Dilemma - to sell or rent out current property

Bea787

Dear forum, I could really use some advice. I made a nod to this in another query some weeks ago but now this part of the decision is crucial and I find myself going full circle repeatedly. I could really do to talk it through and get advice from others who are savvy in these matters. I've put all info in as I know that helps but please bear with me if its a lot. 

The situation - I am buying a new home. I have no mortgage on my current home and due to having some inheritance I will be able to buy my next property outright. The idea was always to sell my current home. I have been a landlord through circumstance twice previously so I have some experience and it was a nightmare. I vowed never to do it again. However, one of the properties was an HMO with students (never again, also sold in negative equity as bought in 2005 boom) and the other (an aunt's flat when she went into care) cruised along fine until sale and the tenant refused to evict. The agent for both was probably not the best. Anyway, my current property is different - a two bed terrace and I'm as confident as you can be in the current circumstances from talking to a number of letting companies that I could let it out to a professional person/couple. I am also confident that I can sell it should I want to proceed with that.

The dilemma is whether to sell and invest the money or to keep the property and rent it and and that be the investment. My work is changing and I am likely to go into more self employed work so I will need to self assess anyway - something I hated but I'll be doing regardless.

So, the maths according to me (!):
Rental income £650 pcm
Minus 10% management fee of £65 = £585 pcm
Minus landlord's insurance (say £50) = £535 ppm  
£535 x 12 months = £6420 income a year (I appreciate there will be maintenance costs to accommodate)
Minus tenant find fee (£325 - assume annually though would hope to find a tenant to run over a few years) = £6095 income a year
Minus set up costs (£600 certification costs - electrics, legionella etc; SDLT £7710) = £8310

In the first year I will probably be a basic rate tax payer (new self employed position so all uncertain), so if i assume 20% tax off this income year 1 income would be £4876
Year 2 if I am a BR tax payer income would be as above or £3657 if I am a higher rate payer.
It will take approx 2 years of rent alone to cover the set up fees (SDLT mainly!).

I looked at this with a 5 year minimum plan in mind. I have two scenarios as my employment income is uncertain.
Scenario 1 (basic rate tax payer for 5 years): £6095 annual rental income after management fees, insurance and tenant find - 20% tax = £4876 a year x 5 = £24380 - set up costs £8310 = income over 5 years £16070
Scenario 2 (basic rate tax payer for year 1 and higher rate for years 2-4): £4876 rental income for year 1, £3657 for 4 years = £19504 - set up £8310 = income over 5 years £11194.

If I then sell in 5 years - again uncertain what house price would be so 2 rough scenarios:
General info: Purchase price £108000; purchase fees roughly £2000; improvement costs approx £15000 (I've taken off decorating) = roughly £125000 purchase costs; and estimate £2000 selling fees = £127000 spent 

Scenario 1: If house price stays the same and sells at £160 000 [160000-127000 = 33000 gains - 12300 CG tax free allowance (I think I'm entitled to this?) = 20700 taxable gain.   
I put this into the HMRC calculator with an estimated income of £40000 and it says £4796 tax to pay. 
20700 - 4796 = 15904 net gains from sale. 

Scenario 2: if it increases and sells at £180 000 (I looked online and there was a suggestion of using a 2% annual increase in house prices, used that roughly); [180000 - 127000 = 53000 gains - 123000] = 40700 taxable gain.
HMRC calculator for £40000 income says tax to pay £10396.
40700 - 10396 = 30304 net gains from sale. 

I've no idea what my income will be and got confused as I initially worked out CGT at 28% which gives much higher figures so am unsure how to project this bit or what to use?

SO, IN SUMMARY OVER A 5 YEAR PERIOD: 

Rental income:                                                                                      Sale gains:
as a BR tax payer = £16070                                                                 if sells at same price £160 000 = £15904 
as a HR tax payer = £11 194                                                                if increases to £180 000 = £30304

Therefore the potential outcomes are:
as a basic rate tax payer if house sells at 160 000 = total net gains £31 974
as a basic rate tax payer if house sells at 180 000 = total net gains £46 374
as a higher rate tax payer if house sells at 160 000 = total net gains £27 098
as a higher rate tax payer if house sells at 180 000 = total net gains £41 498

So a potential range of £31 974 to £41 498 net gains over 5 years. 
My total out lay in these figures (purchase, sale, improvements) is £127 000
My actual total outlay (as my home improvements totalled more than the figure I can use for CGT) is £134 500
So over 5 years I'm not sure how to work out the % earnt by the net gains (if I do 31974 as a % of 134500 I get 23.8% or 30.9% if I use 41 498; if i divide that by 5 years I get 4.76% and 6.18% a year respectively). Is that right?

I compared these to an average 5% gain for stocks and shares as advised by my financial advisor.

The 5 years is not set but I imagine a minimum timeframe for this to be viable. I may keep it much longer. I am aware of maintenance costs and rent voids and hassle too.

I also read something that said many experienced landlords are ducking out now as its too much in favour of tenants and tax so I wonder if I should heed that. I also read that some set up a limited company and pay corporation tax at 17% and avoid CGT. I've no idea what this is or if it would be a better option for me? 

But I now have a spinning head. There's so many uncertain factors to project. The property value could increase more? Who knows just now.

So, if you have read this far thanks so much. And if you have time to advise on whether I am on the right track and whether on this basis you think that this is a better option than the simplicity of selling please please help me work this through. I am keen to make the best investment decision I can with all that is known and unknown and I need to decide by the end of the week at the latest now. Any help really appreciated. I know it is ultimately my decision but I would value any advice from those with experience of renting and investing. TIA 
 

Comms69

"cruised along fine until sale and the tenant refused to evict. "

Funny that, almost like having your home sold from under you, accommodating viewings etc, isnt ideal.....

Bea787

I appreciate that though she knew the circumstances from the outset. It was fully transparent. I was fair and accommodating and did everything I could to minimise disruption. 

grumiofoundation

5 years is quite a short time frame for either BTL or investing. 
Will you need access to the money in 5 years?
What is your pension situation like?

Obviously either way you are taking a risk - with stocks that they will drop in value, especially near the time you need access to them. With BTL (especially relevant for one property) that the tenant will not pay rent and cause added costs, legal fees etc. 

With a single BTL a lot of your investment returns is in the hands on one other person and in the local property market  whereas with S and S (assuming global, diverse portfolio) is spread over thousands of companies in different sectors around the world. You have to weigh up which level of risk you 'prefer' (or least dislike depending on how you want to look at it!).

A good question to ask yourself is - would you buy this house to rent it out? If you choose to rent it out you are making this decision (although actually with a higher initial cost due to SDLT). 


Re your calculations
It might be better/safer to assume 10 months occupancy rather than 12 (likely would not be empty for 2 months but this then also covers tenant find fees, agents fees, cost of cleaning etc)?

5-7% average annual return from shares over a long period is likely to be achievable - however 5 years is a short timescale for this and you are at a  higher the risk of getting back less than you put in compared with 10-15+ years.
134500 with 5% growth per year for 5 years = 172600, 7% = 191000

Another thing to consider re stocks and shares is investing via a pension and/or Lifetime ISA - the tax relief on these gives these an advantage over BTL. Especially if you are going to be a higher rate tax payer you get 40% tax relief on pensions contributions! 

P. S. As an aside Capital gains tax is currently being reviewed which might impact.

Bea787

Thanks for taking the time 😊

steampowered

It is worth mentioning that s21 is likely to be abolished, in which case you will be able to evict tenants for breaching the tenancy agreement, but will probably not be able to evict them simply because you would like to sell the property.

If you need the flexibility to be able to sell the property within relatively short timescales then you should bear in mind that this might not be possible if you get long term tenants who comply with the tenancy agreement.

Personally I would maximise tax efficient investments (i.e. pension and stocks & shares ISA) before considering BTL. If you are determined to do BTL, it could be worth taking out a BTL mortgage if that lets you also make the most of pensions (tax relief on pensions is worth an instant 20% uplift at least) and stocks & shares ISAs.

AdrianC

So let's say everything goes swimmingly, you get full rent in every year, and minimal unexpected costs. The value of the property remains the same. Let's say £6k income per year.

x 5 years = £30k income, before tax.
- setup costs. Let's say £9k. = £21k net income across five years.
The property is worth £160k. That's 2.6% annual return on your investment, averaged.

Not great, is it?

MovingForwards

Just sell it, you already said you didn't enjoy being a LL, why would this one be any different?

Then you can invest / save the money for various goals / points through your life.

Bea787

AdrianC said:

So let's say everything goes swimmingly, you get full rent in every year, and minimal unexpected costs. The value of the property remains the same. Let's say £6k income per year.

x 5 years = £30k income, before tax.
- setup costs. Let's say £9k. = £21k net income across five years.
The property is worth £160k. That's 2.6% annual return on your investment, averaged.

Not great, is it?

No! and those figures make sense, but so did mine as I did them! Do you see how come we arrive at a different %?

Bea787

steampowered said:

It is worth mentioning that s21 is likely to be abolished, in which case you will be able to evict tenants for breaching the tenancy agreement, but will probably not be able to evict them simply because you would like to sell the property.

Yes, thank you for reminding me of this.

kazwookie

Hi

I didn't read all of the OP, but just sell it, renting out property can be a nightmare.