Take a risk or simplify life?

Happy_planner · 10 July 2021 at 3:54PM

Hi all, wondered if I could ask your thoughts on two options.

I have a friend who is separating from her husband and expecting to leave with nearly £400k:

- Own home worth £390k with £180k mortgage (£210k equity)
- Rental property worth £390k with £240k mortgage (£150k equity)
- Cash £35k

She is not working and has two young children who need a lot of attention. Her ex is planning to pay maintenance.

She could just about survive on the income from the rental property providing nothing went wrong, and if the maintenance payments come through on top, she'd be fine.

However if maintenance stopped for whatever reason, and something went wrong with the rental, the £35k emergency fund might not last long.

In her shoes, would you sell the rental and live almost mortgage free, or keep the rental in the hope it appreciates in value?

Thanks for your thoughts.

ss2020jd · 10 July 2021 at 4:15PM

It is a very personal decision and there can be lots of variables to take into account. But if it was me, I would feel safer being mortgage-free. There would be too much uncertainty with interest rates on the mortgage(S) and no guarantee that the rental would not cause issues down the line with defaulting tenants, maintenance costs and the like.

nicknameless · 10 July 2021 at 4:15PM

If I sold the rental I certainly would not be putting the equity against the mortgage with mortgage rates as historically low as they are.

Relying on a single rental for income is madness in my eyes. I said the same to my sister 2 years ago when she asked me pre COVID. She laughed at me and then proceeded to lose a significant proportion of her income when she was unable to let a holiday rental for 16 months. I know that's different to residential lets, but it's not wholly chalk and cheese.

nicknameless · 10 July 2021 at 4:26PM

ss2020jd said:

It is a very personal decision and there can be lots of variables to take into account. But if it was me, I would feel safer being mortgage-free. There would be too much uncertainty with interest rates on the mortgage(S) and no guarantee that the rental would not cause issues down the line with defaulting tenants, maintenance costs and the like.

Sorry but disagree - mortgage free with no income if maintenance ceases or is unreliable? That's not peace of mind.

I would be;

(1) Carefully construct SOA for minimum monthly / yearly income (no frills at all)
(2) Seeing how much assets that are hypothetically in the bank (equity plus savings)
(3) See how long assets provide income against (1) - scenario based on maintenance and no maintenance
(4) Plan income from (2) according to (3) and take an income from the assets
(5) Depending on calculation invest in lower risk (small % shares vs bonds) funds anything that would be left over after 3 or 4 years income based on above calculations
(6) in the meantime look for other means of income

hippocrates1 · 10 July 2021 at 4:32PM

Why no income can she not work when they go to school?

AdrianC · 10 July 2021 at 4:44PM

Happy_planner said:

I have a friend who is separating from her husband and expecting to leave with nearly £400k:

- Own home worth £390k with £180k mortgage (£210k equity)
- Rental property worth £390k with £240k mortgage (£150k equity)
- Cash £35k

She is not working and has two young children who need a lot of attention. Her ex is planning to pay maintenance.

She could just about survive on the income from the rental property providing nothing went wrong, and if the maintenance payments come through on top, she'd be fine.

However if maintenance stopped for whatever reason, and something went wrong with the rental, the £35k emergency fund might not last long.

In her shoes, would you sell the rental and live almost mortgage free, or keep the rental in the hope it appreciates in value?

Think of the rental as what it is - a business.
If she was looking at getting shares in any other kind of business with £390k assets and £240k debt, what's the first thing you'd want to know... PROFITABILITY! Right? Yet there's no mention of that.

The chances are that it's making a fairly slender profit, probably about 2% at absolute best after tax on the £390k asset.
Meanwhile, what's she paying in interest on that £180k mortgage?
Can she even remortgage in her own name with no other income?

tacpot12 · 10 July 2021 at 7:13PM

Another aspect to consider is benefits. She might be entitled to claim Universal Credit if she doesn't have savings/assets (other than her home) of more than £16K. If she sold the rental property and used the equity and some of her emergency cash, she could own her home and have a £40K mortgage and £15K in savings. This would allow her to claim Universal Credit if she needed to.

The Universal Credit calculation would take into account the fact that she has two children, would contribute to child care, and might include a further carer's element if either of the children receive Disability Living Allowance.

The downside to Universal Credit is that they may expect her to look for work if the children could use child care.

I'm not suggesting that she should plan to claim Universal Credit after the divorce, but it is a safety net that is available to the people who need it. She would not qualify while she owns the rental property.

It is likely that her maintenance will be a useful amount (if it arrives) and it is not taken into account when claiming Universal Credit.