What's the best financial act for an outright owned home that may not be needed sell/rent..etc?

me1000uk

Hi All,
I've been racking my brain and trying to research and am not really sure what to do. We are moving from our flat and it's owned outright but only one flat and our only owned asset. It's probably in the 100k range so not the most as far as properties go.
In this scenario what do I do with it? Do I simply rent it for income, or somehow leverage it into more than one flat? or sell/invest?
For various reasons we are moving back to the family home.
What would be the best use of the old property to generate income and maybe use it to buy something for ourselves say in a decade or whatever? The obvious choice seems to try to rent it, but the more I research the more it seems that having all your savings in one flat may not be most efficient way to generate income.

Appreciate any opinions.

steampowered

Unless you want to move back into this flat in future, I'd sell it.

Keeping the flat would mean you need to pay higher rate SDLT if you buy another property before selling this one, plus you will need to pay income tax on the rent you receive.

You could use the money to invest. Ideally into a diverse multi-asset fund, such as a Vanguard fund. As much as possible through stocks & shares ISAs. This will almost certainly generate a better return than keeping the property.

me1000uk

Hi thanks for the response, it certainly gives me more to think about.
I will just think out loud, not saying that your advice isn't the best advice:

Let's say property is worth 100k, and  rent is say 500 or 600 per month, less random/fixed costs so net 5k/year, and in 7 years time the property goes up in value to 110k, so I've got 10k extra capital, plus the 7x5k yearly income (with some deducted due to income tax If I'm in a decent job).

Would the fund not be less stable? especially as it's 20k per year so won't be seeing returns anything like rental income for a few years?

Conservative assumption that property will go up (the 100k figure is below the last valuation, and below the price a few years back and they've been creeping up).

You probably know more than me so maybe I'm missing something? If I want to buy a property as my main dwelling in 7 years then I can surely choose to sell this superfluous one at that later date to avoid extra duty?


Cheers.

BabyStepper

I used to be a follower of Dave Ramsey (not any more, but that's a different story). He spoke often on issues such as this and general thoughts are:
people often get confused like this when they move home. Should I sell the house or not? What else could I do with it? You needed the flat, now you don't, so sell it. 
being a landlord is a job. If you're not looking for a job like that, don't do it. Anyone who thinks it's a quick and easy way to extra income at the moment (especially in the UK) is wrong. 
That part of your life is ending. Face the music, get rid of the flat and you will be freed up to invest  or do whatever else you decide to do. 
You don't say where your flat is, or how far away it is from the home you're moving to. All of that might further effect your decision. Try to imagine living in your new place, you have £100k in the bank, how would you invest it? If the answer is property in the area your flat is in, then keep the flat. I suspect that would not be the case though.  

MovingForwards

Sell it as not only are you opening yourself up to additional stamp duty, when you do get round to selling it there's capital gains tax. 

GDB2222

You will eventually want to buy a new home, so the natural investment for you is residential property. The flat will hopefully keep pace with any increase in property prices generally, whereas, if you invest in a diversified multi asset fund, you are taking a risk that the growth is completely different.

Against that, it’s dead easy to own an investment fund, whereas being a landlord is surprisingly hard work, with a steep learning curve. Also, with a rental of £500 a month, you would not keep anything like £5k a year out of it. There are a lot of costs, plus there will be void periods. 

AdrianC

me1000uk said:

What would be the best use of the old property to generate income

That's the wrong question. Don't think of it as "I have this flat", think of it as "I have £100k".

If you had £100k in the bank, would you be considering starting a residential lettings business? Would you buy THAT flat to do it with?

£100k asset, £6k raw rental yield... Sounds lovely...
...but...
Now subtract the costs from that.
Service charge and ground rent.
Allowance for maintenance, decoration, repairs.
Allowance for bad debts, voids, tenant-finding.
Will you be managing the let yourself, or will you be paying somebody else to do it?
Income tax on the profits. Do you already do self-assessment tax returns?
CGT on capital growth.

Worst case - what happens if your non-paying tenant finally does a runner on the eve of repossession, only for you to find they've trashed the place?

We have a rental flat - historically, it's been about 3-4% actual return to date over the 7yrs we've had it. We've been very lucky - very few repairs, just one tenant change.
This year, it's almost certainly going to be -ve.
Huge service charge for EWS/lift repairs/replacement fire alarms in the block, replacement smoke alarms in the flat, EICR, an expensive blown DG unit...
If the tenant handed his notice tomorrow, it'd be on the market, priced to sell - which may well be below the purchase price.
Of all the friends and relatives I know have rental flats, I think we're the only ones who haven't had a call from the police saying it's being used as a knocking shop...

lookstraightahead

Being a landlord is hard - it's like parents thinking they can teach, or those that do a bit of DIY thinking they can build a house, without any training.

I'm not saying you can't invest your time to become an expert to do these things, but will will take time and effort to become a professional landlord. 

Markneath

I’ve got a few btl’s myself but if in your position I would sell.
You need a few btl properties to make it pay having one was just extra work for small reward at the time. 

Government rules/laws seems to want to punish btl landlords at the moment too, not one of my tenants could raise a mortgage to buy, there’s very little social housing available but more and more hurdles are being put in our way.

me1000uk

Thank you so much for all the responses. I would love to respond to each individually but as there's some recurring themes perhaps I'll make some general comments based on your feedback and it'll make it easier to see where I'm going wrong, or provide you all with greater input that might give a better idea.


- I would be moving to a different city, so would want to ideally pay someone to deal with however much can be outsourced to an agent or whatever. (seems a few flats like this are managed for the neighbours so would research that).
- Capital gains I don't think will be much of an issue. It's tax on capital increasing and between me and my wife surely it would take a double-allowance increase in value to trigger CGT, and it's really our only asset. So if we have to pay CGT then it surely means we've made great money on it?
- Income tax on rent is something I guess but I'm not fortunate enough during this crisis to be on higher rate, but if I get there and pay more tax it means I am essentially earning more money so why would that be an issue? (similar to CGT example above). I do some freelance work so have an accountant that can be used if needed. More tax means I have more money right and the only issue would be opportunity cost of something 'potentially' better?
- 2nd property taxes are only an issue if I am in the position to purchase a second property which is unlikely for years, and I can sell the flat later before that decision and maybe get better value on sale price.
- Flat is in good location (city centre but a quiet street), purchased at a price as low as it can go (and should be worth well above 100k in the coming years), and haven't heard of any disasters in neighbouring flats who are mostly young couples/families professionals with some students as there's a university nearby. It's also been recently refurbished with plumbing and electrics checked and appliances are new, mitigating some repair risk. 

So by the above it is clear there is the universal risk that all rented properties have, but I would hope it's at a lower end of that spectrum in comparison to an overvalued flat likely to need a structural overhaul and in a crime-ridden area. (apologies if not being too specific about area but giving as much info as I am comfortable with on the internet )

Is it crazy to think that I can find someone to handle everything (don't know if the factoring people do it or a dedicated management company), and my only decision will be financial rather than a time investment. So I pay for repairs/empty flat, or I just receive income whilst the outsourced entity take their cut. 






 

user1977

me1000uk said:

You probably know more than me so maybe I'm missing something? If I want to buy a property as my main dwelling in 7 years then I can surely choose to sell this superfluous one at that later date to avoid extra duty?

Yes, but you'd need to start planning that far in advance if you want to get vacant possession before you start marketing it. And as you see from countless threads here, it's hardly straightforward at the best of times for that to be achieved.

If you had £100k, wouldn't sticking it in your pension be a much more tax-efficient (and hassle-free) thing to do?