortgage as quick as possible. I've got about £160 equity in this property, and I reckon I'd get £320k for it in sale.

Then you've got £320k-85k=£235k equity in it, not £160k.

3. Rent existing home out which goes for approx £1200 a month, take on the pro's n cons of becoming a landlord and potentially own a 3-bed home as well as the rented existing 2 bed home. 
What are your thoughts and experiences of above? is option 3 any more benefitial than option 2, I mean, the romantic idea of owning 2 properties seems enticing, having the rental income basically pay for a larger mortgage? But apart from the landlord headaches, laws, costs, etc. what's the catch if any? Would like opinions and experiences please....

How do you see the numbers working?
You currently have £235k equity. You haven't mentioned any other savings.
Let's assume the new 3-bed property you want to buy is £400k, plus £22k in SDLT, plus a few grand in purchase costs. Let's say £26k all in.
If you don't keep the old 2-bed, you only pay £10k in SDLT, plus a few grand in purchase costs. Let's say £15k all in.

Your option 2 - sell property A, buy B. £320k in, £85k mortgage paid off, £415k out - You now have a £180k mortgage. £763/mo at 2%.
Your option 3 - you need at least 25% equity in A, £80k, and 15% in B, £60k. That's £140k of your £235k equity, £166k with the SDLT and purchase costs. You can do it...
But £235k equity means you now have a total of £511k you need to borrow to own £720k of property... Let's say that's all at 2% - £2,166.

£1,200/mo rent income? Well, you're already subsidising your tenants by £200/mo, even before you figure the tax bill and maintenance etc... Oh, yes, and the minor details of "landlord headaches, laws, costs etc". What DID the Romans ever do for us?

Now, tell me again about the "romance" of this unprofitable business you're planning to start...?

Let's turn it around. You already own this £400k 3-bed house with a £180k mortgage. Would you be considering freeing some equity and borrowing heavily to buy THAT £320k house to let for only £1,200/mo (4.5% raw yield)...? Because the main difference between the two scenarios is that your option 3 includes an extra two and a half grand of SDLT...

tallmandat

AdrianC said:

tallmandat said:

So at moment I've got about £85k left on my mortgage, about 24 years remaining. I am 41. The options I've been thinking are these two:
1. Split bedroom, kill the 85k mortgage as quick as possible. I've got about £160 equity in this property, and I reckon I'd get £320k for it in sale.

Then you've got £320k-85k=£235k equity in it, not £160k.

3. Rent existing home out which goes for approx £1200 a month, take on the pro's n cons of becoming a landlord and potentially own a 3-bed home as well as the rented existing 2 bed home. 
What are your thoughts and experiences of above? is option 3 any more benefitial than option 2, I mean, the romantic idea of owning 2 properties seems enticing, having the rental income basically pay for a larger mortgage? But apart from the landlord headaches, laws, costs, etc. what's the catch if any? Would like opinions and experiences please....

How do you see the numbers working?
You currently have £235k equity. You haven't mentioned any other savings.
Let's assume the new 3-bed property you want to buy is £400k, plus £22k in SDLT, plus a few grand in purchase costs. Let's say £26k all in.
If you don't keep the old 2-bed, you only pay £10k in SDLT, plus a few grand in purchase costs. Let's say £15k all in.

Your option 2 - sell property A, buy B. £320k in, £85k mortgage paid off, £415k out - You now have a £180k mortgage. £763/mo at 2%.
Your option 3 - you need at least 25% equity in A, £80k, and 15% in B, £60k. That's £140k of your £235k equity, £166k with the SDLT and purchase costs. You can do it...
But £235k equity means you now have a total of £511k you need to borrow to own £720k of property... Let's say that's all at 2% - £2,166.

£1,200/mo rent income? Well, you're already subsidising your tenants by £200/mo, even before you figure the tax bill and maintenance etc... Oh, yes, and the minor details of "landlord headaches, laws, costs etc". What DID the Romans ever do for us?

Now, tell me again about the "romance" of this unprofitable business you're planning to start...?

Let's turn it around. You already own this £400k 3-bed house with a £180k mortgage. Would you be considering freeing some equity and borrowing heavily to buy THAT £320k house to let for only £1,200/mo (4.5% raw yield)...? Because the main difference between the two scenarios is that your option 3 includes an extra two and a half grand of SDLT...

loving the maths man - thats why I used the word romantic, because I thought it too good to be true. I know someone that has 2 properties, and did your breakdown of my option 3, which I always thought was romantic, or, now that someone's done the maths for me, illogical. I have no interest in going down the BTL route, just wanted to see what options there are out there, to upgrade, apart from traditional sell then buy. Thanks all.

Grumpy_chap

tallmandat said:

1. Split bedroom, kill the 85k mortgage as quick as possible. I've got about £160 equity in this property, and I reckon I'd get £320k for it in sale.
2. Move and upgrade to a 3 bed house 
3. Rent existing home out which goes for approx £1200 a month, take on the pro's n cons of becoming a landlord and potentially own a 3-bed home as well as the rented existing 2 bed home. 

If this were me, and subject to the finances working out suitably, I would pick the options in the reverse order to what is listed.  Being a landlord is not for the faint hearted, though.  Option 2 is probably the most common route for those that can afford it.

Crashy_Time

Don`t borrow any more IMO.

gwynlas

Most three beeds come with two double bedrooms and a box room. Would it be better for you to convert loft to create master suite and give kids the middle floor?

Scotbot

Don't  split the second room into 2  rooms, you will devalue the house as no one wants a house with 1 bedroom and 2  tiny box rooms, aka storage cupboards. Assuming you have a secure job sell and upgrade.

AlexMac

My gut feeling (based on 45 years' experience of home ownership, mortgage interest rates ranging from an eye-watering15% to a bargain 1.25%, economic booms,  two recessions and two house price crashes,, good jobs, bad jobs, redundancy, unemployment, marital breakdown, re-marriage ...) is that I've been really-well served by buying the best/ most expensive home I could afford at the time. So Option 2 every time. 

So I'd not worry about paying off the mortgage.  In fact if I was you, 30-odd years younger,  in stable employment, with no wanderlust or expensive tastes, I'd be taking advantage of current low interest rates and stretching myself to a forever home (at least til the kids leave- hopefully not til the spouse does; but if that or other upsets happens and  you have to sell, a better house will be worth more than an average one...)

Depending on where in the UK you live, it may be worth buying something with potential to extend; up, back or sideways.  A bit of heavy-duty DIY will always enhance your lifestyle, but spending £20k-50k on an extension will only be really worthwhile if you live in the kind of area where an extra room adds more that the construction cost. We spent £18k on a high spec garage conversion last year but the added en-suite room 's probably worth £50k + round here. Either way, go for the cheapest house in the best street; not vice-versa.

If, along the way, you want to get into BTL, fine.  But again, you'll best choose a suitable location (good rent-to value %, commutable, local demand,,,) rather than simply let out the one you happen to own. Again, its will depend on locality; I couldn't afford a BTL now here in London, as prices rose stupidly in the late 20th Century and early 21st.  But I am delighted we bought one in the 1990's and another in 2012. Useful income, great ROI (at the time of purchase), unbeleivable capital gain ( several hundred percent on the first; some 80%+ on the second) but that won't happen in the next 10 years....

Come back in a few years with an update on your decison and how you did?