Buying second property, renting the first

cat2018

Hi, 

I’m looking for some advice. My husband and I are thinking of buying a house and renting out the 2 bed flat we already own. 

We bought our flat for £362,500, hoping to sell for about £375,000.

We paid £80,000 deposit and have £267,000 left to pay on the mortgage. 

We think we would get around £1,200 in rent for the flat per month which would cover the mortgage (currently 1,000 per month)

The house we are looking at buying is £500,000

My questions are: how much of a deposit would we need for the house? (Can we use leverage from the first home?)

How much tax would we pay, would the stamp duty holiday help us or is this just for first time buyers? 

Thanks in advance! 

AnotherJoe

Ok so on those figures after tax and expenses and voids you are losing money. 

And that's before you account for the extra £15k SDLT*, and the increased mortgage rate on your home because your LTV will be worse than it could be by £80k. 

And there's a risk with bad tenants you'd lose significantly. 

So why would you do this?

* Even if you were making £200 a month it would take more than SIX  years just to break even ! 

Claire2989

Most BTL mortgages start at 25% deposit which you’re only just reaching with your equity. So it’s unlikely that you’ll be able to leverage to buy your home.

It’s unlikely with that mortgage and that rental income that you’ll actually cover your mortgage with the rent after expenses and tax (paid at the same rate you pay income tax). It’s also a terrible ROI.

Nothings actually been announced officially about SDLT yet. So as it stands you pay an extra 3% on top of the standard rate for your £500k home.

Also you might want to learn about what it’s takes and the legal responsibility of being a landlord and starting out this business including all costs.

Not an investment I’d want to get involved in.

getmore4less

£1000 per month mortgage will have significant capital payments which is not counted in calculating profit/loss

Gross yield  4% not that good. 

£50k-£100k deposit for the new place is probably the sticking point.

might be able to release £10k-£15k but deposit and cost need a big chunk of money.

Business also at risk of a cashflow problem if there is not more money around to cover bills nad potential voids. 

tom9980

Being a landlord with just one property is a hassle, economies of scale really require multiple properties, there is a lot to learn and get right.

There is also a real risk that a bad tenant will cause much distress, currently evictions are paused so tenants who were being evicted before the pandemic are literally running large rent arrears, it is unlikely a landlord will get the money back because tenants generally don't have assets, savings or decent jobs, and those that do pay their rent. Worse still insurance companies are attempting to void rent guarantee insurance policy claims during the pandemic because the government changed the evictions notice from 2 to 3 months.

You can expect a no fault evictions ban becoming permanent, possible rent controls,  much more taxation and regulation to come over the next few years.

The fact is there are easier ways to make money with less hassle and risk so I am selling my rental property now. 

steampowered

This sounds like a bad idea to me. If the rent is £1200 pm and the mortgage is £1000 pm, you'll be losing money each month after taking account of costs and tax.. 

The £200pm difference is going to be swallowed up very quickly by letting agent fees; mortgage lender fees; property maintenance costs; higher rate stamp duty; the income tax you'll have to pay on the rent; and void periods. 

Also remember that "consent to let" is only valid for a limited period of time - usually 12 months to 2 years. After that, you'll need to remortgage onto a BTL mortgage, which will have a higher interest rate on it. So in future the monthly repayments on the mortgage will be higher.

You are likely to be much better off using some of your spare cash to make the most of tax efficient long term investments. Make the most of your stocks & shares ISA and pension contributions before considering BTL property. That is going to be more profitable and lower risk than investing in a heavily mortgaged buy-to-let property.

It is possible that this is the first time in your life when you've been able to access a serious amount of spare cash, so you might not feel that you have a sufficient understanding of pensions or stocks & shares. It is worth spending a few hours reading websites like monevator to get yourself up to speed - start with https://monevator.com/index-investing/. Head on over to the Savings & Investments forum.

cat2018

Thanks everyone for your help.

Much appreciated! 

csgohan4

why would you run business at a loss? are you a charity. Equity you build up will be eaten by these costs

A taste of things to come if your not careful
https://forums.moneysavingexpert.com/discussion/5983050/taking-tenant-to-small-claims-court

https://forums.moneysavingexpert.com/discussion/5896992/evicting-tenants-via-court-and-bailiffs

greatcrested

I'd link you to the stickie for more information, but there's no real point as this is a non-starter.....